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Don’t blame the banks for not lending enough to small businesses

6 September 2013

10:35 AM

6 September 2013

10:35 AM

It is now a truism in Westminster to argue that banks are failing UK businesses, especially smaller ones, by reining in lending, thus thwarting growth. The problem with this truism is that it isn’t, er, true. And it also distracts attention from the real funding problems that businesses struggle with, which means government policy consistently misses the point.

This myth about banks refusing to lend is based partly on anecdote and partly on the sharp decline in the stock of lending to small and medium-sized enterprises since the credit crisis.

Demos Finance research published today shows that only a tiny proportion of businesses want bank loans but are unable to get them: just 40 per cent of all UK SMEs made a credit application in the past year, and only 1 in 25 SMEs applied and were refused. Despite this, they receive an extraordinary amount of attention. Further, there is very little evidence that banks really are unwilling to lend to SMEs. Criteria for loans have been toughened up, but why is that a bad thing? No-one can really want banks to start lending irresponsibly again, can they?

Yet largely for political reasons — the importance of being seen to ensure banks support economic growth after causing such harm – the debate focuses almost exclusively on incentives for banks to lend more. And banks do need to step up to the plate. But current policy is addressing the wrong issue, sucking up funds and effort that could be better spent elsewhere.

A balanced economy needs a steady amount of the right kind of funding. Britain has a weak equity culture and business funding has been far too dominated by the banks and also treating SMEs as a homogenous mass. Policies instead should be adapted to emphasise growth potential among companies of all sizes. There should be greater attention on non-nank finance, particularly medium-term and equity capital, with an overhaul of the tax system to create new incentives. And banks — with their unrivalled branch networks – should play a key role in supporting and nurturing businesses.

Our national debate about business funding has been impoverished by an insistence on looking to banks to provide the single answer. It is a classic case of the drunk looking for his lost car keys under the lamp-post because that is where the light is. We need to swivel our torches away from traditional lending and have a new debate on how companies grow and the role the state can play in abetting that growth.

Andrew Freeman is Director, Demos Finance and a Risk Fellow at the Judge Business School, Cambridge

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