Baroness Kramer
Main Page: Baroness Kramer (Liberal Democrat - Life peer)
Baroness Kramer (LD)
My Lords, let me begin by saying that I totally sign up to all that my noble friend Lord Sharkey said and by adding to the words of the right reverend Prelate the Bishop of St Albans. I listened with real interest to his discussion of post offices and banking hubs but, of course, his whole speech was significant.
I, too, recognise that the Government are sincere in trying to improve access to finance for SMEs and to encourage their take-up of financing opportunities. We do business start-up well in the UK. Although equity capital is harder to come by here than in the US, start-up capital and even growth capital are not, I suggest, our primary problem. Most small businesses are wary of outside equity as it dilutes control. They know that most outside equity intends to sell off the business sooner or later. I would argue that our biggest problem is the lack of availability of debt finance for SMEs, whether that is just to acquire a second van or for a major scale-up. Scale-ups hoping to grow speak of a valley of death as loan opportunities, particularly for unsecured debt, seem to disappear just as they are needed.
In their consultation document, the Government identify the many new challenger banks and alternative finance providers that have come into and now dominate the SME debt finance market. However, I am clear from conversations with groups such as Responsible Finance, but also the British Business Bank, that these new players are essentially offsetting the sharp drop in debt financing offered by the high street banks. The total pool of lending to SMEs has not grown. In addition, the bank referral scheme, to which my noble friend Lord Sharkey referred, for those SMEs that are turned down by banks, is turning, quite frankly, into a bit of a dud at the moment. The British Business Bank has also made significant efforts to fill in this gap, especially with programmes such as its growth guarantee scheme.
I am delighted with the recognition that the British Business Bank has now given to the capabilities of CDFIs—community development financial institutions. These are typically not-for-profits in deprived areas or areas of modest income, whose only purpose is to serve the local community and its banking needs. The BBB’s community enable fund will support £150 million in lending to SMEs via CDFIs over the next two years, with money from the Department for Business and Trade, but the scheme is then intended to grow as private partners join the fund. Challenger banks such as Unity Trust and Triodos have also invested in CDFIs, as have, more recently, Lloyds, NatWest and JP Morgan Chase, but the problem is scale. That is why I propose that the Government should look again at their CDFI policy and at the template of the United States.
In the US, community development financial institutions—primarily community banks, but also credit unions—are the backbone of the economy. As we speak, they have outstanding $304 billion in loans, primarily to small businesses. They have been the instrument through which the US Government have supported small businesses during financial crises and recessions, avoiding the pitfalls of the random financing that the UK was really forced to offer through its loan schemes during Covid. That is because CDFIs know all their customers, so the same level of fraud is nowhere near experienced in the United States. Their role in cushioning the US economy continues, and it plays a crucial role in the resilience and growth of small businesses, which then go on to feed larger businesses. US CDFIs are usually not-for-profit but, despite lending to many customers who could not qualify for loans from mainstream banks, they typically have lower default rates than the mainstream banks.
It was not always thus. The use of CDFIs to fund small businesses was a result of the Community Reinvestment Act 1977. It was a civil rights measure to counter the decision by mainstream banks to redline deprived and ethnic minority areas and to refuse to lend within those boundaries. These mainstream banks were, in effect, required by the regulators to lend to all communities or put funds into an entity that would—hence the CDFIs. By 1997, there were roughly 200 CDFIs in the United States. The Clinton Administration decided to back their growth with a federal fund, and today the number is 1,400, typically in areas of deprivation or middle-income areas across the country. They have the mission and the staff to connect with their communities. I have visited CDFIs and met the civic societies that they use to enable small businesses to understand business plans, accounting and marketing—in other words, to become bankable and a success. Mainstream bank officers at the highest level vie for places on the boards of CDFIs, such is the prestige. Indeed, mainstream banks now look to CDFIs to develop their future customers. Angel investors engage regularly with CDFIs for exactly that same reason.
Responsible Finance has been arguing for years that we need a UK community reinvestment Act. It is right. We are simply missing a layer of community banking from which the high street banks have withdrawn, leaving a space that no one else has properly filled. The British Business Bank funds 41 CDFIs—yes, 41—versus 1,400 in the United States. That is woefully inadequate. The collective CDFI loan book in the UK is approximately £100 million. That may sound respectable until you look at, again, $304 billion in the United States, as I mentioned earlier.
This tells us in volumes that there is huge scope in the UK to grow the existing CDFIs and add to their numbers. There is potential to look for opportunities to combine CDFIs with banking hubs, which at present, as the right reverend Prelate described, provide limited banking services—mainly access to cash—in areas without a bank branch. Those hubs are now contemplating their medium-term and long-term futures, so they are very open to new ideas and new possibilities.
The British Business Bank could use the ENABLE fund—that mix of government and private funding. Beginning to push forward such a programme would require enhanced and greater funding, but it seems to me that it is a viable strategy. I also see no reason why mainstream banks should not be required to contribute, as they do in the United States. It could be required as part of the price for closing branches.
We have tried pretty much everything: challenger banks, alternate banks, open banking, bank referral schemes and support from the British Business Bank. Nothing has reached the scale required. Community banking is a necessary pillar for communities; it keeps alive high streets, is the beginning point for entrepreneurs and is absolutely key to oil the engine of growth.
So if growth is the Government’s agenda—they are very firm that it is, and it is certainly our agenda—the growth of small businesses is absolutely vital. A layer of organisations to provide the necessary debt financing is simply missing. It is time to seize the day, as the United States once did.