On the money: characterizing banking and lending in the California cannabis industry

Abstract

Purpose Despite 2016 legalization of recreational cannabis cultivation and sale in California with the passage of Proposition 64, many cannabis businesses operate without licenses. Furthermore, federal regulations disincentivize financial institutions from banking and lending to licensed cannabis businesses. The authors explore the impact of legal cannabis business activity on California financial institutions, the barriers to banking faced by cannabis businesses, and the nontraditional sources of financing used by the industry.Design/methodology/approach The authors use a mixed methods approach. The authors utilize call data for banks and credit unions headquartered in California and state cannabis licensing data to estimate the impact of the extensive and intensive margins of licensed cannabis activity on key banking indicators using difference-and-difference and fixed effects regressions. The qualitative data come from interviews with industry stakeholders in northern California's “Emerald Triangle” and add important context.Findings The quantitative results show economically and statistically significant impacts of licensed cannabis activity on banking indicators, suggesting both direct and spillover effects from cannabis activity to the financial sector. However, cannabis businesses report substantial barriers to accessing basic financial services and credit, leading to nontraditional financing arrangements.Practical implications The results suggest opportunities for cannabis businesses and financial institutions if regulations are eased and important avenues for further study.Originality/value The authors contribute to the nascent literature on cannabis economics and the literature on banking regulation and nontraditional finance.

Economic Governance of Cannabis: The Implications of Polycentric Governance in Mendocino County

“…Local government administrators we spoke with expressed feeling unable to act on state guidelines for elements of the cannabis equity program despite state assurances, paradoxical in a county that has clearly decided to develop local cannabis markets. Furthermore, local financial institutions are reluctant to provide banking, loans, or services to cannabis businesses, out of fear of federal prosecution or high administrative burden, making it difficult for cannabis businesses to access basic financial services (Plakias et al 2021).…”

Guest editorial: Nontraditional Credit in U.S. Agriculture

“…However, there has been little research into how non-traditional credit serves particular types of operations. “On the money: characterizing banking and lending in the California cannabis industry” (Plakias et al , 2021) describe how a specific and heavily regulated sub-sector utilized non-traditional lenders to finance production. Due to the regulatory environment of the cannabis industry along with the perceived riskiness of the cannabis industry, traditional lenders were unable to serve this growing market.…”

What do we know about opportunities and challenges for localities from Cannabis legalization?

“…Federal illegality creates financial challenges (Plakias et al, 2021). More than 99% of U.S. banks and credit unions do not lend to cannabis operations , since such banks are required to report suspicious transactions to the federal government (Bronfein, 2016;Polson & Petersen-Rockney, 2019).…”