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Funding for lending scheme will continue to fail if money is not ring fenced for SMEs warns James Hardy, Head of Europe, Alibaba.com:
Last week’s announcement about the stress test results by the Prudential Regulation Authority is another nail in the coffin of the Funding for Lending Scheme (FLS).
The purpose of the FLS was “to boost lending to the real economy” (Bank of England website). It is failing for two reasons: A regulatory banking environment which with today’s announcement is arguably penalising banks which lend under the scheme; and the misconceived notion that mortgage lending is as important for the economy as lending to SMEs.
Lenders prefer mortgage lending because the asset is tangible and perceived as safe. But mortgage lending makes no meaningful contribution to economic growth, is fundamentally a political activity and is only contributing to an increased risk of a property crash.
By contrast SMEs currently employ 60% of Britain’s workforce, are the most important macro-economic driver of the economy and a huge contributor to exports. They are the biggest losers whenever a bank makes a mortgage loan in favour of a loan to an SME, and also when total bank lending falls from banks like Barclay’s, Royal Bank of Scotland and Lloyds.
We need to concentrate on supporting SMEs by ring-fencing government money for their needs and growth, which must be free of any external forces or competing lending priorities.
Only then will we see the much needed credit-injection to help support the small and medium-sized businesses which could guide us out of recession.
James Hardy