Banking sector needs more competition

The Federation of Small Businesses (FSB) has urged the government to take action to introduce more competition into the banking system.

In its response to the government's own consultation on the issue, Financing a Private Sector Recovery, the FSB argued that without offering small firms greater choice in funding providers, the economy risks a double-dip recession.

The Cruickshank Report, published a decade ago, revealed that the four main UK banks held 83 per cent of the small business lending market.

With the overall market still concentrated in the hands of a few lenders, the FSB claimed that now is the time to investigate new ways of changing the shape of the small business lending landscape.

More than four out of ten small firms use bank loans, overdrafts, leasing or factoring as a means of securing credit. But those firms that turn to their banks for finance are being hit by high interest rates, despite base rates resting at a historic low, the FSB added.

The FSB response included a number of recommendations.

The government should resist the temptation to sell its shareholdings in nationalised and capitalised banks to other banks.

Other action would involve promoting financial intermediaries to help small businesses that are currently unable to access finance; introducing a series of regional capital markets and community investment trusts; and turning the Post Office into either a solely state owned bank or a mutual or trustee bank for small firms.

The FSB said such measures would not only help small businesses in accessing credit but would provide stability in the event of any future restrictions on credit the banks may impose.

John Walker, the FSB's national chairman, commented: "Demand for finance is at its highest as the economy enters recovery - something which the UK economy is tentatively moving through. If the government truly believes that the private sector is going to help avoid a double-dip recession, it needs to consider alternative sources of finance.

"Small firms don't have a huge amount of scope in accessing finance, unlike larger businesses. More competition in the sector will mean greater competitiveness in terms of the cost and the services provided and give access to the type of finance which large businesses are able to tap into."