The Federation of Small Business says that more competition will be needed in the banking sector if the economy is to avoid a double-dip recession.
The Government must encourage more competition in the banking sector if the UK is to fully recover from recession said the Federation of Small Businesses (FSB) in its response to the consultation ‘Financing a private sector recovery’, which closed today.
A decade ago, the Cruickshank Report found that the four main UK banks held 83% of the banking market to small businesses. The FSB says it is vital the Government looks at new ways to change behaviour in the credit market for small firms, and that the economy “cannot return to business as usual” with current lending conditions. 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. The FSB has said that small businesses that take out loans from banks are being unfairly disadvantaged by high interest rates when the base rate remains at an all-time low.
The FSB is asking 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 maintains that such radical moves will help small businesses in accessing credit for start-up needs and growth requirements, as well as help provide stability in the event of future limitations of credit through the banks.
The organisation has pointed to the USA, where credit unions play a major role in financing for small businesses as they provide a local link for firms looking for finance. In addition, regional stock exchanges currently operate in a number of EU countries.
John Walker, the national chairman of the FSB, 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.”
The FSB exists to protect and promote the interests of the self-employed, and all those who run their own business. It has over 200,000 members.
