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Growth is the defining challenge for the remainder of this parliament.  As most people in business know, growth will come when businesses have the confidence and the finance to invest, expand and hire more people. But access to finance, and debt finance in particular, remains a serious challenge for businesses since the crisis hit in 2008. Solving this problem is crucial if we are to achieve strong economic recovery.

For many people, the answer to the financial crisis seems to lie in bashing the banks for their failures. But the overwhelming majority of business owners I speak to, whilst frustrated with their banks, are less interested in the political slagging match over who can take the toughest line on bankers. They want to know that if they have cash flow problems, are looking to raise fresh investment or finance expansion, as long as they have a credible plan they will be able to raise the money they need at a reasonable price within an appropriate time frame.

For these businesses to be successful, access to the right sort of finance is essential. Risky, early-stage ventures are best financed with equity. Yet our financial system discourages equity investment by providing tax deductions for debt interest payments, but not for the dividends paid to shareholders. Competition among providers of finance is beneficial for borrowers, encouraging innovation and better offers. Yet debt finance in the UK is dominated by a relatively small number of banks who control 90% of the business lending market, with bonds being relevant only for the largest borrowers and other alternatives being rare. Addressing these shortcomings could provide an important fillip to our economic recovery.

Fortunately, the Government is showing signs that it understands the problem. For instance, there are enterprise loans available for young entrepreneurs with great ideas, and for early-stage ventures the rules around the Enterprise Investment Scheme have been relaxed. The £2.5bn Business Growth Fund should assist larger businesses that create most of the jobs access the equity capital they need. And on the lending side, the Government has recently launched the National Loan Guarantee Scheme, using its balance sheet to reduce the interest rates on up to £20bn worth of bank loans for SMEs. But there is more to be done.

In the longer term, accelerating the pace of our recovery means changing the lending landscape for businesses. With only one new banking license being granted in the last 150 years, we cannot simply rely upon more traditional banks entering the market. However, there are already disruptive new solutions that exploit the power of the internet to process applications faster and serve customers more effectively, such as peer-to-peer lenders like Market Invoice or Funding Circle. What this tells us is that the solution to the lending drought doesn’t have to be a traditional bank. That is why creating the right regulatory environment for these new providers to grow is absolutely vital. As we seek to reform the banking landscape so that no institution is too big to fail, we should be careful that these reforms do not stifle the innovation that allows new lenders to enter the market. The £1bn of funding for non-bank lenders through the Business Finance Partnership demonstrates that the Government wants to support the development of this market, but again we should be careful to avoid a bias in favour of traditional incumbents. And as I concluded in the Beyond the Banks report co-authored with NESTA last year, to change the lending landscape we need to support businesses models that can harness new technology and divert pools of capital (such as that held by retail investors and pension funds) efficiently to the business that need it.

A number of people have suggested to me that we should force RBS, which is after all taxpayer owned, to fill the lending gap. Yet RBS already has the largest market share of SME lending in the UK. For me, the long-term solution is to look beyond incumbent banks that are still suffering from the overhang of the crisis. Creating real competition to drive down the cost of borrowing and give businesses a genuine choice is exactly the kind of solution our recovery demands.

Sam Gyimah is the Member of Parliament for East Surrey.

Follow Sam on Twitter: @SamGyimah 


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