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

Zoë Plakias (Agricultural, Environmental, and Development Economics, The Ohio State University , Columbus, Ohio, USA)
Margaret Jodlowski (Agricultural, Environmental, and Development Economics, The Ohio State University , Columbus, Ohio, USA)
Taylor Giamo (Department of Human Ecology, University of California Davis, Davis, California, USA)
Parisa Kavousi (Department of Human Ecology, University of California Davis, Davis, California, USA)
Keith Taylor (Department of Human Ecology, University of California Davis, Davis, California, USA)

Agricultural Finance Review

ISSN: 0002-1466

Article publication date: 14 December 2021

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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.

Keywords

Acknowledgements

The authors would like to express their gratitude to the University of California Davis Cannabis and Hemp Research Center for the funding support via Research Investments in Cannabis and Hemp (RICH) grant (PI: Keith Taylor). Also, the authors thank the cannabis industry stakeholders that consented to be interviewed, as well as the editors and anonymous reviewers at Agricultural Finance Review for their helpful feedback.

Citation

Plakias, Z., Jodlowski, M., Giamo, T., Kavousi, P. and Taylor, K. (2021), "On the money: characterizing banking and lending in the California cannabis industry", Agricultural Finance Review, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/AFR-06-2021-0075

Publisher

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Emerald Publishing Limited

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