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The importance of Minority Depository Institutions (MDIs) in reducing racial economic disparities

with a short history of redlining

While we’ve discussed before the positive impacts that specific Minority Depository Institutions (MDIs) have had on their communities, and defined the basic terminology in our glossary, Better Banking Options hasn’t previously featured the essential role MDIs have played in the general banking landscape. Traditional banking practices have historically left out and let down people of color (POC), who play an essential role in our workforce and economy on a local and national level. While MDIs haven’t made up for much of the discrimination in the banking industry, they’ve been able to fill some of the gaps for individuals and communities that would otherwise have no access to capital.

For those that haven’t read our other articles pertaining to MDIs, a Minority Depository Institution is defined by the FDIC as “any Federally insured depository institution where 51% or more of the voting stock is owned by minority individuals.” Additionally, a banking institution can also be designated an MDI if more than half the board members and the community served by the institution are considered to be part of a minority population. The four types of minority communities that are served by MDIs are “Black American, Asian American, Hispanic American or Native American.”

Most MDIs were established because individuals belonging to minority populations were unable to obtain fair banking and loan services from traditional banking institutions. All POC, but especially Black Americans, were subjected to the practice of redlining, which labeled black and immigrant majority neighborhoods as risky for lending, particularly housing lending. National and state policy contributed greatly to banking inequality as well, as the federal Home Owners’ Loan Corporation was the first to establish redlining nationwide. Most banks readily adopted this new system of loan discrimination, as it aligned with public attitudes that non-white neighborhoods were high-risk and not worth investing in and were already systematically denying housing loans to POC.

The reason housing loans are so vitally important to the balance of wealth in this country is that the overwhelming majority of Americans hold most or all of their wealth in their home. The value of a home increases over time, and this is the main way white families have built and passed down wealth over generations. Because they have systematically been denied housing loans and the homes in their neighborhoods aren’t considered valuable, minority groups have essentially been denied the ability to build intergenerational wealth. This is a key factor which explains the economic inequality between Black, Latino and Native Americans and white and Asian Americans.

Redlining in Philadephia in the 30's

Too little has changed. The Community Reinvestment Act (CRA) has improved what percentage of loans goes to low- and moderate-income families and neighborhoods, but it desperately needs to be updated, and has been deliberately neglected under the Trump administration. And many of the same redlining and discriminatory practices continue today. Data from 2015-2016 showed that in Philadelphia, a city with roughly equal populations of white, black, and Latino people, white people received 10 times the amount of conventional mortgage loans.

While Asian Americans may not have faced the same level of discrimination in banking practice in the past 30 years as Black and Latino Americans, there are still large Asian American immigrant populations that have particular banking needs not prioritized by non-MDI institutions. For example, Asian Bank in Philadelphia’s Chinatown serves their customers in both English and Mandarin, as many of their customers may understand very little English. Native American MDIs also have particular challenges when serving their communities, as many American Indians don’t have internet access or reliable transportation, making them the third-most underbanked and unbanked demographic group in the nation. While the reasons may vary, many minority communities have a reason for not wanting to, or not being able to, participate in traditional banking.

What happens when there aren’t community banking or MDI options in a demographically diverse area? People simply won’t use banks, which can be financially precarious, especially for those lucky enough to have significant savings. People won’t build interest, either in their accounts or through the equity in their homes. People won’t build wealth through their small businesses, because they’re unable to obtain the small business loans. Instead, for basic banking transactions like check cashing, they’ll turn to widely available, predatory check cashing and payday loan businesses, which charge high fees and get people trapped in a cycle of debt.

Minority Depository Institutions, while not even close to a solution to racial economic inequality, get capital into the hands of families which have been systematically denied it by our government and our banking institutions. When an MDI functions effectively, it not only keeps minorities’ assets in their communities, but also brings in assets from community allies who may work, shop, or have friends in the area. While the purpose of an MDI varies depending on the particular needs of the community it resides in, they were all created to help populations of people receive quality banking and lending services who aren’t prioritized by the average bank.

When you bank with a Minority Depository Institution, you invest in racial economic equality in an incredibly effective way that costs you little or nothing. They will use your deposits to invest in communities that have been systematically disinvested for no reason other than institutional racism, through housing and small business loans which allow people to build wealth and grow their community’s economy. However, some MDIs are much better than others; you still want to make sure the institution is lending to their community effectively and fairly. Regardless, investing in and looking out for MDIs is beneficial to the underbanked communities they work in, as well as helping our entire banking and economic system break away from systemic racism.

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