A study analysing the tension between legal cannabis and the financial industry in California has suggested that for each new cannabis manufacturing or retail license, bank assets and loan capacity grew by tens of thousands of dollars.
The study analysis showed that assets held by financial institutions in counties that legalised cannabis increased from 2015 to 2020 by almost $750m (£554.98m). Loan activity also rose by about $500m.
Despite this, it also underlines the need for evidence-based policy – as misaligned regulations lead to stifling businesses that could otherwise flourish.
The study, carried out by researchers at the University of California, Davis, Ohio State University and University of California Cooperative Extension, analysed data used from bank and credit union calls, as well as interviews with cultivators and bankers.
The study has been published in the journal Agricultural Finance Review.
Legal cannabis benefits the financial industry
The analysis demonstrates how cannabis and finance co-exist in California, where cannabis is legal, and suggests regulatory changes could create new opportunities for both industries.
As a Schedule 1 drug in America under the Controlled Substances Act, working with cannabis-related businesses in the state can be risky business for banks, as it is still a crime at the federal level. And for cannabis businesses in California, this difficulty in finding banking services means a large number of them are forced to work with cash.
This means unlicensed, illegal growing and exporting continues as an enormous cash-based sector of the industry.
The authors highlighted that interviews with financial institutions indicated there has been little appetite among banks to associate with the legal cannabis industry, suggesting that the benefits to financial institutions in California are presumed to be from spillover effects.
Margaret Jodlowski, assistant professor of agricultural, environmental and development economics at Ohio State, commented: “It’s important to remember when talking about loans that it’s not possible to identify whether they were for cannabis operations, and they’re probably not based on what we heard from stakeholders.
“It’s more of a general relationship. The bank is doing better, and they’re able to lend out more in general and earn more interest from loans.”
Lead study author Zoë Plakias, assistant professor of agricultural, environmental and development economics at The Ohio State University highlights that a better understanding of the economics of cannabis is needed so that the impacts of policy choices are intentional.
“If we want to have a more equitable society and allow communities to keep more of the value of this crop, how do we do that? We first need to characterise what happens in communities when you legalise cannabis,” commented Plakias.
“Licensed cannabis businesses need to bank their cash and take out loans to build their businesses, but many banks worry that by doing business with the cannabis industry, they’ll be flouting federal laws,” added Taylor, University of California Cooperative Extension community development specialist.
“Banks that won’t accept legal cannabis cash deposits and don’t provide loans aren’t monetising their deposits. Marginalised cannabis communities are missing out on capital.”
Plakias said: “This suggests that a lot of the economic benefits of legalisation come from other stages of the supply chain – and it’s not a foregone conclusion that farmers benefit from legalisation.
“There’s a need to think about how farmers who are producing cannabis in the legal market, often operating in rural environments with a weaker economic base to start with, can be supported in the context of economic development.”
The need for evidence-based policies
The authors highlighted that bankers reported being hamstrung by ambiguous federal guidelines that pose a real risk to financing cannabis, largely because banks are required to report suspicious transactions to the federal government.
“What’s consistent across all financial institutions is that it’s very costly, and does involve taking on some risk, to be in compliance with all of the guidelines – the risk being that even if you follow all guidelines to the letter, there’s no assurance that you can’t still get in trouble,” Plakias said.
Jodlowski said: “There is a lot of evidence that cash can be better for a local economy because cash tends to stay local – but we are now a credit-based economy.”
“In this day and age it’s incredibly harmful for local economic development to have an entire sector that’s denied access to credit, because so much of developing as a household, or individual, or industry requires credit and requires demonstration of credit-worthiness.
“That’s a fundamental harm of these sorts of restrictions.”
“It’s clear we need policies making cannabis banking and finance more equitable,” Taylor said.
“It’s also clear that ‘Ma and Pa’ enterprises need to associate together in formal organisations so they can achieve economies of scale and harness their political power to endure the transition to legal.”
Jodlowski concluded: “Our findings speak to confusion around existing policies and the need for streamlining, clarifying and having a more unified approach to regulating this industry.”