SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING

SOCIAL FINANCE:UNLOCKING THE POTENTIALOF DEVELOPMENTAL LENDINGAn Impakt study into the potential of developmental lendingto address social and business challenges in Alberta

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDINGSOCIAL FINANCE:UNLOCKING THE POTENTIALOF DEVELOPMENTAL LENDINGAn Impakt study into the potential of developmental lendingto address social and business challenges in Alberta

AN IMPAKT STUDY ABOUT IMPAKT Founded in 2001, Impakt helps corporations and not-for-profit organizations become social purpose leaders by assessing, improving and measuring the value of social investments and social programs. For more information: impaktcorp.com ABOUT INDIAN BUSINESS CORPORATION Since 1987, the Indian Business Corporation – a developmental lender – has provided financing for First Nations peoples in western Canada. IBC believes that access to capital for First Nations peoples provides opportunities for success and economic development. For more information: indianbc.caAcknowledgementsImpakt would like to first and foremost thank the IBC clients who participated in the research bysharing their stories and expertise. In addition we’d like to thank the IBC staff and the IBC boardwho provided valuable input and guidance throughout the process.We would also like to thank Statoil Canada for supporting this study. Statoil has a track record ofpiloting social innovations aimed at preparing local businesses and individuals to access contractswith industry, which in return provide industry with contract-ready local service providers.We are grateful for the support of the Government of Alberta, which recognizes the potential ofdevelopmental lending to achieve socioeconomic priorities shared by communities, corporationsand governments.Other key informants were the Canadian Council for Aboriginal Business and the NationalAboriginal Capital Corporation Association.AltaGas Ltd. must also be recognized for its early leadership in establishing the AltaGas FirstNations Development Fund within the Indian Business Corporation. This relationship came aboutduring the writing of this paper and provided a vision for the practical approach to social financereferenced within.Finally, thanks to Rob Rollingson, general manager at IBC. Rob’s experience with conventionaland developmental lending and sincere concern for individuals and communities achieving self-sufficiency make him a valuable resource for everyone concerned with unlocking the potential ofsocial finance.

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDINGTABLE OF CONTENTSExecutive Summary 6Unlocking the Potential of Development Lending 9 Developmental lending: a global context 9 Finance for development 10 Traditional roles and responsibilities 11 Pursuing more social and business value 11 The unrealized potential of Aboriginal businesses 12 Lack of access to capital 14 Recognition of aboriginal financial institutions 14 Shared priorities, shared solution 14Indian Business Corporation: Best-Practice Developmental Lending 151. Providing Aboriginal entrepreneurs with access to capital 17 Geography 17 Demographics 17 IBC’s access to loan capital 192. Expanding IBC’s services 203. Being a good developmental lender 21 A tailored approach 224. Increasing the prosperity of individuals and communities 23 Indications of increased prosperity 23 Defining prosperity 235. Supporting employment 24 NACCA employment indicators 24 Loans to start-up businesses versus existing businesses 24 A case study on employment: Frog Lake First Nation and area 256. Building positive relationships within communities 27 Repeat loans 27 Supporting Frog Lake First Nation and area 27 Importance of building positive relationships 28A Way Forward 29Endnotes 30

AN IMPAKT STUDYIf Canadian resource companies really want to do something valuable for Aboriginal people while securing their social licence to operate, they should provide capital for developmental loans. Trusted intermediaries like the Indian Business Corporation have shown that developmental lending is an effective way of bringing people into the resource economy, increasing self-sufficiency and community resilience. – Brian Cardinal President, Indian Business Corporation

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDINGConnie’s Oilfield Lease Maintenance Ltd., Frog Lake Alberta“TRUST ME I REALLY HAD A HARD TIME WHEN I FIRST STARTED.”says Connie Saliwonczyk, president and founder of Connie’s OilfieldLease Maintenance Ltd., based in Frog Lake, Alberta. “I was in businessfor nine years prior to getting financing. Back then I was cutting grassand pumping water, providing well-site maintenance. I started out verysmall on my own. I worked with child welfare and I saved my moneyand started buying my own equipment.”Connie has built a reputation for dependability and accessibility. Connie SaliwonczykHer clients appreciate that she is local, hires local employees, and ishardworking and quick to respond.“Over the years of hard work, I watched as larger companies provided services like vac trucks.Eventually, I said to myself why can’t I provide services like that?“I wanted to expand from three inch water pumps to floating pumps. I wanted more equipment,like a vac truck to clean up spills. But it was a long struggle probably a good five years and therewas no hope with the banks for financing.“Eventually I was introduced to Indian Business Corporation. I heard it was a company that lentmoney to folks living on reserve. I was the happiest person when they approved my application.“My company today? It’s growing it’s growing thanks to IBC. We employ four full-time, three part-time and ten to fifteen seasonal workers. It’s just incredible.“I run the company with my son and daughter. We run a strong crew of all women. People alwaysknow Connie’s Oil Field Lease Maintenance Ltd. as a ‘ladies’ crew. They know we are women, theyknow we work hard.”Ted Walker, another Frog Lake entrepreneur financed by IBC claims that Connie set the path he isnow on. “Connie started a few years before me and that is where I plan on being in a few years. It’slife changing for real. It’s going from ‘like I might lose my job this month’ to having real security.”“Starting a business” says Connie, “forces you to grow personally, to do your taxes, to keep records.It builds self-sufficiency better than any program I can think of.“I was so proud of that first truck. The success I felt, to actually go and get it - I was literally in tears. And inthe back of my head all I could think about was my Dad. He would have said ‘I’m so proud of you’.”“Personally I am proud”, says Connie’s daughter Janine Weaver. “I see my Mom as a pioneer in this.I have a Diploma in Legal Administration, the Oil Patch is not where I wanted to be but my Momstruggled through it and made it possible for my brother and me to join the business. Now I amout here and I love it. She made it that much easier for me. Together I hope we can make starting abusiness easier for others.”

AN IMPAKT STUDYEXECUTIVE SUMMARYConnie’s story is just one example of how developmental lending can createeconomic opportunities for Aboriginal people while supporting the priorities ofthe private sector in Alberta. With a loan from the Indian Business Corporation(IBC) – a developmental lender – Connie was able to contribute to, and benefitfrom, the growth of the Alberta resource sector, while providing employmentopportunities for her children and others in her community.This report represents an important first step towards understanding thepotential of developmental lending to improve socioeconomic conditionsin Alberta’s Aboriginal communities. Our research involved considering thecurrent context for developmental lending, reviewing IBC’s loan records, andconsulting directly with IBC clients. Our research revealed four key findings1 There is a growing gap 3 Over the past 27 years, between the need for IBC has fostered a “made high-value industries in in Alberta” approach that Alberta to engage more helps Aboriginal people Aboriginal suppliers and the become successful financial resources needed entrepreneurs, transforms for Aboriginal people in the lives of families and the province to become communities and supports entrepreneurs; the needs of industry;2 As a result, opportunities for 4 Despite evidence of the meaningful socioeconomic business and social value development within of developmental lending, Aboriginal communities industry has not yet remain limited and embraced this approach businesses run the risk of and the the pool of available incurring higher costs and loan capital in Alberta jeopardizing their social remains inadequate. licence to operate; 6

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING We believe that the gap between supply province, Aboriginal people continue to and demand for loan capital is a missed experience more income inequality and opportunity for industry, governments, worse health and social outcomes than and importantly Aboriginal individuals and other Canadians.2 Increasing Aboriginal communities. In response, there is a sound involvement in the resource economy argument for resource companies and through entrepreneurship is one way to governments to make more loan capital improve these disparities. available to Aboriginal entrepreneurs in Alberta. With support from industry and A major barrier to increasing Aboriginal government, Alberta’s developmental lenders entrepreneurship is the lack of capital could meet growing client demand, while available to start new businesses or grow helping corporations secure their social existing ones. Many Aboriginal people living licence to operate. on reserve lack collateral, borrowing history, or sufficient financial records. As a result, Growth in Alberta’s resource sector has mainstream lenders consider Aboriginal driven the Canadian economy, stimulated people to be high risk. While resource employment, and fostered much prosperity, companies are seeking more participation including among Aboriginal entrepreneurs. by Aboriginal people, and the demand for Many First Nations are located close to local suppliers and employees is expected to important areas of resource extraction, and continue to increase, most companies do not corporations have recognized the potential have the inclination or the capacity to lend for Aboriginal entrepreneurs to support directly to entrepreneurs, nor should they be business objectives. The Government of expected to. Canada has made Aboriginal business a priority by developing a Procurement Closing the gap between industry’s need for Strategy for Aboriginal Business, supporting more participation by Aboriginal people and the Aboriginal Business Development aspiring entrepreneurs’ demand for business Program and positioning entrepreneurship loans presents an ongoing challenge. “Access prominently in the Federal Framework for to capital” is commonly identified as the Aboriginal Economic Development. Policies biggest constraint to stimulating local such as the Alberta Competitiveness Act are businesses, keeping capital within the local helping Aboriginal people play a meaningful economy, and increasing long-term economic part in the provincial economy. sustainability and resilience. Despite growth of the resource sector The situation is complex: Aboriginal and many shared interests, there are communities have differing degrees still proportionally fewer Aboriginal of readiness for new business growth, entrepreneurs than non-Aboriginal awareness of developmental lending remains entrepreneurs. The reported self-employment low, and most corporations have never rate for First Nations individuals on reserve worked with developmental lenders and may is substantially lower than for those living not understand that the solutions they offer off reserve.1 In Canada’s most prosperous are viable ones.7

AN IMPAKT STUDYThis report serves as a starting point by The pages that follow provide the contextoffering a model for how the Government for developmental lending, establishof Alberta, the business sector, Aboriginal reasons why it is an effective way to addresscommunities, and developmental lenders socioeconomic priorities that Aboriginalsuch as IBC can work together to mobilize people and industry share, and featurescapital in support of Aboriginal entrepreneurs and overview of IBC’s 27-year history as aworking in Alberta’s resource sector. developmental lender in Alberta.Developmental lending through IBC OLUTION: INCREASE ABORIGINAL ENTREPRENEURSHIP THROUGH GREATER ALBERTA AND A FEDERAL GOVERNMENT CCESS TO CAPITALSHARED VALUE S Seeks to ȗ
Increase the participation of Aboriginal people in the “social and economic life of the province” ȗ Support positive engagement between resource companies and Aboriginal communitiesABORIGINAL PRIVATE SECTORCOMMUNITIES Seeks toSeek to ȗ Build positive relationships ȗ Build capacity and with Aboriginal communities promote self-sufficiency ȗ Increase procurement from ȗ Support and attract Aboriginal business means for economic development ȗ Build economic capacity in or near areas of operation ȗ Secure social licence to operate 8

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING Developmental lending: a global context There is a global move to address poverty and underdevelopment with financial or market instruments, such as social impact bonds, social enterprise, and developmental loans. Underpinning this shift is a commitment by governments and corporations alike to broad-based economic growth as being essential to sustainable, long-term development. [Developmental lending] creates • Working with private- the opportunities impoverished sector companies to spur economic households need to raise their living development so that citizens can standards, provides countries with the participate in a vibrant economy that resources to expand access to basic allocates resources wisely services, and – most important of all – enables citizens to chart their own • Encouraging local channels of prosperous futures.3 financing to empower entrepreneurs in developing countries to improve This marks a departure from traditional their lives and shape their own approaches to development, such as direct futures aid and philanthropy. The U.S. Agency for International Development has championed The goal of this approach is to “help build new economic development and trade as essential markets by expanding trade and supporting tools for tackling poverty, including: the emergence of middle-class consumers that can buy U.S. goods and services, with the belief that stable economies are less vulnerable to crises.”49

AN IMPAKT STUDYFinance for developmentMICROFINANCE Small loans allocated to non-traditional, high-risk FINANCE GENERATES loan recipients (e.g., low-income women in POSITIVE SOCIAL IMPACTS developing countries) In developing countries, Example: Grameen Bank, Bangladesh microfinance provides business opportunities to low-income (http://www.grameen-info.org) people. Similarly, social value created from developmentalDEVELOPMENTAL Targeted loans ... aimed at stimulating lending begins with providing LENDING entrepreneurship ... financing that is provided capital to individuals considered high risk by mainstream lenders to businesses with a clear social or and helps them establish or environmental purpose5 grow their businesses. Common to both is support for businesses Example: Indian Business Corporation, Alberta that deliver a positive social impact. These social enterprises (http://www.indianbc.ca) create social value as an integral part of a company’s business SOCIAL Businesses that are committed to creating a model.ENTERPRISES positive social and economic impact through their business activities Example: Businesses supported by the Acumen Fund (http://www.acumen.org)The Government of Canada has also challenges and that many global companiessignalled its commitment to this approach are working in Canada’s rural and remoteby transferring what were once the regions, a strong case can be made for a usingresponsibilities of the Canadian International a similar approach in Canada.Development Agency to Foreign Affairs,Trade and Development Canada. This has A Canadian equivalent of microfinancegiven rise to the engagement of Canadian can be found in the lending activities ofresource companies as important new actors Aboriginal financial institutes, such asin creating social value in regions where IBC, that provide developmental loans toresource extraction is taking place. Aboriginal entrepreneurs. The parallel to the international context is extended furtherIn developing countries, the role of when the potential of developmental loansmicrofinance and micro loans is well made in areas of resource development isunderstood, and these financing methods considered.are a mainstream approach to helping poorpeople start businesses, encouraging themto be self-sufficient and having the goal oflifting them out of poverty. In Canada, the useof this approach is just beginning. Given thatAboriginal people here face socioeconomic 10

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING Traditional roles THE RISK OF TRADITIONAL COMMUNITY INVESTMENT and responsibilities Companies with a charitable mindset that pursue While it is the government’s responsibility community investment (e.g., facilities, training centres, to consult and accommodate communities museums) frequently encounter a range of long-term in which resource development is taking risks. When a company fails to achieve its promise of place, aspects of this responsibility are improved socioeconomic conditions, the community often delegated to the resource companies investment the company made stands as a reminder that themselves. In response, most resource it could not deliver positive social change. companies operating in the Alberta resource sector have established Aboriginal relations Recent court decisions related to resource departments, charged with the task of development have influenced the tone of consulting and accommodating communities relationships between industry, governments, in areas slated for development. Much has and Aboriginal communities.5 been done in the name of building positive relationships with communities (e.g., corporate The result has been a growing imperative social responsibility, community investment, for resource development companies stakeholder relations), but the actual value to establish more value through their of these efforts is difficult to measure and is relationships with their supply partners, increasingly questioned. local governments, and individual business owners. In instances where this is not the Industry has both a challenge and an case, the company’s social licence to operate opportunity to find more effective ways to has been called into question, often resulting establish high-value relationships that expand in delays, added expense, and in some cases local participation in the resource economy the cancellation of a development project. while reducing a range of business risks. Developmental lending offers a promising While the business case for better community approach – one that provides the private engagement and accommodation has been sector with an opportunity to have a positive made clear, the best approach for doing so and measurable socioeconomic impact. is less clear. Statoil and Shell, two global energy companies, have both established Pursuing more social business incubators in partnership with First and business value Nations partners on reserve. The intent of the business incubator is to help foster small Companies operating in Alberta’s resource businesses, from inception to the creation sector are increasingly placing priority on of business plans and other supports. While building business relationships with local both Statoil and SUNCOR have been praised Aboriginal communities. The business for their approach, neither effort has included advantages of doing so include access to a financing component for small business. land and local labour and contractors, faster approvals, lowered risk, and so on.11

Almost a third AN IMPAKT STUDY (31%) of Alberta’s The unrealized potential of Aboriginal businesses Aboriginal population The Aboriginal population in Alberta is among is under 14 years of age. the youngest in the country and is growing faster than the general population. AlmostOf the 150,000 businessness a third (31%) of the province’s Aboriginal operating in Alberta, population is under 14 years of age, whereas 19 percent of the non-Aboriginal population is more than 95% are small or in that age group. Half of all Aboriginal people medium sized businesses. living in Alberta are children and youth under 24 years of age. Nevertheless, Aboriginal OPEN people continue to be underrepresented in Alberta has 50.3 small & Alberta’s workforce.medium enterprises (SMEs)per 1,000 inhabitants. Across Canada, the number of Aboriginal business owners and entrepreneurs is Owners of SMEs in Alberta growing at a rate that far exceeds that for self- anticipate approximately employed Canadians overall. The magnitude of small business within the Alberta economy 10% growth in 2014. is undeniable – of the 150,000 businessness operating in Alberta, more than 95% are small or medium sized businesses.6 • Compared with other Canadian provinces, Alberta and Saskatchewan have the highest number of small and medium enterprises (SMEs) relative to the total working-age population (15 years old or older): 50.3 SMEs per 1,000 inhabitants in Alberta and 47.8 in Saskatchewan. • Saskatchewan ranks first in terms of the proportion of high-growth SMEs (13.2%), followed by Alberta (9.3%) and British Columbia (9.2%). • Owners of SMEs are optimistic for their growth in the current economic environment; in Alberta these owners anticipate approximately 10 percent growth in 2014.7 12

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING Almost 4 in 10 Aboriginal business owners create jobs for others, Aboriginal & non-Aboriginal people alike, and most hire full-time permanent workers, as well as part-time & casual labour. Given the important role of SMEs in Alberta and and communities to ensure Alberta the growing priority for increased engagement of increases its competitive advantage Aboriginal communities in the resource economy, within Canada and the global economy. the Government of Alberta has established a Its focus on partnership may be a mandate to increase participation by Aboriginal timely opportunity for the province people in Alberta’s workforce and economy.8 and First Nations to come together on projects that benefit everyone.9 Recent federal and provincial legislation indicate the priority on growing Aboriginal businesses Clearly, thriving Aboriginal businesses, especially those related to major resource development, • The federal Procurement Strategy benefit not only the individual entrepreneurs for Aboriginal Business (PSAB) aims but also the communities in which those to increase federal contracting oppor- businesses operate and the companies that tunities for Aboriginal businesses, and employ local services – that is, the whole of improve their access to the overall society. Almost 4 in 10 Aboriginal business federal procurement process, includ- owners create jobs for others, Aboriginal and ing procurement commitments (e.g., non-Aboriginal people alike, and most hire full- set asides) negotiated through impact time permanent workers, as well as part-time benefit agreements between companies employees and casual labour. Almost all have and communities as part of the commu- at least one Aboriginal employee and consider nity consultation and accommodation the development of employees’ skills important. process. Like other small businesses across Canada, Aboriginal businesses create employment, • The Government of Alberta through economic prosperity, and social well-being. its Competitiveness Act seeks to work closely with industry, business leaders,13

AN IMPAKT STUDYLack of access to capital Apeetogosan (Métis) Development Inc. In the 2010 report of the MLA Committee onSupporting the development of businesses the First Nations, Métis and Inuit Workforceowned by Aboriginal people is increasingly seen Planning Initiative – titled Connecting theas a promising approach to building self-suffi- Dots: Aboriginal Workforce and Economicciency and prosperity in Aboriginal communi- Development in Alberta – Alberta-basedties. As economic opportunities increase through Aboriginal capital corporations were“court judgements, land settlements, new mentioned for their role as developmentalrevenue sources, the new economy, resource lenders, business services providers, anddevelopment and export markets,”10so does the facilitators of economic development.12incidence of Aboriginal entrepreneurship. But,as the National Aboriginal Capital Corporation IBC defines developmental lending asAssociation (NACCA) notes, the rapid growthof entrepreneurship “is generating increased • providing financial services (primarilydemand for both debt and equity capital.”11 loans) to Aboriginal people who, for a variety of cultural and/or financialDespite an increased demand for finance and a reasons, are alienated by mainstreamcommitment from traditional financial institu- lending institutions (e.g., charteredtions to provide services to Aboriginal people, banks, trust companies, credit unions);many – particularly those on reserves – remainalienated from mainstream sources of capital. • approving loan applications on theBusiness owners may lack the traditional assets basis of typical financial considerationsneeded for adequate loan security. Further, while taking into account the potentialdue to section 89 of the Indian Act, “banks are for positive social or communityreluctant to provide financing to First Nations outcomes; andgiven the issues around security and rights ofseizure resulting from the restrictions placed on • evaluating social outcomes resultingthe use of property as collateral.” Given the lack from the loan portfolio over the long term.of alternative options for obtaining capital, thesebarriers to Aboriginal economic development Shared priorities, shared solutioncan be insurmountable. The needs of industry (e.g., securing aRecognition of Aboriginal social licence, reducing business risk,financial institutions engaging a local labour force and suppliers) and the challenges that rural AboriginalOne of the best solutions to address the communities face (e.g., unacceptable rates oflack of available capital for Aboriginal unemployment and poverty, low secondaryentrepreneurs is through Aboriginal Financial school completion rate) can be met throughInstitutions (AFIs). The Government of an increased support for developmentalAlberta has recognized the important role lenders such as IBC.of developmental loans made by AFIs,such as Indian Business Corporation, theAlberta Indian Investment Corporation and 14

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING INDIAN BUSINESS CORPORATION: BEST-PRACTICE DEVELOPMENTAL LENDING IBC has successfully practised developmental lending in Alberta since 1987. The company – owned by the three treaty areas of Alberta (treaties 6, 7, and 8) – is a financial institution first, tailored to meet the specific needs of Aboriginal entrepreneurs. Developmental lending, however, is more than a financial transaction. Clearly, IBC is a social business, one that expects positive social outcomes from its financial activities and whose main organizational goals go beyond those of mainstream or commercial lenders. IBC six main goals, which are discussed in detail below, are as follows 1 Providing Aboriginal entrepreneurs 4 Increasing the prosperity of with access to capital individuals and communities 2 Expanding IBC’s service 5 Supporting employment 3 Being a good developmental 6 Building positive relationships lender within communities In its developmental lending, IBC targets contributes to sustained community economic the needs of rural and reserve-based small development. The reality and the frustration businesses and applies its particular expertise for IBC, however, are that 95 percent of its base to helping individual entrepreneurs. IBC of capital is deployed at any given time. As a recognizes that creating more access to result, viable Aboriginal businesses go without finance promotes thoughtful planning by finance, and the many benefits previously all actors, and is starting to track how this discussed are not achieved.15

AN IMPAKT STUDYSo much of the research related to Aboriginalbusiness innovation and entrepreneurshiplumps together all actors (e.g., governments,community, the private sector). Report afterreport has the same conclusion: accessto capital is a constraint to realizing thepotential of Aboriginal business. Ways mustbe found to broaden and facilitate access tocapital. One conclusion became clear as aresult of this study: greater access tocapital must include access to capital fordevelopmental lenders so that they can inturn, make capital available to Aboriginalentrepreneurs and evaluate the socialoutcomes that result from doing so.The aim of this study is to increaseunderstanding of how more capital can bemade available to Aboriginal entrepreneurs– particularly those seeking to participate inAlberta’s resource economy. The following sixsections of this report draw on the experienceof Indian Business Corporation to illustratehow Aboriginal finance institutes makecapital available to Aboriginal entrepreneurs. 16

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING 1. PROVIDING ABORIGINAL ENTREPRENEURS WITH ACCESS TO CAPITAL IBC’s core goal is to provide FIGURE 1 IBC DISBURSEMENTS 2005–13 Aboriginal entrepreneurs with access 7 $6.8 to capital so that they can create new businesses, or maintain or expand 6 existing ones. The social benefits $5.0 of Aboriginal entrepreneurship will never be fully realized if sufficient 5 capital is unavailable to Aboriginal entrepreneurs. 4 $3.4 $3.5 $4.0 3 $2.5 $2.6 $3.5 BETWEEN 2005 AND 2013, IBC DISBURSED APPROXIMATELY $32.6 MILLION 2 (SEE FIGURE 1) TO 382 ABORIGINAL $1.3 INDIVIDUALS AND COUPLES. 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 year FIGURE 2 IBC DISBURSEMENTS ACROSS ALBERTA SINCE 2005 Geography ALBERTA Since its inception, IBC has lent money to legend clients across Alberta. Figure 2 shows IBC’s < $299K disbursements across Alberta since 2005. $300 - $699K $900K - $2.9M Demographics $3M - $6M+ Developmental lenders seek to improve access to capital for all First Nations, including subgroups that may be at a greater disadvantage. Our research sought to answer the question, who are IBC’s clients?17

AN IMPAKT STUDYFIGURE 3 PERCENTAGE OF MALE AND FEMALE CLIENTS, FEMALE ENTREPRENEURSBASED ON IBC’S CURRENT LOAN PORTFOLIO According to Aboriginal Affairs and Northern Development Canada, female Aboriginal 20% entrepreneurs are “starting businesses FEMALE at double the rate of Canadian women generally.”13 80% MALE Despite this, Aboriginal women, on average, are less likely to own businesses and haveFirst Nation women play an important worse social outcomes than Aboriginal menrole in the creation of small businesses or non-Aboriginal people.14in Alberta. IBC currently has over $2million lent out to 25 Aboriginal women. This disparity illustrates the need to activelyWhile we are proud to support First engage female entrepreneurs in business.Nation women entrepreneurs, clearly Currently, 20 percent of IBC’s portfolio is lentthe lack of capital is a significant to Aboriginal women (see figure 3).barrier in assisting this group to reachtheir full potential. AGE IBC lends to clients across a wide age range.– Rob Rollingson, IBC general manager Many IBC clients are within the 46 to 49 age range (see figure 4) this is in part becauseFIGURE 4 IBC LENDING BY AGE RANGE, IBC gives preference to applicants who haveBASED ON IBC’S CURRENT PORTFOLIO demonstrated sector experience or work history. Of the clients interviewed during our 21% research, most mentioned the importance of 19% sector experience. As well, personal savings are the most common source of finance for 15% 12% business start-ups, but a lack of personal 12% 9% savings may prevent younger individuals from starting their own businesses.5% 7% IBC has a specific fund dedicated to promoting youth entrepreneurship. The small loans disbursed from this fund allow young entrepreneurs to build credit, learn business skills from more experienced friends and family, and take on responsibility with an appropriate level of risk. 18

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING CLIENT ATTRIBUTES Yes I have had a few younger IBC provides tailored support to diverse people approach me. They clients whose circumstances vary. According want to know how [to start a to our research, when they apply for funding business]. My first advice … many of IBC’s clients have a stable income to them is get involved. Get or employment, either through their own involved and work in that field business or through work in their community. that you are thinking of. You Only a few clients reported unstable have got to know it; you have employment or income at the time of got to understand it. Then get application. Over half of IBC’s current clients into business. – IBC client have good credit; the remainder either have no credit or credit challenges. For many of IBC’s access to loan capital the latter, lower credit scores were a result of unpaid cell phone or credit card bills. Before Our research clearly indicates that IBC is approving loans, IBC often requires clients to improving access to capital for a range of settle their debts or make arrangements to Aboriginal people in Alberta. IBC’s lending pay them. capacity, however, is limited by its own access to loan capital. In 2011, IBC lent nearly Other common strengths of approved $7 million dollars (see figure 1), nearly $3.3 applicants include having sector-related million more than in 2013. IBC received a experience, support from the community, large loan payout in 2011, thereby increasing a co-signer for a loan, and demonstrated the amount of capital available to lend. The entrepreneurial skills (e.g., financial records, corresponding increase in disbursements business plans, work guarantees). suggests that IBC is not limited by its organizational capacity or the demand for The diversity of IBC’s clients indicates loans, but rather by the funds it has available that entrepreneurs vary in many ways a to lend. prototypical entrepreneur does not exist. This suggests that IBC’s lending approach is flexible enough to accommodate a range of client needs and circumstances. IBC’s client- centred approach (which includes client calls, site visits, and ad-hoc business support) mitigates against client attributes that may pose too great a risk for traditional financial institutions.19

AN IMPAKT STUDY2. EXPANDING IBC’S SERVICEIBC endeavours to expand its service across Alberta to more individuals,communities, and sectors. Although IBC’s current loan portfolio is diverse,the company recognizes that an opportunity exists to expand service andbuild relationships in communities where it has been less active.An important facet of expanding service successful business, other members of theis understanding how IBC attracts clients. community become interested in pursuingAccording to our research, many clients of entrepreneurial opportunities for themselves.IBC were referred to it by a friend, a family This suggests that IBC can effectively expandmember, or a leader in the community. its service by locating clients who will extolHistorically, when IBC lends money in the benefits of entrepreneurship.a community where it has not done sobefore, demand for loans in that community IBC’s ability to expand its service, however,increases in subsequent years. This is is contingent on IBC having sufficient accessconsistent with the feedback we received to capital to meet entrepreneurs’ growingfrom interviewees in Frog Lake First Nation demand for financing.when an Aboriginal person establishes a 20

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING 3. BEING A GOOD DEVELOPMENTAL LENDER As a financial institution, IBC must IBC’s SEVEN-STEP DEVELOPMENTAL practise sound and effective lending. LENDING PROCESS Responsible lending ensures that IBC can remain a competitive 1. IBC receives paper applications from First and sustainable source of capital Nations individuals who want to start or for Aboriginal entrepreneurs. expand a business. Importantly, IBC relies on its loan interest income to achieve 2. A loans manager meets with the operational self-sufficiency. This applicant to assess the strength of the ensures that operational costs do loan application and viability of the not erode the loan capital, thereby business opportunity. maximizing the capital available to lend. The following indicators suggest 3. Based on the outcome of the interview, that IBC is operating in accordance the loans manager conducts a thorough with its mandate by using its review of the applicant, including a credit resources to the fullest: check. • IBC commits 92 percent of its capital to the 4. The loans manager submits his or her business of lending, whereas other lenders recommendation to the general manager, in the AFI network commit on average only who reviews the application and makes 52 percent. approvals accordingly. • IBC’s income arising from loan interest 5. If a loan is approved, the loans manager and investments is nearly three and a half meets with the client to review the times greater than the average income for conditions of the loan. other lenders in the AFI network. 6. Funds are released, in exchange for • IBC’s annual draw on government funding security, typically at a 12.5% interest rate. is less than one-third of the average draw of other lenders in the AFI network. 7. Loan managers maintain ongoing communication & provide after care for clients as well as ongoing monitoring and evaluation of business and social outcomes.21

AN IMPAKT STUDYA tailored approachDevelopmental lending entails a higherdegree of risk than does traditional lending.While write-offs are anticipated, IBC strivesto hold loan loss to a maximum of 3% ofits annual operating revenue. Whereverpossible, IBC seeks to provide solutions thatkeep borrowers on track while protecting theeffectiveness and integrity of IBC’s business.This client-centred approach is based oneffective two-way communication betweenIBC staff and clients. IBC supports its clientsthrough regular calls and semi-annual sitevisits. As well, IBC is flexible with respectto the needs of its clients, recognizing thatthere is no “one-size-fits-all” approach todevelopmental lending. As part of its flexiblelending approach, IBC endeavours to makequick but informed decisions about loansso that entrepreneurs can take advantageof business opportunities in a timelyfashion. While IBC’s business risk would beconsidered too high for a commercial lender,its approach to lending mitigates risk andensures the company and its clients havethe best possible chance for success. Whenclients are successful, the social benefits ofincreased entrepreneurship arguably exceedthe risk of developmental lending. 22

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING 4. INCREASING THE PROSPERITY OF INDIVIDUALS AND COMMUNITIES To be engaged in developmental lending is to be engaged, through business, in improving economic and social outcomes for individuals. IBC’s remaining goals relate to the capacity, stability and self-sufficiency of Aboriginal individuals and communities. Indications of increased I do see our community supporting prosperity small business within [it], because we help electricians and plumbers and On IBC’s presence in the community: “It builds contractors, small time contractors the community, I think. Personally, I don’t … When I need an electrician, I hire think a little bit of competition has ever hurt. It an electrician from the reserve. When makes people more ambitious.” – IBC client I need a plumber, I hire the plumber from the reserve … We always try to The data that IBC currently collects suggests encourage everybody. – IBC client that its approach to lending positively affects individual prosperity. For example, IBC’s current Defining prosperity loan portfolio indicates that 51 percent of clients have had at least one previous IBC loan. This On owning a business: “You take stuff more shows that IBC clients are successfully paying off seriously. Not just that but [life] got way better. their loans and coming back to IBC for addition- You can’t imagine owning your own truck or al financing. Those who are able to successfully having your own business. One of my friends, grow their business are supporting the prosperi- he doesn’t work for me [directly], but I got him ty of others through employment many of IBC’s a job. It snowballs.” – IBC client clients employ Aboriginal people from their own community. For example, 21 percent of clients Prosperity is traditionally measured through in Frog Lake who have IBC loans employ at least economic indicators however, prosperity can one person other than themselves. By creating be defined more broadly to include measures new revenue sources and supporting employ- of quality of life. An individual may not define ment, IBC is encouraging individual prosperity prosperity by an accumulation of wealth. A and helping individuals support their families. more holistic view of prosperity allows for An IBC client gave us another example of how individual and cultural priorities to be valued economic development and individual prosperi- equally. ty can radiate throughout the community:23

AN IMPAKT STUDY5. SUPPORTING EMPLOYMENT I do see a lot of people that have NACCA employment indicators gone through IBC to start their own business ventures … our As part of their annual reporting to NACCA, unemployment rate on our reserve is AFIs report the number of jobs they create so high, I think a lot more people are and maintain. Using the NACCA methodology, looking to run their own business. IBC reported that, since 2008, it has created 364 jobs and maintained 137.18 For the – IBC client purposes of our research, we modified the NACCA methodology, placing less emphasisIn the last 20 years, economic outcomes for on job creation, and calculated the degree toAboriginal people have improved. Despite which IBC supports sustained employment.this, Aboriginal people in Canada have higherrates of unemployment and lower incomes Loans to start-up businessesthan non-Aboriginal people.15 Many people versus existing businessesin the federal and Alberta governments,the private sector, and Aboriginal IBC’s lending falls into two categories loanscommunities are seeking opportunities to start-up businesses or loans to existingto support Aboriginal employment,16 and businesses (see figure 5). Loans that fall intoentrepreneurship is increasingly seen as a the latter category are often sought by clientsfavourable option for improving Aboriginal who have received multiple loans from IBC.employment. IBC puts priority on supporting Both types of lending are important. A highAboriginal employment through lending. percentage of loans to start-up businesses suggests that IBC is providing access to capitalThe five year success rate of AFI-supported to a diverse group of individuals. Conversely, aSMEs has, through an AFI pilot study, supported high percentage of loans to existing businessesby a search at the Business Register Statistics suggests that clients are seeking capital toCanada, been determined to be 58%. grow their business, which could result in increased employment and prosperity.– NACCA 2010 AFI Federal Government Job CostEfficiency Analysis17 This distinction affects IBC’s impact on employment. Providing loans to start- up businesses almost certainly creates employment, even if only in the form of part-time or seasonal positions. Lending to existing businesses may have various effects. For example, if an existing oil service company uses a loan to purchase a vacuum truck, a job is created however, if the company uses 24

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING the loan to repair a truck, a job is not created To understand how many jobs are created but is maintained. On the basis of an analysis or for how long jobs exist, we developed a of IBC’s loans, the inference can be made methodology to apply to IBC’s loan portfolio in that IBC is certainly supporting employment. Frog Lake First Nation and area. FIGURE 5 IBC LOANS TO START-UP BUSINESSES VERSUS EXISTING BUSINESSES 80 47 64 70 70 24 50 30 60 35 45 37 35 50 45 21 20 Number of loans to 40 start-up businesses 30 Number of loans to existing businesses 20 15 10 0 2007 2008 2009 2010 2011 2012 2013 A case study on employment: Frog Lake First Nation and area FROG LAKE AND AREA FACTS: Lake Cree Nation, Chipewyan Prairie Dene First Nation, Cold Lake First Nations, Whitefish • 109 loans, to 67 individuals and couples; Lake First Nation and Kehewin Cree Nation. • 5.6 million in IBC disbursements between 2005 Currently, IBC collects information on the number of jobs it estimates it will create by and 2013; approving loan applications. While the estimate • average unemployment rate in Frog Lake and area may be accurate, in many circumstances a loan might create less, or even more, employment 19.5% (of 2,500 individuals over 15 years of age in than predicted. For example, a business owner Frog Lake and area). may lose a contract for work, have difficulty finding and keeping employees, or become ill. We sought to determine to what extent IBC Conversely, a business owner may find that his is supporting employment through its loans or her business grows quickly and therefore by building a case study on employment in more employees are needed than were Frog Lake First Nation and area. For this case projected at the time of applying for a loan. In study, we included loans made to the following short, anything can happen! First Nations: Frog Lake First Nation, Saddle25

AN IMPAKT STUDYFIGURE 6 NUMBER OF JOBS SUPPORTED BY IBC LOANS IN FROG LAKE FIRST NATION AND AREA 504030 Jobs supported2010 $698,000 $1.73 million $488,000 $1.16 million 2010 2011 2012 2013 $414,000 0 2009We reviewed all of IBC’s loan records from The dollar figures in the graph indicate theFrog Lake First Nation and area in an disbursement amount for the correspondingattempt to estimate how many jobs had year. A correlation between disbursementsbeen sustained over a five-year period. and jobs supported cannot be assumed.IBC loan officers conduct semi-annual site IBC lends money to a number of sectors andvisits to each of IBC’s clients and document for a number of purposes; therefore, therethese visits in reports. On the basis of the is a great deal of variation in the “price of ainformation in loan officers’ reports, we were job.” Furthermore, if IBC makes a loan forable to estimate how many people a business the purposes of business expansion, theowner employs. loan may not create a job directly but does increase a client’s chances for success andOur estimates are very conservative. First, increased prosperity, which in turn could leadwe were able to track only whether a job to increased employment.was sustained as long as the loan remainedopen. When a loan has been paid off, site During our interviews, more than one clientvisits and the reports on them cease. Second, emphasized that employment figures arewe made an effort to count only those jobs only part of the story. While we estimatethat IBC directly supported. In some cases, that IBC supported 45 jobs in 2013, manyIBC’s clients employed more people than we of the people in those jobs have family orrecorded in our job count. Figure 6 shows friends that they support. The benefits ofa conservative estimate of the number of employment radiate beyond the individualsjobs IBC has supported (i.e., created or employed. Through lending, IBC is supportingmaintained) since 2009. individuals, families, and communities. 26

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDING 6. BUILDING POSITIVE RELATIONSHIPS WITHIN COMMUNITIES IBC’s sixth organizational goal is to build positive relationships with the individuals and communities it serves. As discussed previously, many of IBC’s clients are referred by family members and friends. Whether IBC can reach its other goals (e.g., providing access to capital, expanding its service) depends on its ability to build trusting relationships within communities. Repeat loans OPPORTUNITY When asked about IBC’s presence in Frog At present, the data collection IBC undertakes Lake First Nation, people who participated does not capture the extent to which IBC in our study mentioned the importance of is building positive relationships with opportunity. IBC’s approach to services (one- individuals and communities. However, that on-one client support) creates a context for 149 clients have applied for and received individuals to succeed. This strong emphasis more than one loan since 2005 is a clear on opportunity is consistent with the thesis indication that IBC is successfully building of this report: many individuals have the strong and positive relationships. ability, desire, and knowledge to succeed in business, but without reasonable access Supporting Frog Lake First to capital, they simply do not have the Nation and area opportunity to do so. Assessing the strength of relationships I think [IBC] has given a lot of our through quantitative data is difficult. community members opportunities Therefore, through a series interviews with … a lot of them have tried certain entrepreneurs in Frog Lake First Nation, we business ventures, whether it is sought to determine the extent to which IBC machinery, cattle, or whatever, and clients feel supported and encouraged by IBC. then haven’t been able to come up with funds. I think with IBC they’ve been given that opportunity to be successful. – IBC client27

AN IMPAKT STUDYActually everyone refused me; I went On continuing a relationship with IBC: “Ito a number of banks … They all feel more comfortable with [IBC’s generaljust said no. Straight up, no. I was manager] and I can go to him and talk to himfrustrated ... It was a really long about ideas. I can go to a bank and they arestruggle and there was no hope in the not going to be more open-minded aboutbanks like CIBC, TD, Royal Bank, all something, whereas with [IBC’s generalthese banks I approached … That’s manager], we can put our heads together.”how [IBC] came into it. I was thehappiest person when I walked out – IBC clientand [they] said yes. – IBC clientA SUPPORT SYSTEM Importance of buildingAnother theme that arose during the study positive relationshipswas IBC’s role in business support. IBC clientsreported that IBC was open-minded and IBC’s effort to build positive relationshipsapproachable, and provided a channel through is more than something “nice to have” it iswhich to discuss concerns, seek advice, and imperative to the success of IBC’s clients andshare good news. IBC’s client-centred approach future. Strong relationships between IBC andbecomes more important when loans are in its current and prospective clients allow fordanger of faltering IBC loans officers and the better access in the community, an increasedgeneral manager increase contact with the demand for loans, and better-supported,client and look for solutions to help the client more successful businesses.get back on track. One client said that animportant element of IBC’s success is that itssupport is tailored specifically to Aboriginalpeople and their needs. 28

SOCIAL FINANCE: UNLOCKING THE POTENTIAL OF DEVELOPMENTAL LENDINGA WAY FORWARDThe research summarized in this report represents a preliminaryinvestigation into an area of social finance that is deserving of more detailedstudy. The findings indicate that developmental lending improves thesocioeconomic well-being.Poverty among Aboriginal people in Alberta innovative ideas to the private capital theyis a complex problem for which there is no need to tackle complex societal problems,simple solution. Despite the best efforts create jobs and strengthen communities.”19of people in all sectors, well-intended In Alberta, the unique confluence of thegovernment policy, and an increasing priority growing needs of industry and an Aboriginalon corporate social responsibility, chronic population increasingly motivated to becomeunemployment and persistent poverty on entrepreneurs creates a landscape forIndian reserves remain at unacceptably developmental lending to flourish.high levels. The precise socioeconomicimpact of IBC’s developmental loans to We suggest that unlocking the potentialAboriginal entrepreneurs across Alberta of developmental lending in Alberta willis difficult to quantify. The findings of this deliver value to stakeholders in all sectors,report, however, suggest that developmental in all regions of the province. We believe thatlending, in conjunction with effective policy taking developmental lending to the nextand community-based initiatives, is one level requires ensuring that the businessof the most obvious ways to address the sector is aware of the option to reallocatesocioeconomic needs of Aboriginal people. capital to organizations such as IBC as needed to engage more Aboriginal suppliers.In its 2010 report, the Canadian Task Force onSocial Finance described Canada as standing Our findings will, we hope, help increaseto gain from the expansion of an impact awareness and understanding of the value ofinvesting market that can “more efficiently developmental lending in Alberta and set theconnect the best people and the most stage for further investigation.29 OPEN

AN IMPAKT STUDYEndnotes1. Ravina Bains, Opportunities for First Nation Prosperity through Oil and Gas Development, Fraser Institute, November 2013, http //www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/ publications/opportunities-for-first-nation-prosperity-through-oil-and-gas-development.pdf.2. Daniel Wilson and David Macdonald, The Income Gap between Aboriginal Peoples and the Rest of Canada, Canadian Centre for Policy Alternatives, 2010, https //www.policyalternatives.ca/sites/default/files/uploads/ publications/reports/docs/Aboriginal%20Income%20Gap.pdf.3. U.S. Agency for International Development, Economic Growth and Trade, last modified May 8, 2014, http //www. usaid.gov/what-we-do/economic-growth-and-trade.4. U.S. Agency for International Development, Economic Growth and Trade.5. Canadian Association of Petroleum Producers, Industry Practices: Developing Effective Working Relationships with Aboriginal Communities, 2006, http //www.capp.ca/getdoc.aspx?DocID=100984.6. Industry Canada, The Canadian Provinces – Special Edition: Key Small Business Statistics, 2013, http://publications.gc.ca/collections/collection_2013/ic/Iu186-1-2013-2-eng.pdf.7. Industry Canada, The Canadian Provinces – Special Edition: Key Small Business Statistics.8. MLA Committee on the First Nations, Métis and Inuit Workforce Planning Initiative, Connecting the Dots: Aboriginal Workforce and Economic Development in Alberta, Government of Alberta, 2010, http //work.alberta.ca/documents/ connecting-the-dots-aboriginal-workforce.pdf.9. MLA Committee on the First Nations, Métis and Inuit Workforce Planning Initiative, Connecting the Dots.10. National Aboriginal Capital Corporation Association, Strategic Plan: 2008–2011, 2008, http //www.nacca.net/ Publications/Strategic-Plan.pdf.11. National Aboriginal Capital Corporation Association, Strategic Plan: 2008–2011.12. MLA Committee on the First Nations, Métis and Inuit Workforce Planning Initiative, Connecting the Dots.13. Aboriginal Affairs and Northern Development Canada, Backgrounder – Aboriginal Women’s Entrepreneurship Key Issues, last modified December 14, 2010, http //www.aadnc-aandc.gc.ca/eng/1292345911615/1292345967813.14. Aboriginal Affairs and Northern Development Canada, Backgrounder – Aboriginal Women’s Entrepreneurship Key Issues.15. Government of Canada, Federal Framework for Aboriginal Economic Development, 2009, https //www.aadnc- aandc.gc.ca/DAM/DAM-INTER-HQ/STAGING/texte-text/ffaed1_1100100033502_eng.pdf.16. Government of Canada, Federal Framework for Aboriginal Economic Development.17. National Aboriginal Capital Corporation Association, 2010 AFI Federal Government Job Cost Efficiency Analysis, 2010, http //www.nacca.net/Publications/AFI-JobCostEfficiency.pdf.18. National Aboriginal Capital Corporation Association, 2010 AFI Federal Government Job Cost Efficiency Analysis, 2010.19. Canadian Task Force on Social Finance. “Private Capital for Public Good,” 2010, http //www.marsdd.com/app/ uploads/2011/02/MaRSReport-socialfinance-taskforce.pdf 30

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