The U.S. cannabis industry is poised for massive expansion over the next decade, which will require big money – as $130.7 billion – to fund it, according to a new industry report. But absent federal banking legislation and greater institutional involvement, the odds a sustainable source of capital panning out are slim.
The study, conducted by research firm Whitney Economics with support from cannabis credit agency CTrust and fintech firm Green Check, projects that the cannabis industry could add 25,000 to 30,000 new business licenses to the existing 40,000 licenses over the next 12 years.
“There are tremendous opportunities for the banking industry in the United States cannabis sector,” said Beau Whitney, founder and chief economist at Whitney Economics. “These opportunities are matched by significant risks. All risks can be mitigated, at least to some extent, by expertise.”
Currently, the U.S. cannabis industry generates an estimated $28.8 billion in retail sales, a figure that is projected to grow to $87 billion by 2035, according to the report. The firms said that California, Florida, Illinois, New York, Pennsylvania and Texas “are among the top states for financial funding opportunities over the next decade.”
Whitney noted that that kind of growth “cannot be supported solely by friends and families.”
The total addressable lending opportunity for financial institutions could range from $65.6 billion to $130.7 billion over the next 10 years, the report posits. That capital could be used to launch new cannabis businesses and help refinance existing operations. In turn, it could generate between $1 billion and $2.4 billion per year in interest revenue for lenders.
But financial institutions have to be willing to enter that market to get their piece of that pie.
“Banks have long been cautious about entering the cannabis industry due to regulatory and financial risks, though when they do, they have to rely on non-cannabis specific underwriting and due diligence,” Dotan Y. Melech, CEO and co-founder of CTrust, said.
Melech added that the report “should pave the way for conversations with financial institutions to develop more informed lending partnerships with the cannabis industry.”
That said, “not every state market presents an equally high-quality opportunity,” the report’s executive summary warned. “Some states are saturated with businesses, while other state markets have plenty of room for growth.”
Last month, the Congressional Budget Office published an analysis of the SAFER Banking Act, projecting that, if enacted, it would increase federally insured deposits from cannabis businesses by billions of dollars. The CBO estimated that by 2026, banks could see insured deposits increase by about $1.5 billion and credit unions by $125 million, rising to $2.9 billion and $475 million, respectively, by 2034.
CBO also estimated that the bill – which would require federal mortgage programs to treat income from state-legal cannabis businesses the same as other legal sources of income – would, on average, increase the number of VA loan guarantees by about 950 and increase loan volume by about $450 million per year. For the government-sponsored Fannie Mae and Freddie Mac, CBO estimated an average annual increase of 350 loans and $150 million in loan volume.
However, the office acknowledged “significant uncertainty” around the guidance federal agencies would issue and the responses of financial institutions and cannabis businesses, which could impact the actual economic effects.
In the meantime, some states are taking matters into their own hands. For example, Delaware Gov. John Carney recently signed a bill protecting financial institutions and other service providers working with cannabis businesses from state-level prosecution. Other states have considered doing the same.
Lenders could stand to gain between $1 billion and $2.4 billion per year in interest revenue. Read More