Local Entrepreneurs and small-business owners in Wyre Forest consistently tell me that the reluctance of banks to lend is the greatest barrier standing between them and their goals. This is true throughout the life-cycle of a business: those who want to start out, to grow, or expand all face problems accessing the finance they need. And these problems are getting worse: net lending to business has fallen by £56 billion since May 2010.
The root causes of this problem go much deeper than the banks’ need to recapitalise in the wake of the financial crisis. In the decade before the crisis, 84 per cent of the money lent to British residents by British banks went into property and financial services. Entrepreneurs in other trades and industries are clearly under-served.
Fixes tried by successive governments have tinkered around the edges of this problem but failed to deliver truly transformational change. The Commons Public Accountants Committee’s report notes that the government’s most recent scheme, Funding for Lending, has fallen into this pattern.
The vast majority (85 per cent) of the UK’s five million small businesses are locked into just five big banks. It’s not uncommon to hear from businesses in Wyre Forest who have been rejected by each of these in turn. To get to grips properly with the problem we need to address this fundamentally uncompetitive lending market.
We can see the importance of this by looking at our competitors. Community banks in the US were relatively unaffected by the crisis and astonishingly our prime European competitor, Germany, actually increased lending during the global downturn.
The secret to this German success was of Sparkassen. These are commercial banks, but they are also established with state backing. They are profit-making but not profit-maximising institutions, confined to lend within a specified region and with a legal responsibility to promote local economic growth. They are also staffed by old-fashioned local bank managers who are intimately attuned to their local economies and have the autonomy and the authority to lend significant sums to entrepreneurs whom they feel will succeed in their town, community or region. What a contrast to the lack of autonomy our local bank managers in Wyre Forest have.
Of course the Sparkassen have a long tradition in Germany and are ingrained into its federal structure. It would be impossible to exactly replicate the model in this country.
But its key principles – permanency through state backing; a core duty to support growth and innovation within a defined geographic area; and professionalism with real banking experts that understand their local customers and communities -; could be transferred to a British context.
Examples such as the Bank of Salford, which lends to businesses and consumers within the City of Salford, highlight the potential of this transformative model. I would love to see a similar Bank in Wyre Forest offering such services to our own businesses.
Small businesses are the lifeblood of the economy in Wyre Forest. But they can only flourish when they have the financial baking they need. That’s why the next Labour Government is determined to be the Party of Small Business.