We have just published the report - Finance for Growth: Increasing Competition in SME Banking

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The financial crisis exposed a multitude of flaws in the finance landscape in the UK. Households and businesses continue to feel the effects; banks have to adjust to new rules and government and regulators must

A great deal of action has taken place to date to support lending in the short term and some of the structural changes that need to happen to ensure our banking system is safe, while remaining a global leader, are also under consideration.

But there is more to do. The UK’s banking sector now needs to adjust to meet the requirements of the diverse business community it serves. Pre-crisis, the flow of cheap finance bridged the gap between a large number of small businesses with differing needs and a small number of large banks supplying finance. It is still the case that: 

  • For SMEs that invest, the large majority use external finance to support their investment; 
  • Bank finance is heavily favoured and still much more available than other sources of finance. 

Since 2008 there has been a marked swing in risk appetite amongst finance providers and for some, new pricing and decision models. The relationship between banks and firms over this period – particularly with respect to small firms – became strained, and for some the damage has been lasting. There is evidence that this is a particular issue in the UK: 

  • A higher proportion of bank loan applications from SMEs are declined in the UK compared with other countries; and
  • SMEs appear to be disengaging more and more from the UK banking system. 

Addressing these continuing challenges matters because we need to see SMEs invest and grow for the future. We see this as central to achieving our ambition of having more globally focused companies expanding in the UK, one of four key strands of our modern industrial strategy, outlined in our recent report, The Route to Growth. Improving the flow of credit, from banks and other providers, is one way to accelerate this investment and support small companies growing into mid-sized, globally focused ones.

The solution must be sustainable and deliver over the long term. And it needs to start with addressing the underlying problem of a lack of competition in SME banking in the UK. The lack of competition impacts on the availability, cost, and terms and conditions of SME finance. This is a structural and long-running problem, exacerbated by the financial crisis.

Author

Chief Economist

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