A folk club wouldn't reject a singer on grounds of race, but might on grounds of musical style, which is what mostly defines 'folk' (and any other genre) in this context. 'Folk' in England is derived from traditional English culture. BAME musicians have their own cultural references, both contemporary and traditional, and most appear to prefer to perform in a context which feels more relevant to them, just as white musicians do. I don't believe there's anything wrong in that

An important element of folk music is celebrating and preserving one's own cultural traditions. That seems to be encouraged when its minority traditions which are being talked about, but is somehow suspect when it's English traditions.

Of course, for some who were born and raised here then folk music may be part of their own cultural consciousness. Where BAME musicians perform in a style which is relevant to the folk scene then they'll be accepted. Dogan Mehmet is an obvious recent example, but the Spinners included a black singer in the 60s. Other examples are EII and Boka Halat.

Festivals have been booking non-white performers from the UK and overseas for decades. However I don't think its the role of EFDSS to promote say bhangra or rap just because it's being performed by English people (of any ethnicity. On the other hand, for years the Arts Council was criticised for promoting minority ethnic music whilst ignoring British folk.

Nevertheless, in one sense what you say is true, but the same accusation must then also be made about other genres. Why aren't rap venues booking white folk artists? By that measure they're 'institutionally racist' too. However this dilutes the term to the extent that it becomes meaningless.