Presenting the case for regional mutual banks

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There are many difficulties with the UK and indeed the global economy right now, certainly too many for this piece.  However, one particular problem that has dogged us for decades, if not forever, is the lack of funding (including sufficient credit facilities) to our critical SME (small and medium sized enterprise) community.  

We know the rhetoric, that SMEs are the backbone of the economy, the largest private employer, the large companies of tomorrow and so on. It is all true. Yet, despite this, the funds have never really flowed through from our traditional financial services sector to support SME activity and rightful ambition.

As the British Business Bank perfectly put it in their March 2022 report:

‘Historically, SMEs are underserved by the finance sector, and often don’t have the same characteristics that banks and other lenders like about large corporations. 

This includes lengthy credit histories, detailed audits and financial accounts, and a large portfolio of assets for collateral on debts.

For start-ups, whose business models are unproven and yet to be deemed creditworthy, these problems are even more pronounced.’

This is not a universal problem experienced by SMEs around the world. It is done differently elsewhere. In Germany for example, in 2021 SME funding was more than 600Bn in the UK, in the same period, it was just £57Bn.  Even when all of the necessary adjustments are applied it’s not a great picture, nor a growth picture.  

It is hardly surprising then that we are seeing a post-Covid trend for SMEs moving away from the traditional financial services sector.

Again, the British Business Bank notes:

‘After the end of the coronavirus loans facility in March 2021, an interesting trend to emerge was that SMEs began to move away from large banks for their finance needs. 

Instead, challenger and specialist banks made up 51% of lending in 2021, compared with 32% in 2020.’

When it comes to the regional dimension it just gets worse for SMEs, those in London receiving over 70% of equity investment, with just 30% for the rest of the UK.  

This is obviously not great news for the economy, but it also results in lower levels of community and differing levels of wellbeing.  How can we ‘level up’ the country if we don’t urgently address this issue of the extreme (and unacceptable) regional funding differentials for our SMEs?

Although a perennial problem, I raise it now because there are two important pieces of legislation which may provide an opportunity to do something about it.  Both the Financial Services and Markets Bill and the Levelling Up Bill are currently progressing through the Lords 

I will be raising the issue and proposing what I think is an essential part of the solution – which is pushing the critical need for regional mutual banks.

I will be proposing the same amendment to both bills. The full text of the amendment is: 

Insert the following new Clause…

“Regional mutual banks

(1) The Secretary of State must report to Parliament, within 3 months of the date of the passing of this Act, on existing barriers to the establishment of regional mutual banks in the United Kingdom.

(2) The report must consider—

(a) current capital adequacy requirements,

(b) other limiting features of the current regime,

(c) regional mutual bank structures in jurisdictions outside the United Kingdom and the adoption and adaptation to the United Kingdom of best practice, and

(d) the use of dormant assets as seed capital for the establishment of such regional mutual banks.”

The clear intention of the amendment is threefold. To:

  • dramatically increase financial inclusion for our superb SME businesses
  • develop an effective ‘patient’ capital ecosystem across the UK
  • reignite the positive reality of ‘friendly societies’ and mutuals

The amendment would force the consideration of current capital adequacy requirements. Are they fit for what we want, across all potential financial services models? 

It is also essential that such potential sources of regional finance are seen very much against the backdrop of the digital transformation. Such banks, I believe, need a physical presence in all our communities, with business bankers ready to support customers at each growth stage.  The benefits must also encompass full digital functionality alongside the physical.  If got right such banks could bring to bear another element of the financial and digital inclusion story with the financial inclusion potentially driving the digital.

None of this is about a lowering of thresholds for SME finance – not at all.  If we support SMEs by increasing the range and number of regional mutual banks then the banks will do what they do best and SMEs will thrive, as will the communities, the cities in which they are based.  Through this single intervention, one of the fundamental planks on which levelling up will come will have been effectively laid.

As we build our way out of Covid, there could barely be a better moment to consider the benefits of regional mutual banks.  Built in our great communities and cities, with close customer connection, and crucially, with an interest and a stake in all those future economic, social, individual, and organisational (as yet unwritten) stories of success.

We need regional flows of finance to enable and empower more – and more regionally diverse – SMEs. I firmly believe regional mutual banks can be an essential part of delivering this and I hope the government will include my amendment in at least one of these new laws. 

Lords debate link

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