| 24-04-2018 | treasuryXL |

There are more and more reports in the media of a shrinking market between SME (MKB in Dutch) and commercial banks- but why? Micro, small and medium sized companies represent 99% of all businesses within the EU. They employ 67% of the workforce and contribute more than 55% of the Gross Value Added. It is fair to say that they are the lifeline of the economy and provide significant employment. So why are banks reluctant to lend to them?


A recent report in Elsevier showed that over the last 4 to 5 years there has been a drastic reduction in SME loans outstanding to commercial banks. The number of SMEs with a bank loan has dropped by 20 per cent over this period to 653,000. Furthermore, the cumulative outstanding balance has shrunk from around EUR 145 bn to EUR 125 bn. Data from the UK shows a decline in bank lending of around 11 per cent in the last year.


Businesses generally complain about the costs of loans and banks complain about repayment problems. On top of this is the ongoing legal actions regarding the miss-selling of financial derivatives by banks. Feeling among the SMEs is that banks – with their large legal departments and healthy wallets – are able to fend off and delay the SME claims. It would also appear that due to the comprehensive legislation and regulation that is imposed on the banks that the actual costs of servicing loans for SMEs is starting to become prohibitive.

Commercial lending is still a large unregulated market, where the power lies with the lenders. In the Netherlands banks have a special department “Bijzonder Beheer” who monitor those loans that are not going so well. There is anger amongst borrowers that they do not receive additional help from the lenders, who they feel are motivated in ensuring that the banks do not make losses. Borrowers who were having difficulty making repayments were charged more interest by the lenders.

From the banks’ perspective there needs to be a return on funds. Their cost of funding might appear low, but the costs of servicing loans appears to be rising. The traditional relationship between commercial banks and businesses (with the exception of large corporations) seems to be deteriorating.

Who will come to the rescue?

There are alternative providers for lending, but as non bank lenders they do not offer the full scope of products and their rates are higher. However, in the age of disintermediation there are possibilities. The processes of non bank lenders appear to be fair quicker than those of the highly regulated banks. Having loans tailored to individual needs is an area that SMEs would highly appreciate and break the monopoly position that the banks presently hold.

Possibly worrying for the banks are the potential damages to long standing relationships. If businesses are able to source funding from alternative lenders, then the traditional role of banks could become endangered. What is now an SME could, eventually, be a large company employing 1,000s of staff. Banks would be wise to consider this fact.

The marketplace would seem ripe for development by the Fintech industry, if universal standards and compliance procedures could be defined and implemented.

The cost of credit is always expensive when you are wanting to borrow, but bespoke loans could do a lot to negate this perception and advance the cause of non bank lenders.

If you have any questions, please feel free to contact us.