Community Development Financial Institutions and Individuals’ Credit Risk in Indian Country

Native communities in the United States have been persistently underserved by traditional financial institutions. To fill this gap, in recent years both Native and Non-Native Community Development Financial Institutions (CDFIs) have emerged on or near American Indian reservations. Yet to date, no comprehensive evidence exists on the effect of CDFIs on credit outcomes in Indian Country. We combine a large-scale dataset on individual-level credit bureau records with Census block group-level measures of CDFI activity to explore how the presence of Native and Non Native CDFIs affects Indian Country residents’ credit risk scores, a key summary measure of individuals’ credit performance and creditworthiness. Using multiple empirical approaches and addressing endogeneity concerns, we uncover a positive association between Native CDFI presence and credit risk scores for the subsample of individuals initially deemed least creditworthy. We do not find consistent evidence of a similar effect due to Non-Native CDFIs. To the extent that CDFIs have indeed causally impacted individuals’ credit risk scores, our findings indicate that the corresponding improvements have arisen primarily because of Native, rather than Non-Native, CDFI activity. Our analysis thereby offers the first systematic empirical evidence suggestive of the importance of a cultural fit for credit outcomes in Indian Country.