More competition needed in the banking sector

Nia Williams

September 21, 2010

This is the view of the Federation of Small Businesses (FSB) in its response to the consultation ‘Financing a private sector recovery’.

A decade ago, the Cruickshank Report found that the four main UK banks held 83% of the banking market to small businesses. It is vital the Government looks at new ways to change behaviour in the credit market for small firms, as the economy cannot return to business as usual with current lending conditions, said the FSB. This is likely to be a hot topic as business organisations and ministers rub shoulders during party conferences season.

Over 40% of small businesses use a bank loan, overdraft, leasing or factoring for major credit purposes. And those firms which do use the banks as their main source of finance are being penalised by high interest rates at a time when the base rate is at an all time low.

The FSB is urging the Government to:

  • Refrain from selling its shareholdings in nationalised and capitalised banks to other banks
  • Promote Financial Intermediaries to viable small businesses unable to access finance
  • Introduce a series of Regional Capital Markets and Community Investment Trusts
  • Create a Post Bank: turn the Post Office into either a solely state owned bank or as mutual or trustee bank for small firms by utilising the Post Office Network.

The FSB firmly believes that such radical moves will not only help small businesses in accessing credit for start-up needs and growth requirements, but it will help provide stability in the event of future limitations of credit through the banks.

However, the FSB is concerned that the Government has not fully considered international comparisons. Credit unions play a major role in financing for small businesses in the US as they provide a local link for firms looking for finance and regional stock exchanges currently operate in a number of EU countries.

John Walker, National Chairman, Federation of Small Businesses, said: “During the recession the FSB has actively sought to promote lending to small businesses, be that through the banks or Government backed schemes such as the Enterprise Finance Guarantee. But despite this help, firms are still facing an uphill struggle.

“Demand for finance is at its highest as the economy enters recovery – something which the UK economy is tentatively moving through. If the Government truly believes that the private sector is going to help avoid a double-dip recession, it needs to consider alternative sources of finance.

“Small firms don’t have a huge amount of scope in accessing finance, unlike larger businesses. More competition in the sector will mean greater competitiveness in terms of the cost and the services provided and give access to the type of finance which large businesses are able to tap into.”

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