Evidence of meeting #28 for Indigenous and Northern Affairs in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was afis.
A recording is available from Parliament.
Conservative
LaVar Payne Conservative Medicine Hat, AB
Okay.
In your presentation you talked about the varied types of financing required. I believe you talked about seed capital, term loans, and entrepreneurial capital. We know from experience that home ownership is the largest single source of equity for new entrepreneurs. I'm wondering if you can elaborate on what you have learned and comment on whether that prospect for private ownership of lands on reserve has been discussed as a possible solution.
Chair, National Aboriginal Capital Corporations Association
Actually, in terms of private ownership, as I noted in my presentation, the communities are very territorial in respect to how they use their land base.
For example, the B.C. region is more susceptible to that private ownership idea than is Saskatchewan, which is very treaty-based. The collective land ownership philosophies are a little bit more difficult to penetrate in respect to individual ownership in that region compared to the B.C. region. Nationally, across the country, we don't really lend to individuals for private home ownership. We just basically lend for business development. Part of it is that if they are using their own home to leverage business loans, the home is off-reserve.
Conservative
LaVar Payne Conservative Medicine Hat, AB
The other point that you talked a bit about was section 89.
Certainly we've heard that the fundamental difficulty for aboriginal entrepreneurs located on reserves is being able to collateralize on-reserve assets, including land, to allow them to access capital and debt financing for businesses. I understand NACCA has been doing some research on some of the member institutions that have developed innovative approaches to lending on reserves, with possible workarounds of section 89 of the Indian Act. Can you expand on what is going with NACCA in those terms?
Chair, National Aboriginal Capital Corporations Association
I can share what individual regions do in respect to getting around section 89.
Some of the AFIs have direct community relationships, and some of the community members have a stake in all of the AFIs as well. What we basically do is—and some of the mainstream banks do it as well—is based on reputation. If they have a good reputation, we'll lend. However, we do go to the chief and council and ask for a waiver. They waive that individual right and allow us access to that asset that we have securities on, etc.
Conservative
The Chair Conservative Chris Warkentin
Your time is up. Thank you, Mr. Payne.
We'll go to Ms. Fry for seven minutes.
Liberal
Hedy Fry Liberal Vancouver Centre, BC
Thank you very much.
We're talking about access to private capital. Mr. Schindelka was talking about trying to improve and encourage access to private capital. To what extent does the Indian Act itself stand in the way of that? What are the challenges posed by the Indian Act, given that most private capital ventures would like to see equity either in land or in homes, and we know that this isn't so?
What other guarantees can be put forward, other than that kind of equity—land or homes—that could maybe help with access to larger loans and to private venture capital in businesses here? How do you see us getting around some of the challenges presented by the Indian Act? That's the first question I'd like to ask.
Director, Corporate Development, National Aboriginal Capital Corporations Association
Some of the discussion we've had in the working groups I referred to earlier with the AFI GMs and AANDC staff deal with that issue. We're looking at revamping some existing programming that is available now to assist, in that regard, in leveraging capital.
In respect of some of the loan loss reserve programming that has been in place, perhaps that might be modified to substitute for land ownership or real asset ownership. There is room for the government to bridge a gap.
Liberal
Hedy Fry Liberal Vancouver Centre, BC
Yes, but government would have to put in those sorts of circumventions to make it happen. Is that what you're suggesting?
Director, Corporate Development, National Aboriginal Capital Corporations Association
I think we've progressed far enough that they're sharing the concept right now and are trying to work through it.
Acting Chief Executive Officer, National Aboriginal Capital Corporations Association
I think a fundamental characteristic of the lending we do is that it's character-based rather than asset-based lending. In fact, give or take, we look for about 10% equity from the business owners. We operate with a much lower threshold in that area than the commercial financial institutions do.
Liberal
Hedy Fry Liberal Vancouver Centre, BC
Do you know, or can you tell me, how many loans have been advanced to aboriginal businesses using, as you have suggested, the loan loss guarantee?
Director, Corporate Development, National Aboriginal Capital Corporations Association
The loan loss reserve that has been set up hasn't been used by AFIs. It has been used, to some extent, by the mainstream.
Acting Chief Executive Officer, National Aboriginal Capital Corporations Association
I think that is in syndication generally.
Liberal
Hedy Fry Liberal Vancouver Centre, BC
You have given about $18 million in loan loss guarantees to other institutions; how many of them have actually been actively involved in giving loans?
Director, Corporate Development, National Aboriginal Capital Corporations Association
I don't have precise information. It's hard to get. One of the AFIs did some research about a year ago and determined that it was about $5 million at that stage.
Liberal
Hedy Fry Liberal Vancouver Centre, BC
Is there some way you think you can change the basic structure and criteria for which AFIs loan?
One of the things an aboriginal community might have to do is go in partnership with a non-aboriginal group to be able to access more than that amount. That really almost deprives the aboriginal community of having any kind of autonomy and of being able to go out and do their own thing, because once you take partners from outside of the community, you have to abide by whatever it is the partners want to put in there as their own criteria. To an extent it takes away that entrepreneurial spirit, that ability to go out there and do your thing, as most of us are able to do.
How do you suggest we deal with that conundrum?
Acting Chief Executive Officer, National Aboriginal Capital Corporations Association
As Ms. Pelletier mentioned, during the program renovation process that we're undertaking with AANDC, we're actually looking at what we call a capital attraction tool, and that is essentially for NACCA to operate a treasury supported by liquid assets—whether those are loan portfolios from the AFIs, cash in the hands of NACCA, or possibly some government financial support for those liquid assets—that pays a guaranteed interest rate to private sector institutions or private sector individuals. Those can be either aboriginal or non-aboriginal.
In fact, we have been undertaking some exploratory discussions with financial institutions. We are currently in discussions with two mainstream commercial financial institutions and one aboriginal trust. There is strong interest in participating in this concept, because the interest rate they could secure when they have fallow assets, such as in an aboriginal trust, is much more than they can earn on those assets in a GIC at the bank. As a result, we're getting a lot of interest both from the aboriginal and the non-aboriginal sector.
Liberal
Hedy Fry Liberal Vancouver Centre, BC
I don't know what I can ask you to elaborate on in under one minute, but what kind of expansion do you see if you use this new model? How do you expand your part, and by what? Will you double it, triple it? What will you do?
Acting Chief Executive Officer, National Aboriginal Capital Corporations Association
Will we expand our part? Well, yes.
Kevin, the current pool is approximately...?
Director, Corporate Development, National Aboriginal Capital Corporations Association
The gross loan portfolio is $238 million, and we feel we can take it up by $100 million.
Acting Chief Executive Officer, National Aboriginal Capital Corporations Association
That's right, so we're looking at growing it by $100 million to $150 million over the next decade.
Conservative
Conservative
Kyle Seeback Conservative Brampton West, ON
Thank you, Mr. Chair.
I want to just quickly talk about something I saw in your report and your discussions with respect to the financial viabilities of AFIs. You're talking about 10% for administration, 6% for losses, so there's this 7% gap. Are you saying that most AFIs are operating at a loss and have a 7% loss on an annualized basis? If so, what's the basis for that loss? Is it unrepaid loans, higher overhead, interest rates that aren't market rate?
What would be the reason for that?
Director, Corporate Development, National Aboriginal Capital Corporations Association
The AFIs essentially lend to pre-bankable clients; they're high-risk clients located lots of times in remote communities where it's expensive to service, and doing those kinds of loans was the intent of AFIs when they were set up.
The numbers Lucy quoted, and that you reflected back, are correct. The administration cost associated with these loans are higher for a number of reasons. One is the geographic size of the area covered, and another is because the risk is higher.
Conventional institutions will receive an application, do a risk measurement, and determine that it's beyond their risk tolerance level for whatever reason, and they're valid reasons. The philosophy in AFIs, and the intended purpose, was to work with developmental clients who couldn't obtain loans from banks, so when they measure risk, AFIs don't use a probability-of-default tool. The tool emphasizes where the risk lies, whether it's in marketing, management, or wherever. They then know where to devote their human resources, whether it's marketing or....