By Nigel Maine, European Head of Marketing, Finpoint (UK)
Negative interest rates have been mooted as a solution to unlocking business lending to the UK’s small to medium-sized enterprises (SMEs). But is the disincentive of having to pay for the privilege of holding cash reserves with the Bank of England likely to encourage banks to lend more? Or are there more fundamental barriers to overcome beyond simply a willingness of financial institutions to lend?
Deputy Bank of England Governor Paul Tucker told the Treasury Select Committee that the Monetary Policy Committee had considered negative interest rates to improve credit flows. His ideas were swiftly and officially disavowed by the Bank of England, but too late to avoid opening a Pandora’s Box of speculation.
Negative interest rates does not mean that individuals and companies would be made be to pay on their savings. Rather, the banks would be charged interest when holding their spare cash on deposit with the Bank of England. The theory is that negative interest rates would encourage lenders to make money from their cash by extending credit to individuals and businesses, rather than it costing them money to hold cash. That’s the theory, at least.
But further analysis of why banks are not lending as much to small businesses as they were before the recession suggests that it is not simply down to a lack of willingness to lend. It is rather more complex than a case of ‘the computer says no’, because research shows that three-quarters of SMEs seeking finance receive it.
The same research, by the Department for Business, Innovation and Skills (BIS), highlights that at any one time only about 20% of the UK’s entire SME population is seeking finance. This provides some evidence to substantiate claims in the media by financial institutions that fewer small businesses are actually asking for any money.
Further evidence suggests that many SMEs are simply unaware that other forms of business finance exist beyond traditional overdrafts and unsecured finance. For example, a business owner who was refused an overdraft could well fund their business’s growth through invoice financing.
Until the relatively recent emergence of online financial matchmaking platforms, the process of matching borrowers and lenders has been incredibly inefficient. A single business customer with a single financial need approaches a single financial institution, probably in a single location. This traditional closed lender-borrower relationship stifles competition and transparency for both borrowers and lenders.
The result is borrowers approaching lenders who have no knowledge of or interest in lending to their sector. Sometimes lenders do not even offer the financial products the business needs. It’s not the lender’s fault the borrower’s targeting was poor, and no amount of negative interest will make a financial institution provide finance outside of their core competencies.
So, it would seem that other, more fundamental challenges have to be overcome before implementing radical policies such as negative interest rates. As a result the impact of such policies may be limited, and in addition may add to borrowing costs. Nevertheless online matchmaking platforms oil the wheels of financing, to the benefit of borrowers and lenders alike.
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