This note uses linked administrative data to investigate the extent to which the financial conditions faced by firms – measured through the implied interest rate from annual tax filings – vary with the ethnic composition of the firm’s owners and shareholders. Access to capital has been highlighted as a barrier and constraint for Māori firms (New Zealand Productivity Commission 2021, and the references within), owing to a combination of legislative challenges specific to Māori land-based businesses, systemic bias in the financial system, low financial literacy rates and existing disparities in income, home-ownership and business experience. This research is part of a wider work programme at the Reserve Bank investigating the financial system landscape faced by Māori entities.
This note builds on previous work looking at specific dimensions of our analysis, specifically the work of Te Puni Kōkiri and Nicholson Consulting (2020) for defining Māori firms and Fabling (2021) for building firm balance-sheet measures using administrative tax data. This work brings together Māori firms, the firm balance-sheet measures and the characteristics of the owners and shareholders to investigate the financial conditions faced by Māori firms, and how these compare to New Zealand firms more generally. While the note measures variations in firm financing for each of the major ethnic groups in New Zealand, the presentation of the results throughout the rest of the note focuses on Māori firms given the observed disparities in outcomes.
The key insights from this note are as follows. First, Māori firms are, on average, paying higher implied interest rates on debt compared to non-Māori firms. This stage of the analysis does not adjust for the characteristics of firms or their owners, but this finding for the average interest rates is robust to a range of definitions for a Māori firm, and for each of the broad industry groups considered in this analysis.
Second, after adjusting for the available characteristics of firms and their owners, this analysis finds no statistically significant difference in the implied interest rates paid by Māori and non-Māori firms. The analysis is complicated by the fact that around half of owners who identify as Māori also identify as European. To put this another way, our analysis does not find evidence that systemic ethnic bias plays a role in determining the interest rates paid by firms. It shows that the difference in interest rates paid by Māori and non-Māori firms can be explained by the characteristics of the firms receiving the loans. However, it addresses only one dimension of firms’ access to finance. Bias may be present across other dimensions. Data limitations prevent us from exploring whether there is systemic bias at the loan application stage, for example.
Finally, this analysis highlights a number of data gaps, particularly the lack of loan level application data for firms. A more comprehensive investigation of ethnic variation in firm financing would need to address these data gaps.
Key findings of Analytical Note
- This note uses annual tax filings from firms – consisting of companies, working proprietors and sole traders – to calculate an implied interest rate on debt. These firm data can be linked to the owners and shareholders to investigate the effect of ethnicity on firm financing.
- Māori firms, defined using the ethnicity of the owners, are paying higher implied interest rates on average than non-Māori firms, by about 50 basis points.
- This analysis does not find evidence of systemic ethnic bias in the financial sector contributing to the interest rates paid by firms. It shows that the difference in interest rates paid by Māori and non-Māori firms can be explained by the characteristics of the firms receiving the loans. However, it addresses only one dimension of firms’ access to finance. Bias may be present across other dimensions. Further research is required to determine why Māori firms tend to have firm characteristics that raise financing costs - the role of home ownership and socioeconomic disparities would be interesting areas of future research.
- This analysis highlights a number of data gaps, particularly the lack of data linked to loan applications. A more comprehensive investigation of ethnic variation in firm financing would need to address these data gaps.