Barriers to Accessing Capital for Indigenous Businesses

Policy Considerations for Federal Reform

Indigenous economic development has existed since time immemorial in Canada. Long before there was contact with European settlers, there was a thriving economy within First Nations and Inuit communities. These Indigenous economies were born from an Indigenous worldview that was precise and distinct.[1] The Métis Nation played a significant role in the development of the Canadian economy that we know today. With ancestral and social connections to both First Nations and Europeans, citizens of the Métis Nation acted as bridge-makers in advancing the economy of the fur trade in Canada. In this way, economic development has always been a part of the Indigenous experience. Unfortunately, Indigenous contributions to the creation and growth of the Canadian economy have often been forgotten.

Today, there exists a vivid landscape of Indigenous wealth creation across the country. As such, Indigenous entrepreneurship contributes more than $31 billion to Canada’s GDP, with the private sector adding more than $12 billion.[2] According to a recent RBC Report, the number of Indigenous business owners is growing at five times the rate of self-employed Canadians.[3] This growth exists despite the specific challenges which are faced by Indigenous businesses, namely with respect to accessing capital.

Access to capital is a critical lever of success for entrepreneurship. It is the means by which an entrepreneur obtains funds to start or expand a business. In the Canadian lending system, accessing capital can be challenging for any businessperson. However, it is particularly challenging for Indigenous businesses who have historically accessed proportionally less capital than non-Indigenous businesses.

A report by the National Indigenous Economic Development Board found that for every dollar of market capital accessed by non-Indigenous Canadians between 2003 and 2013, First Nations and Inuit accessed 8 and 9 cents.[4]

Much has been written to expose the barriers that prevent Indigenous entrepreneurs and communities from accessing capital. From structural barriers such as legislation to social barriers such as systemic discrimination and socio-economic conditions, the market access reality of many Indigenous entrepreneurs is different than that of their non-Indigenous peers. The National Indigenous Economic Strategy for Canada eloquently concludes that “Access to capital remains one of the greatest challenges to greater autonomy and self-reliance for Indigenous governments, businesses, and individuals”.[5] The Strategy’s Call to Economic Prosperity No. 84 advocates that policy-makers should “Reform government policy and legislation to remove all barriers to Indigenous access to capital.”

At this time of the year, the federal machinery is hard at work conducting analysis and making recommendations on what should be included in the next federal Budget. There are key points that the Prime Minister, the Minister of Finance and their Cabinet should take into consideration in breaking down the barriers of access to capital for Indigenous businesses.

Legislative Reform – Points to Consider:

• The OECD estimates that 70% of SMEs in Canada are asked to pledge collateral to secure loans.[6] The Indian Act is the largest hurdle that First Nation entrepreneurs living on-reserve face when trying to access capital because it limits their ability to provide the guarantees and collateral required to access business loans. Under the Indian Act, reserve land and the infrastructure that sits on it is owned by the Government of Canada so that entrepreneurs living on reserve cannot use private homes or property as collateral for loans.
  

• This barrier also impedes individuals living on reserve in the development of their credit history. When considering whether to grant a business loan, mainstream financial institutions analyse an entrepreneur’s personal credit score to evaluate creditworthiness. Without a record of home or property ownership, First Nation members living on-reserve are at a disadvantage because their credit history does not contain this key type of information.

Policy Reform – Points to Consider:

• In the mainstream lending system, an entrepreneur’s personal savings are often used as leverage for business loans. Generally, Indigenous peoples have less opportunity to secure personal savings due to socio-economic circumstances including the fact that 12% of Indigenous people live below the poverty line, which is double that of non-Indigenous Canadians.[7] Statistics also reveal a wage gap: First Nations (living off-reserve) and Inuit employees earn between 75% and 80% of what non-Indigenous workers earn.[8]
  

• Systemic discrimination of Indigenous Peoples also has an impact on how much they interact with mainstream financial institutions. Analysis by the Prosper Canada Centre for Financial Literacy suggests that Indigenous peoples “in urban, rural and remote communities sometimes feel unwelcome in mainstream financial institutions” and tend to feel more welcomed in the more expensive payday lending institutions.[9]
  

• Remoteness is also a challenge. In Canada, there are approximately 200 Indigenous remote communities. High costs of living and the complexity of doing business in remote areas make potential business opportunities less attractive to mainstream lenders who see them as riskier and less profitable.
  

Indigenous economic development is a complex policy area. This blog does not purport to hold the answers to addressing the barriers which prevent Indigenous entrepreneurs from accessing the capital required to launch and expand businesses. It does, however, point to the fact that specific Indigenous challenges require tailored policy responses.

It is my hope that the Government of Canada is turning to Indigenous leaders to craft solutions that will address these barriers in a way that is tailored to the specific needs of First Nations, Inuit and Métis entrepreneurs across the country. For too many years, Indigenous entrepreneurs and communities have been placed at a disadvantage in navigating mainstream lending markets. The next federal Budget is a prime opportunity to invest in Indigenous-led solutions in a way that dismantles these barriers and meaningfully advances Economic Reconciliation.

[1] Hilton, Carol Anne. Indigenomics: Taking a Seat at the Economic Table. Gabriola Island, New Society Publishers, 2021. Page 14 [2] CCAB. (Fall 2022) “Digital Directions: Discussion on the findings of Google Canada’s Indigenous-led Businesses Poll Fall 2022”, page 3. [3] Amato, D. (June 18, 2020). Indigenous Entrepreneurship in Canada: The Impact and the Opportunity. [4] NIEDB (2017) “Recommendations Report On Improving Access To Capital For Indigenous Peoples In Canada”, page 7. [5] NIES, page 82. [6] OECD (2020) “Financing SMEs and Entrepreneurs 2020 : An OECD Scoreboard”. [7] Statistics Canada (March 2022) “Canadian Income Survey, 2020”, page 5. [8] Indigenous Services Canada, 2020 Annual Report to Parliament, page 17. [9] Prosper Canada. “Financial Literacy and Aboriginal Peoples,” 2015, page 2.