Banks in Arizona are teaming up to provide much-needed credit to the state’s Native Americans and at the same time meet Community Reinvestment Act obligations and acquire customers.

The nine banks signed up so far in Arizona Native American Community Development Corp. range from $61 million-asset Valley Bank of Arizona in Phoenix to $234 billion-asset Wells Fargo & Co. They will share the risk in lending to tribal members through the nonprofit corporation — the first of its kind to be completely funded by banks.

Each of the banks is anteing up at least $2,500 for shares in the organization, which will make consumer and small-business loans to members of the state’s 21 tribes. It aims to make its first loan by early next year.

The founders hope to raise $2.5 million by yearend and are looking for more bank members, said Barbara Boone, Community Reinvestment Act officer in the Tempe office of $1.4 billion-asset National Bank of Arizona. Other enrollees include Bank One Corp., Washington Mutual Co., and a few community banks.

“The corporation is an excellent investment for banks,” Ms. Boone said.

Banks have historically been skittish about lending to Indians, Ms. Boone said, because most tribal members do not own land and therefore cannot pledge it as collateral. Moreover, sovereign tribal laws usually have jurisdiction in disputes with bank customers.

Lending on reservations has been almost “nonexistent,” said Cassandra Wilson, CRA officer for $1 billion-asset M&I Thunderbird Bank in Phoenix, one of the nonprofit’s nine bank enrollees. Tribes in other states, however have formed banks themselves — the Viejas Band of Kumeyaay Indians founded Borrego Springs Bank in San Diego County, for example.

“I think California is a more progressive state,” Ms. Wilson said. “The Arizona Native American population has been slower in dealing with these issues.” Each tribe will elect a loan committee to review applications and make recommendations. The committees “will act as go-betweens,” Ms. Wilson said. “They will be able to tell us who is good for a loan and who is not.” The committees will be able to structure loan terms in accordance with tribal laws, which should help keep disputes to a minimum: Recipients’ promise will be their collateral.

“On the reservation, there is a shame that comes with not being of your word,” Ms. Wilson said. “The is a greater obligation to take care of a loan repayment when you’re essentially borrowing from people in your neighborhood who have said that you’re good for the money.”

The corporation will be overseen by the American Indian Credit Association, of Browning, Mont., which has helped to set up credit associations on reservations in Nevada and Arizona. These efforts were funded primarily by state and federal government grants.

“The corporation will bring needed capital to the smaller tribes and will also build the technical knowledge of the residents so that they can begin to take on the financial responsibilities of their tribe,” said Carolyn Mitchell, Wells Fargo’s community development manager for Arizona.

The banks would earn Community Reinvestment Act credits in proportion to their contribution to the loan pool. But they also aim to get new customers, Ms. Wilson said, noting that the organization can lend as little as $250 for livestock or equipment.

“We can introduce them to traditional banking products, such as checking accounts or CDs,” she said. “We have two branches located very close to Native American land, and we’re hoping to cross-sell traditional banking products in our branches.”

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.