The UK Govt uses taxpayers' money to help fund SMEs through non-bank sources such as peer-to-peer lending; Should NZ follow this example?

By Gareth Vaughan

The British Government has pumped tens of millions of pounds into small and medium sized businesses (SMEs) via peer-to-peer lending, and not surprisingly it's something the CEO and founder of New Zealand's first peer-to-peer lender, Harmoney, would love to see the Government do here too.

The UK government's British Business Bank was set up with the aim of increasing the supply of credit to SMEs. Unveiled in September 2012 with £1 billion (about NZ$1.95 billion) of taxpayer funding, £250 million of additional funding was announced last year. For every £1 the Bank invests or guarantees it expects private sector contributions of £2 to £3.

In February British Business Bank announced £40 million investment in small businesses through peer-to-peer lender Funding Circle, which it said was expected to support about £450 million of lending over 18 months. This follows £20 million of investment via Funding Circle in December 2012, which the British Government says has resulted in £140 million being lent to SMEs.

Harmoney's founder and CEO Neil Roberts told interest.co.nz he commends the New Zealand Government for establishing the regulatory framework for licenced peer-to-peer lending, following the passing of the Financial Markets Conduct Act last year.

Commerce Minister Craig Foss says the introduction of peer-to-peer lending is part of the Government's Business Growth Agenda to "build New Zealand’s capital markets and drive business growth, exports and jobs." And the Financial Markets Authority expects to licence another couple of peer-to-peer lenders over the next year or so.

"There's nothing Harmony would like more than to get involved with SMEs and what we've seen in Britain is the British Government with public money, are the biggest investor through the Government owned bank that has set out to challenge the major five banks because they (the Government) didn't think the capital markets were fluid enough," Roberts said.

"We (New Zealand) are after all a country of small businesses. We'd love nothing more, and as soon as we can we'll get involved in that (SME market). And I'm sure that the Government will be interested in any move that helps get capital into our small businesses," Roberts added.

'Limited choice'

British Business Bank's website says a highly concentrated market for smaller business lending in Britain leads to limited financing choices for smaller businesses. The Bank uses guarantees to share risk with the private sector, and create stronger incentives for lenders to extend credit to smaller or growing companies. It makes money available to smaller businesses through non-bank lenders including peer-to-peer lenders, supply chain finance lenders, asset finance lenders and debt and mezzanine finance funds.

The average loan size through British Business Bank programmes is £68,000, the "typical" equity investment £600,000. So far some 31,000 businesses have been assisted by the British Business Bank.

In Britain SMEs are generally defined as businesses with fewer than 250 employees and an annual turnover of less than £50 million. There are some 4.8 million SMEs in Britain, employing more than 14 million people, accounting for about 59% of private sector employment.

According to a 2011 Ministry of Business, Innovation and Employment paper, SMEs in New Zealand are defined as those with less than 20 employees. They account for 40% of the economy's total output on a value-added basis, and 31% of all employees.

Peer-to-peer lending is where an online service provider acts as an intermediary matching borrowers and lenders, receiving fees for doing so. The principal purpose is to match lenders with borrowers seeking loans for personal, charitable, or small business purposes. See all our stories on peer-to-peer lending here.

"I commend what the Government has done in terms of creating a competitor that isn't held back when competing with the major banks by not having a banking licence," Roberts said.

"We can compete against them (banks) and see ourselves doing that with a very different set of products. We will innovate continuously, we'll try and bring new products to market that really are quite disruptive."

Concentrated markets

According to the British Business Bank, the big four UK banks account for more than 80% of the country's smaller businesses’ main banking relationships.

"Whilst the Government is working hard to improve competition in the banking sector, there is a range of challenges faced by new banks trying to enter the market. These include regulatory barriers, low rates of switching by consumers and reduced access to information to assess creditworthiness of lending applicants compared to existing finance providers," the British Business Bank says.

"This concentration and the challenges to enter the banking market results in credit rationing, a lack of product diversity and higher costs. In addition, when large incumbent banks pull back from the market, smaller business borrowers are often left without sufficient alternative sources of finance."

In New Zealand the big four Australian owned banks - ANZ, ASB, BNZ and Westpac - accounted for 88% of total system loans as of March 31, according to credit rating agency Moody's.

In the year to February 2013, 42,690 new enterprises started operating, according to Statistics New Zealand. This was down 5.2% year-on-year, and the lowest annual number of "births" recorded in the Statistics NZ series, which dates back to 2000. During the February 2013 year, 46,550 enterprises ceased operation, meaning the number of enterprise "deaths" exceeded births for the fourth consecutive year.

See more on the British Business Bank in this Financial Times article, and here's its strategic plan.

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