Lockdowns don’t hit all businesses equally. That’s a point that Andrew McRae, the Federation of Small Businesses policy chair, made following the latest announcement of tougher restrictions. He said that small businesses like retailers had to shut their doors for the next three weeks, “when many big businesses face few operating restrictions”. If you can operate largely or wholly through e-commerce, as many big retailers now do, this lockdown could be a boon, while if you operate out of a high street lot, it’s a disaster.
That’s not the only disparity between corporates and small businesses during this crisis. Critically, big firms can go to big banks and take on loans, or re-structure existing loans. Big banks don’t tend to lend to small businesses – they find they aren’t worth the time and investment for the risk involved. Often big banks don’t even have the local knowledge anymore to know if an SME is a good investment or not with branches closed down all over the country and loan assessments controlled centrally, and based largely on lending algorithms (credit rating criteria, etc).
The UK has a banking sector which is almost only big banks. Five banks control over 90 per cent of UK banking, and over 80 per cent of SME lending. After the 2008 crisis, the SME lending tap was switched off, and the same thing seems to be happening in the pandemic crisis. And what lending they do distribute to SMEs is extremely uneven by region, with a Common Weal report by economist Gemma Bone finding 33 per cent of UK SME lending goes to London, compared to 8 per cent to Scotland. It’s unsurprising then that a 2018 Scottish Parliament report found Scottish SME’s were growing slower than elsewhere in the UK.
But small businesses remain critical to the Scottish economy – 55 per cent of all private sector employment is in SME’s, and they make-up 99 per cent of all private sector enterprises, and 41 per cent of all turnover. Furthermore, the money which goes through an SME will stay in the community, not siphoned out of the country into offshore accounts. If this crisis leads to big multi-nationals eating or displacing small Scottish businesses, we will all suffer as a result.
In other countries, the banking sector is not so concentrated around big banks. Germany is the optimal example, with it’s 1500 ‘Sparkassen’ local banks, which lend overwhelmingly to SMEs. Germany is the second biggest exporter in the world, and over half of those exports come from SMEs. That wouldn’t have been possible without local bank lending for productive investment.
Why can’t we have that in the UK? Because the City of London is based around big corporate interests, rising asset values and international finance, and the Bank of England does everything it can to prop up this model. According to Professor of Banking Richard Werner, an arch-critic of modern central banks, since BoE independence in 1997, 86 per cent of all credit creation in the UK has went towards ‘asset-credit’, i.e. non-productive investment. Werner, who is founding chair of Local First, an attempt to build a community bank network in the UK, believes that central bank’s like the BoE and the ECB are deliberately operating a monetary policy aimed at protecting corporate interests at the expense of SMEs and small banks.
So small businesses are well within their rights to think that the game is rigged against them, but not because of covid-19 restrictions. It’s about time complaints started being directed to Threadneedle Street.
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