Access to Capital: The Key to Unlocking Indigenous Business Potential

What is the state of the Indigenous economy today and what is the most significant way to unlock its latent potential?

The Indigenous economy is probably Canada’s largest untapped sources of revenue. It is grossly underutilized and has a number of barriers that prevent its growth. A 2011 TD Economics report estimated the size of the Indigenous economy to be $32 billion as of 2016, while Canada’s resource projects in the North have the potential to attract $340 billion in investment.

“The Indigenous economy is probably Canada’s largest untapped source of revenue. It is grossly underutilized and has a number of barriers that prevent its growth.”

The Indigenous economy is only growing as fast as the limited access to financial, trade and procurement markets permit, and additional barriers further hinder its growth. Aboriginal Financial Institutions (AFI) were created to overcome some of these barriers. But currently, half of our 59 Aboriginal Financial Institutions (AFI) are not operating at optimum capacity as they lack sufficient capital. These AFIs have approved loans that can contribute to improving the Indigenous economy that are just sitting on their desk because they have already put every dollar to work supporting Indigenous businesses. So, we are operating at 50% capacity in providing much needed capital to entrepreneurs – even though access to capital is a barrier that has always existed. It is not the only barrier, but it should be one of the easier ones to overcome with the amount of capital in the Canadian and global economy. Capacity, a lack of credit history, legislation, the Indian Act, market access, lack of savings, and lack of family support are some of the other barriers Indigenous entrepreneurs face.

“Currently, half of our 59 Aboriginal Financial Institutions are not operating at optimum capacity because of the lack of capital.”

Indigenous people are becoming educated at higher levels than ever before, and have gained the capacity to plan beyond the government and seek international connections. If the government would look at Indigenous people as an asset rather than a problem, it will significantly reduce the pressures on the budget of Indigenous Services Canada, which, at current trends, will grow to $30 billion in the next couple of decades. The government should boost revenues generated within Indigenous communities by supporting Indigenous economic empowerment. The onus is now on the government: what do they want to achieve? Do they want to maintain the impoverished condition of the Indigenous community or see us prosper and unlock the potential of the Canadian economy? I would also take it one step further and pitch to foundations and private investors that are looking to have a social impact in impoverished areas around the world. Canada’s Indigenous people are living in third world conditions, so do consider investing in our health, education and economy.

What is the profile of Aboriginal entrepreneurs and small and medium sized enterprises (SME) in Canada?

The majority of Aboriginal businesses in the past 30 years have been retail, which includes many online shops, construction, transportation and resource industries, but we are starting to see larger and more complex businesses including media and innovation driven industries. Having said that, a large number of our businesses remain in agriculture, forestry, construction and tourism. 40% of Indigenous businesses are on reserve, 60% are off reserve and the AFI network’s loans are split halfway between urban and rural borrowers. 71% percent of our loans are to males and 29% are to females. About 30% of our loan recipients are age 35 or below. We are trying to improve indicators for youth and women and have just hired a Women and Youth Coordinator to develop specific programming and support for them.

“If the government would look at Indigenous people as an asset rather than a problem, it will significantly reduce the pressures on the budget of Indigenous Services Canada, which, at current trends, will grow to $30 billion in the next couple of decades.”

In its early days, the Indian Act was a piece of legislation that prevented Indigenous people from participating in various aspects of the Canadian economy. The agricultural sector is one example. Back in the late 1700s and 1800s, Indigenous people were actually active farmers and competed pretty well with non-Indigenous ones. But the Indian Act outlawed the use of machinery by Indigenous farmers, which pushed them out of the market. The Indian Act also restricted their movement beyond reserves, which further hampered their competitiveness since reserves are in remote regions that are too far from markets.

This historical exclusion from the economy has many present-day repercussions. For example, a lot of Indigenous people do not have a credit history, which is a huge barrier to credit access; many of our Indigenous entrepreneurs were not able to get loans on that basis alone. The Indian Act also prohibits the use of assets on reserves as collateral, so Indigenous entrepreneurs find it hard to list assets against which to get loans. A lack of financial exposure and skills also means Indigenous people are excluded from the traditional banking system. Banks do not have the kind of relationships with our communities that AFIs do. Indigenous entrepreneurs have unique challenges, yet, like all businesses, they also need business support, mentorship, access to capital, good financial tools and capacity building.

What is NACCA’s Indigenous business strategy and how does it fit into the roadmap of building a $100 billion Indigenous economy?

The Business Development Bank of Canada was created in 1944 to stimulate the economy after the Second World War. By the 1980s, they identified that it was not meeting the Indigenous community’s needs, so they created the network of AFIs. The AFIs represented by NACCA have given out 45,000 loans and supported many of the roughly 62,000 Indigenous businesses that exist in Canada today. The government created the AFI network with $240 million and we have turned it into $2.5 billion in lending, by recycling it about 11 times. However, we still lack capital; we are waiting for our loans to be repaid before we issue new ones. NACCA’s Indigenous Business Strategy calls on the government to provide seed capital for a fund that will attract private sector investment and to provide for ongoing funding for mentorship and other supports for entrepreneurship. In total, we are looking to attract $150 million to the fund so that our AFIs can borrow capital from it and lend the money to Aboriginal entrepreneurs in their communities. They have about 35 years of experience doing the due diligence, approving loans and having them repaid at a loan default rate of only 2.2%, which is low on a global scale.

“NACCA’s Indigenous Business Strategy calls on the government to provide seed capital for a fund that will attract private sector investment and to provide for ongoing funding for mentorship and other supports for entrepreneurship.”

Aboriginal Financial Institutions have generally filled the lending space of $250,000 or less. 80% of our lending goes to businesses that employ four people and less. We have identified a market of larger and more complex businesses that require $250,000 to $2 million. AFIs are true partners in the lending pathway from an entrepreneur taking out a first small loan to a successful business accessing mainstream lenders to finance multi-million dollar expansion. No other institutions have demonstrated a more successful ability to process 45,000 loans while developing new entrepreneurs for larger mainstream lending.

“If we really want to unlock the potential of a $100 billion Indigenous economy, we need to open up access to capital so that Indigenous communities can develop infrastructure, grow businesses and take advantage of economic opportunities.”

If we really want to unlock the potential of a $100 billion Indigenous economy, we need to open up access to capital so that Indigenous communities can develop infrastructure, grow businesses and take advantage of economic opportunities such as tourism, major resource projects and procurement. They could then also invest in education and health. We also need to bring some stability to the Indigenous-corporate relationship so that foreign investors feel comfortable coming back to Canada. Supporting the Indigenous economy will assist the Canadian economy. A community that retains rights and title over their traditional territories holds leverage that Canada can ill afford to ignore any longer. Indigenous people want to share the wealth, and so they should.

How would you describe the connection between Indigenous economic development and reconciliation in Canada?

Indigenous communities were wealthy prior to colonization. They had a trading system that provided all their necessities and governance systems that tied the culture closely to the land. So, reconciliation in this context really means bringing the wealth and prosperity back to the community. It means improving health, education, governance and opportunity for business that will give people jobs and plug them into the global economy. Reconciliation also means that the Indigenous community needs the necessary space to create their own system and to create the economy that is best for their territory and community.

Just take a look at the Canadian economy, foreign investment has reduced by 50% since 2015 and is at the lowest level since 2010. This can partly be attributed to the instability and risk of investing in Canada. Although Indigenous people have won more than 200 court cases that affirm their rights to traditional territories, the government is still not respecting our connection to the land or the agreements made. Indigenous communities’ inherent right to their traditional territories has been affirmed by courts time and again, and is affirmed in the Constitution of Canada. We should have access to equity in projects, revenue sharing agreements and business opportunities, because that just makes good economic sense.

“Reconciliation means improving health outcomes, improving opportunities, giving people jobs and plugging them into the economy.”

But reconciliation goes beyond economics as well. Canada’s curriculum has historically failed to educate students about the Indigenous community. The long and ugly history of genocidal policies needs to be told so the gap in quality of life can truly be understood. This will create a greater understanding from which we will be able to begin to change policy and systems to be inclusive of Indigenous history rather than dismiss and exclude the Indigenous contribution to Canadian society.

How are Aboriginal youth tapping into technology and entrepreneurship as forces for development?

Canada has not untapped this market; by ignoring the treaty promises to provide education as a minimum, our youth still suffer from some of the lowest education indicators. We should focus on unlocking the potential of our Indigenous youth, this population is going to reach a million by 2027 and is growing four times faster than the Canadian average. We have an opportunity to take advantage of this highly employable demographic and take Canada’s technology sector forward. Due to the location of the some of our communities technology can be a challenge. It can also be a huge opportunity for our youth to connect to the world and create potential for their own situations.

Part of the Indigenous Economic Development Series presented by: