National investment bank needed to boost SME lending
THE UK government should create a “national investment bank” to increase lending to small- and medium-sized enterprises (SMEs), a think tank has suggested.
Justin Protts, chief economist at Civitas, argued that the UK’s low productivity has been fuelled by the decline in bank loans to businesses as a proportion of domestic lending, from 31 per cent in 1988 to just eight per cent in 2016.
This means that despite the UK having the highest business start-up rate in Europe, it has performed badly when it comes to growing and developing businesses.
According to the report, only three per cent of UK start-ups grow to over 10 employees over a three-year period, putting it among the worst performers in the OECD.
Protts said this is in part driven by banks failing to meet demand for borrowing from creditworthy SMEs because there are easier returns available from alternative investments.
In 2015/16, around 19 per cent of SMEs seeking investment were unable to access suitable finance.
The British Business Bank (BBB) was created in 2012 to support SMEs in the UK, but only provided £717m in new commitments in 2016/2017.
“The BBB does show that a government-owned but independent institution can operate profitably in the UK,” said Protts.
“However, it still relies on government investments to fund new programmes, which themselves are driven by government policy. This limits the volume of lending that the institution can provide and encourages political interference in programmes which undermines the long-term sustainability of the institution.”
Protts suggested a new national investment bank could support enterprise by helping to provide a sustainable source of patient capital.
The proposed UK Investment Bank (UKIB) would be legally mandated to provide loans both directly to SMEs and by on-lending to SMEs through local banks.
Loans and loan guarantees would only be provided on the basis of a direct assessment of the business looking to borrow by analysts with knowledge of the local or regional economy.
The UKIB would be expected to provide lending at a competitive market rate, for loan terms between three and 25 years.
Protts said the UKIB should offer business and management advice to businesses which receive funding or loan guarantees from the bank, and should work with businesses to maximise the chances of success.
It could also operate an infrastructure investment arm which would invest in national, regional and local infrastructure projects.
“There is no doubt that low investment, particularly in enterprise, is a cause of the UK’s current economic woes and a significant part of that problem is a failure of the financial sector to lend to SMEs, which make up the majority of businesses in the UK,” said Protts.
“This lack of suitable finance for investment in SMEs, namely patient capital, is holding back innovation and productivity growth and needs to be addressed if the UK economy is going to be set back on a path to sustainable growth.”
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