Manos Schizas
Earlier this year, the Government announced details of Project Merlin, its deal with the UK’s major banks to boost the flow of credit to small businesses. While Merlin was in many ways a publicity stunt and thus hardly representative of the whole of Government policy, it nonetheless reflected much of what is wrong with the Access to Finance agenda in its many incarnations in the UK and abroad. This is the idea that if a war chest of funds can be amassed and either earmarked for one sector or handed to a suitably labelled intermediary, like the rather unfortunate ‘Bank of Essex’, all will be well.
This earmark fetish is reflected in many Government initiatives, including some whose objectives are clearly worthwhile. Apparently it takes a Green Investment Bank to finance green investment, and a Regional Growth Fund to finance, well, you guessed it. From a ‘raw materials’ point of view, financing both of these agendas relies on referrals and due diligence, balanced incentives, properly valued intangible assets, and optimal sharing risk between the public sector, the financial sector and businesses. If there is a reason to pursue them separately it is almost entirely political.
In the Access to Finance agenda, policy silos come with their own toolkits and thus policymakers and academics alike are reluctant to ask questions they cannot readily suggest solutions to. A case in point is that of trade credit and its importance as a source of short-term finance. In reviewing a decade of payment trends in 2008, Nick Wilson found that UK small businesses typically got twice as much short-term finance from their suppliers as they got from their banks. According to more recent research by ACCA and the CBI, suppliers were at least as proactive as the banks in tightening credit in 2009, tapping into the credit cycle to finance themselves cheaply. The European Central Bank’s Frederic Boissay demonstrated in 2006 that this chain of payments generates systemic risk and has been known to shave up to 2% off Italian GDP growth. Yet when the European Commission published an independent report by EIM into the cyclicality of SME finance, trade credit barely got mentioned. When the UK Government consulted on Financing a Private Sector Recovery last summer, it explicitly stated that SMEs are almost entirely reliant on banks for finance.
The overlooking of trade credit is an example not only of the perils of policy silos but also of the power that headline figures have over policy: unlike bank lending, trade credit is informal and very hard to monitor, and is therefore often overlooked in policy and research. And while this is a problem that many SME related issues suffer from, it reached truly epic proportions last year with the publication of the Basel Committee’s assessment of the impact of new capital adequacy and liquidity rules on economic growth.
The Basel III impact assessment is a vast volume full of mind-numbingly rigorous simulations, which produced a range of estimates based on different economic and policy assumptions. On average, it found that each additional percentage point of capital required would reduce trend growth only modestly (by 0.32% over four and a half years), while analysis by the banking industry predictably suggested an effect up to eight times greater. Both assessments, however, acknowledged a massive risk to their estimates: SMEs account for more than half of the world’s economic output and, according to CapGemini’s 2010 global retail banking report, they also account for nearly half (46%) of the risk-adjusted assets of global retail banks. Yet the effect of Basel III on lending to SMEs is not addressed, because the data is simply not there. All we are told is that it will be disproportionately large. This is a classic case where it is better to be approximately right than very precisely wrong.
But let us briefly return to the ‘earmark fetish’ I mentioned earlier. The raw materials of financial intermediation are neither money nor commitment, but the time-honoured quartet of information, control, collateral and, of course, risk. I got a quick reminder of this late last year while examining data on SME’s access to finance in six countries, compiled for ACCA by Forbes Insights. When plotted against each country’s ‘Getting Credit’ ranking, an indicator of credit information supply and creditor protection estimated by the World Bank, it became clear that countries that ranked higher saw more of their SMEs that applied for finance get all the funds they needed. Those businesses with the strongest balance sheets benefitted from even a small increase in the supply of credit information or creditor protection, while those with medium-strength balance sheets could only differentiate themselves from those that were simply not creditworthy if there was an abundance of information and control involved.
It’s worth making this point over and over again – finance does not create value, whether for SMEs or any other stakeholder, out of thin air. As long as policy continues to overlook how finance does create value, it will continue to miss the point.
Manos Schizas, Policy Adviser, ACCA's SME Unit
<Back to Contents Next Article>