Last week I was kindly invited to the launch of Richard Roberts and Steve Walker’s report on the future of responsible finance business lending. For me, there are four key messages that I take away from the report.
First, we can debate the scale of the SME funding gap, but can we please now accept that it exists, and has continued to do so in the long run. Stemming from Small is Bankable (1998), this is the latest of at least twenty years of increasingly numerous periodic reports. These have provided a range of evidence on the continued SME funding gap; and that its scale and scope has morphed in response to the broader economic and financial landscape merely reinforces the point that it exists. Viable businesses every year struggle to raise commercial funds, with the report carefully suggesting current ‘gap metrics’ of 70,000 SMEs, 7% of new credit supply or about £2 billion. This is not good news – this is viable investment not entering local economies and communities (and foregone economic and social benefits). One might also suggest that the lack of this investment is economically unproductive.
Second is the long run role and track record of responsible finance providers in successfully meeting the funding needs of tens of thousands of viable SMEs unable to raise commercial finance. This track record extends also for at least 20 years, and in 2017 equated to 5,000 viable firms funded to the tune of £60 million. It is a flexible response and policy delivery mechanism to structural drivers which periodically impact the funding gap. For example, when the banks pulled up the drawbridge during the global financial crisis it was responsible finance providers who responded to oil the regional wheels of the economy. Today, regulatory requirements and/or commercial preferences for financial products and property mean that, in an era of cheap money, SME lending accounts for only about 4% of bank balance sheets (BankingFutures, 2017). At best, banking’s commercial appetite for SME lending waxes and wanes – and often not in line with the needs of the real economy.
Responsible finance providers’ lending mission has always been combinations of supporting underserved communities and generating economic and social benefits in local and regional economies. Explicitly or implicitly, they have always understood the impact of their lending, and the broader positive economic externalities and wider social effects of their activities.
The third message of the report is that Roberts and Walker remain concerned about the future funding environment for the sector. The report usefully outlines what seem to be a number of ‘funding mechanism buses’ which are coming along and which may well represent the building blocks of a sustainable funding ecosystem. I do think they are right to be nervous. To my mind we have been here before in the search for financial sustainability and getting a funding ecosystem over the line. Indeed, one of the frustrations of the last few years has been the missed opportunities to build this ecosystem earlier.
The 2012 £60m Regional Growth Fund joint first loss investment of government and commercial money has been a driver of structural change – for some organisations and the sector – and opened up a potential door and infrastructure both to commercial finance and sustainability. Looking back the sector managed to get one foot through the door only to find that when it needed the final helping hand to step through it didn’t appear. On the one helping hand, the British Business Bank (see Civitas 2018), has been limited in its support to responsible finance providers bar mainly the start-up loans programme. This is in comparison to supporting challenger banks and alternative lenders who have generally replicated historical bank SME lending portfolios (and therefore the SME funding gap). It is welcome that these diverse channels have been supported to compete with the big four at their own game – but there is little evidence for these channels providing a solution to the SME funding gap.
And as austerity has hit, RGF funds have depleted and the policy machinery deckchairs have been continually reshuffled at all levels, the sector has struggled. And that’s with bits and pieces of European money. And whilst that struggle has driven overdue organisational and sectoral developments and innovation – it has not helped the real economy. Lending by the sector has been in decline since 2015, despite evidence for the continued SME funding gap.
Finally, how can we get the sector over the line to sustainable funding this time round? Today, there is evidence and infrastructure in place which demonstrate policy guarantee mechanisms as an effective and efficient model to partially fill this gap. This is about a national mechanism – which I think is important. The very recent arrival of regionalised BBB funding is very welcome but there are attendant concerns about the current lack of scale, scope, patchiness and speed of roll-out of devolved access to finance solutions (especially in England). Moreover, there are inherent substantial uncertainties about future funding and governance infrastructures under devolution and decentralisation.
Responsible finance providers, in addition, do the ‘right sort of social investment’ in the eyes of Big Society Capital and a very welcome £30m BSC Community Investment Fund has been launched. Along with the evidence base it will produce this has the potential to inject investment of scale into ‘underserved small businesses often located in disadvantaged communities’.
Finally, as agendas around devolution, decentralisation, and prosperous communities across the UK have been driven forward, renewed interest in models of placemaking, local stakeholder capitalism and inclusive growth is coming to the fore and which reflect the activities of responsible finance. This brings added weight to the call by Responsible Finance and its partners for a dedicated national fund for the sector, alongside new opportunities which are materialising through local authority inspired financial instruments.
In 2010, in our BIS/CO/GHK report on the sector, one of our few key statements revolved around how responsible finance providers were undervalued (and by implication underinvested) given the lack of reporting of the value of the broader economic externalities and wider social value and benefits they generated through their economic activity.
We know there are all sorts of issues and problems measuring ‘such things’ but even allowing for 50% hogwash – to use a whiff of American populism – after some lean years, and from a leaner perspective, my optimism is that the responsible finance sector and its broader community finance brethren may be about to be swimming with the tide once again, and that the door of opportunity for scale and sustainability will be passed through.
Thanks to Richard and Steve for a truly timely report.
Prof Nick Henry, Co-Director, Centre for Business in Society (CBIS), Coventry University