The roots of economic growth are in fair finance

Local banks are starting to make a comeback. But only when the big banks disclose their levels of investment in deprived areas can the problem be tackled, says Jennifer Tankard.

The shock waves of the financial crisis have left many of our local communities faced with rising unemployment and personal debt problems, cuts to public spending and falling living standards.  At the same time small and medium-sized businesses, the engines of economic growth, are struggling to access credit, making start up, expansion and consequent job creation increasingly difficult.

There is a significant and growing evidence base about how and why the current British banking market is having a negative effect on British businesses, especially SMEs, and on communities in deprived areas. This goes further than restrictions to credit, resulting in increasing reliance of businesses and communities on high cost, short term solutions to credit and finance shortages, such as increasing use of high interest pay day loans and reliance on high cost over draft facilities. These ‘extractive’ industries not only siphon out what little economic potential is retained in these communities, but add to the cycle of debt and poor economic growth.

The government repeatedly extols the role of small and medium-sized businesses (SMEs) in dragging the UK out of recession and supporting local economic growth. Its 2010 ‘Financing a Private Sector Recovery’ report states that the UK’s 4.8 million SMEs are vital to the economy and at the heart of economic growth, providing 60% of private sector jobs and half of private sector turnover.  But it also acknowledges the problems SMEs face in accessing finance.

The SME market is one of the most concentrated in the banking sector: four banks controlled approximately 80% of the market in 2008.  But increasingly SMEs find that the services they need are not available and decisions about lending are taken by people whose lack of local knowledge means that they are unable to accurately assess levels of risk.

Since 2004, there has been a significant decline in bank lending to SMEs, with businesses instead forced to rely on their own reserves or loans from friends and families.  It is hardly surprising that saw a gap in the market and leapt in to fill it. For many entrepreneurs desperate to access the credit they need to start up, keep going or expand, the Wonga promise of instant cash and that ‘we’re different, we’re fast, we’re responsible’ will, in the short term, prove appealing.

A recent survey of members by the Federation of Small Businesses found little evidence that Project Merlin, the plan to increase lending to small businesses, agreed by the banks and the government, is having any impact.  In 2011, fewer businesses used finance to support their business compared to 2009.  Instead entrepreneurs are reliant on bank overdraft, savings or inheritance and retained profits for cash-flow and investment.

Households are equally under the cosh.  News in August that Britain’s poorest people are losing their homes in increasing numbers with higher levels of possession claims due to rent arrears highlights the impact of unemployment combined with declining household incomes.  An estimated 1.4 million people are unable to access bank accounts and this in itself creates financial pressures. For example, it is estimated that those who pay for fuel on prepayment meters spend around £359 a year more than those on direct debit.

Households unable to access suitable financial services and those struggling to make ends meet often have little option but to rely on high cost credit.  Again the gap in the market is being rapidly filled with pawnbrokers and payday loan shops.  It is estimated that over four million individuals are borrowing from lenders charging interest rates of between 450% and 2,500%.

There is anecdotal evidence that it is SMEs and households in deprived communities that are most seriously affected by risk-adverse banks and the tightening of credit.  But while banks hold information about where and who they lend to, they don’t currently disclose this in a format that enables those in charge of tackling debt and promoting economic growth to use the data to help fill the gaps.  If this information was disclosed on a geographical basis, local policy and decision makers could feed this into targeted local strategies to fill the gap, by creating credit unions, providing financial advice and innovating new fair financial services.

Cambridge and Counties Bank launched earlier this year and targets small to medium sized enterprises

The new local enterprise partnerships and the power of general competence for local councils provide plenty of scope at a local level to tackle the gap.  Partnerships are springing up across the country to do so.  For example, Cambridge & Counties Bank is jointly owned by the Cambridgeshire Local Government Pension Fund and Trinity Hall, a College of the University of Cambridge. It will provide financial support to help SMEs grow and create jobs.  Sheffield Council works with Sheffield Homes to promote financial inclusion in a number of different ways.  For example, it provides social housing tenants with a low cost insurance scheme that they can pay with their rent.  Haringey Council has worked in partnership with Islington and City Credit Union to set up a credit union in the borough.

Much of the debate around economic growth and discussion papers issued by the government and Local Government Association have focused on the need for planning reform and infrastructure investment.  But these won’t deliver growth in the short term.  Throwing financial lifelines to businesses and communities by freeing up credit and giving access to fair finance could prove more successful.  Encouraging the main high street banks to disclose their level of investment in deprived communities will ensure that these lifelines are targeted and effective.


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