Research Scan: Small-Business Loans: Effect of Race Studied

By Seiberg, Jaret | American Banker, March 12, 1999 | Go to article overview

Research Scan: Small-Business Loans: Effect of Race Studied


Seiberg, Jaret, American Banker


By JARET SEIBERG The Federal Reserve sponsored a two-day conference this week on small- business lending. About half the studies presented focused on whether lenders discriminate against minority businesses. Copies of the studies will be available this summer on the Fed's Web site, www.federalreserve.gov.

Discrimination may be responsible for a 25% higher loan rejection rate for black-owned small businesses than for white-owned companies, according to Phillip B. Levine of Wellesley College, David G. Blanchfield of Dartmouth College, and David J. Zimmerman of Williams College.

Using data from the Fed's 1993 National Survey of Small Business Finances, the researchers find that black business owners believe they are less likely to get credit. This discourages some from applying for loans.

They also write that denial rates on loans to black-owned businesses are higher than on loans to firms owned by whites, even after controlling for creditworthiness and similar factors. Without controlling for other variables, black-owned firms were 42% more likely to be rejected for credit than white-owned companies.

Another study explores loan rejection rates for black- and white-owned small businesses. Ken Cavalluzzo of Georgetown University, Linda Cavalluzzo of the Center for Naval Analysis, and John Wolfken of the Fed look at credit histories, credit risk scores, lender relationships, education and experience of owners, and geography for black and white businesses.

"Despite the role played by these important explanatory variables, African-American-owned firms still faced substantially higher denial rates than businesses owned by white males," they write.

The economists also find that minority firms wanted more credit than they were able to obtain. Application rates from minorities would have been higher if these groups thought they would receive credit, they write. …

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