More rural residents, businesses don’t have local banks to borrow from

A new study suggests fewer rural Americans have local banks who they can interact with and borrow from:

Increasingly, bank branches are headquartered in distant urban areas – and in some cases, financial “deserts” exist in towns with few or no traditional financial institutions such as banks and credit unions. That means that local lending to individuals based on “relational” banking—with lenders being aware of borrowers’ reputation, credit history and trustworthiness in the community—has dropped, according to a Baylor study published in the journals Rural Sociology and International Innovation.

Instead, more individuals launching small businesses are relying on relatives, remortgaging their homes and even drawing from their pensions—all of which are risky approaches, said lead researcher Charles M. Tolbert, Ph.D., professor and chair of the department of sociology in Baylor’s College of Arts & Sciences.

But for the 30 percent who obtain loans through the traditional lending method, that approach also can be very challenging, according to the research article, “Restructuring of the Financial Industry: The Disappearance of Locally Owned Traditional Financial Services in Rural America.”

Federal Deposit Insurance Corporation statistics showed that from 1984 to 2011, the number of banking firms in the United States fell by more than 50 percent—to just under 6,300—while the number of branches almost doubled, to more than 83,000, according to researchers’ analysis of data from the FDIC’s national business register. For the study, Baylor researchers partnered with the U.S. Census Bureau Center for Economic Studies.

I’m sure financial institutions would argue it is not as profitable to locate in more rural areas that do not generate as much business as denser areas. It would be interesting to look at the exact figures from financial institutions in rural areas: are they not profitable at all or are they just less profitable?

However, how essential are financial institutions to local economies? The same argument might be made about hospitals: they provide essential services even as they are not as profitable in rural areas. (I would guess people would probably rate health care as more important than credit access but both are important for communities.)

The article hints at another aspect of this change: fewer banks in rural areas means fewer relationships between lenders and residents. While forming relationships may take time, couldn’t they be better for business in the long run? Prioritizing efficiency and profits over people may be good for the bottom line and shareholders but it is the sort of approach that seems to have turned off a good number of Americans to large banks.


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