Tag: finance

Finance from alternative sources to the tune of £12.04 billion can help SMEs drive economic growth

Author
Angus Dent
Date

An old adage that features regularly on this blog is that “SMEs are the lifeblood of the UK economy” and provide the primary driving force for growth. The capacity for SMEs to outperform the market is a factor, but a host of global permutations aligned to the plunging oil price and the Chinese equity “realignment” have curtailed certain growth expectations in the UK despite our healthy performance relative to the rest of Europe.

So, in light of Mark Carney’s recent revelation that the Bank of England had cut its growth forecasts for 2016 and 2017 from 2.5% to 2.2% and 2.6% to 2.3% respectively, here is a theoretical look at whether SMEs could make up the 0.3% difference, financed only by sources of alternative finance. The £5.5 billion of finance facilitated by P2P Lenders and Crowdfunders to date (2013-2015) is just a drop in the ocean, despite last week’s comments from a bewildered and misguided Adair Turner trying to convince the public that “The losses on P2P lending that will emerge within the next five to 10 years will make the bankers look like absolute lending geniuses …..”. Let’s just put things into perspective; Adair Turner failed to predict the sub-prime mortgage crisis when he was Vice-Chairman of Merrill Lynch between 2000 and 2006. By 2008, the bank had lost $51.8billion from mortgage backed securities. I won’t be asking him to read my palm any time soon.

A quick outline of the sums: the UK’s GDP was measured at $2.9889 trillion in 2014. It grew by 2.4% in 2015 (according to the World Bank). The 0.3% downward swing in Carney’s growth projections for 2016 (2.5% down to 2.2%) is worth around $10.1 billion, which converted to GBP is around £7.04 billion. 2014 saw growth of 161% for the alternative finance sector; The Telegraph was quick to point out that growth had “slumped” to 84% for 2015, although in such a young industry there will be skewed statistics early on. Nesta’s 2015 UK Alternative Finance Industry report has projected between 55% and 60% growth for 2016; a 57.5% growth rate will see the industry lend £5.04 billion. This figure will have to be included in my 2016 GDP projections, meaning the alternative finance sector in 2016 would have to grow 337.5% to £12.08 billion from £3.2 billion 2015 to make up the 0.3% of GDP lost in Carney’s latest finger in the wind. And that is assuming that all of the other facets that make up GDP remain true to prediction. See the graphic below for an illustration of the figures:

updated graph

So, what can we take from all this? Firstly, whilst the figures aren’t exactly astronomical, nobody in their right mind would guarantee such a large jump in the space of a year. But crucially, the potential is there for alternative finance to really make a difference in driving GDP growth through helping SMEs, the lifeblood of the economy. As banks and platforms start to work together, we will see the industry continue to grow at steady rates, and the money lent to SMEs help drive economic growth. The industry should at least be aiming for that extra £7 billion for 2016; with a push anything is possible.

In response to Scaremongering and book Promotions…

Author
Angus Dent
Date

Lord Turner certainly knows how to grab a headline. Speaking with all the authority of someone who knows a thing or two about disasters – he presided over one himself as the former head of the disastrous and now defunct Financial Services Authority (FSA) – he is now predicting that the P2P crowdlending market is destined to come to grief because of poor credit risk processes that are indigenous to the sector.

Predictably, the business Press have been only too eager to seize upon his gloomy assertions, made during an interview with the BBC, on the usual premise that bad news makes better headlines than good news. Don’t let the facts get in the way of a good story, etc….

His most explosive proclamation was that: “The losses on P2P lending that will emerge within the next five to 10 years will make the bankers look like absolute lending geniuses …..”

The first thing to point out is that, in terms of size, the UK’s P2P lending market is, for all its undoubted success, minuscule compared to the size of the whole market place; the major banks still control 90 per cent of lending to SMEs. The second point is that the credit risk processes in P2P lending are at least as thorough as they are with the majority of the banks. Indeed, many of the lending officers in the P2P sector used to work for banks in the days when they actually lent money to SMEs.

In ArchOver’s case, the process is actually far tougher because borrowers over our platform are obliged to cover their loan against default through credit insurance. No bank that I know does that as a matter of strict policy.

However, more important still is the fact that all P2P loans are matched; they have a set duration at a fixed rate agreed between borrowers and lenders. This sort of arrangement is in direct contrast to the banks which ‘borrowed short and lent long’ – precisely the toxic combination that led to liquidity problems and contributed hugely to the banking crisis.

Criticism is one thing, but scaremongering on this scale, especially from someone who should know better, is neither appropriate nor helpful. It is made worse by a blatant distortion of the facts.

 

Are the economic benefits of “Brexit” worth the potential disintegration of political and financial order?

Author
Angus Dent
Date

With a decision on the timing of the “Brexit” vote looming, David Cameron is starting to ramp up the pro-EU rhetoric to convince the public to ignore the Eurosceptics and vote to maintain the status quo. The decision has very much been Cameron’s Sword of Damocles moment, hovering over his current tenure and threatening to create an unwanted Prime Ministerial legacy akin to Eden’s Suez Canal Crisis.

Yet there is an overwhelming feeling that whatever Cameron says will pale into insignificance should a “defining incident” take place that pushes those sitting on the fence to unite against staying in the EU. Marine Le Pen’s initial success in the regional elections in the aftermath of the Paris attacks shows just how quickly people can make a potentially rash decision on the basis of fear and loathing. Le Front National might have mellowed since Le Pen ousted her right-wing firebrand father, but any electoral gains for the party would have represented an alarming move towards the ugly end of right-wing conservatism. Fortunately a wave of sentiment against the Front National and some tactical voting saw the party end up without control of a region, despite support from at least 6.6 million voters.

There is still a feeling that leaving the EU is a proposition that is just too scary for the general public to plump for- the “British” thing to do would be to knuckle down and get on with it in order to avoid such a huge political and social catharsis. Yet a Daily Telegraph poll on Friday last week saw over 80% of the 22,000 voters said Britain should leave the EU. Despite the obvious bias of Telegraph readers, this is still an alarmingly high figure for Cameron to stomach. After all, these are the people that, more likely than not, are the staunchest supporters of his party.

From a financial point of view, the UK’s global financial clout wouldn’t be affected too much by a decision to leave the EU. It is unlikely there would be a banker exodus and freedom from stifling and constantly changing EU regulation will be welcomed by financial institutions. Yet the UK economy would undoubtedly take a beating: world-leading economists unanimously agree on that- have a look at this FT article for more proof: http://on.ft.com/1Q8XeSw.

Cameron needs to emphasize the enormous practical issues that hinder the UK from leaving the EU. The significant upheaval of the EU regulatory framework would be a minefield that would make or break businesses in industries such as the food and drinks sector. As it stands, companies have to abide by EU food regulations if they want to export to the EU but have no say over those regulations. Something as innocuous as a change in the wording of a law can mean the difference between a product being allowed to make a health claim or it failing to meet the requirements. It is worth considering just how crucial altering such stringently inflexible regulation is to UK SME’s who are most the perilously placed.

Moreover, Britain would need to renegotiate its trade rules with the EU in order to preserve its favourable status. Under World Trade Organisation rules, the UK would have no more access to the single market than would China. Any negotiation would come at huge financial and political loss: just look at the amount of financial support Norway gives to the EU each year to curry favour. Britain would then need to renegotiate its trading relationships with the rest of the world; EU partakes in 35% of all world trade so “Brexit” would deny the UK to an extraordinary range of privileges afforded to EU competitors.

The cost of leaving, combined with the converse cost of “staying in”, would be felt for years to come. Yet it looks unlikely to get to that point; the Lisbon Treaty only allows for two years of negotiations for a country to leave the EU, unless all 27 nations unanimously vote to extend the period. Negotiation is done with whole EU rather than country by country, presenting major obstacles. It seems hard to fathom that Britain wouldn’t have the option to cordially extend the negotiations, yet all of the individual nations will certainly seek to negotiate the best deal for themselves, particularly concerning immigration, given the tensions regarding economic migrants and asylum seekers from the Middle East. The rancorous callers for tighter immigration need to recognise how difficult it is for Britain to tighten its control on non-Brits arriving to live in` the country, when the negotiations could force Britain to accept an even greater migratory burden. The British public should also take into account the effect it will have on Britons currently living abroad (c. 2 million) in other EU countries who would lose their EU citizenship. The same notion extends to those with businesses or business interests abroad. It hardly seems aspirational to any business owners to reject the ease at which the EU allows business expansion across borders. Likewise, it is no wonder that Cameron wants to extend the vote to 16 year olds, for whom the Schengen Area presents a chance to escape the clutches of their parents if anything else.

Yet despite the dense complexities of Britain leaving the EU the decision makers will have to take into account, we are still faced with a referendum that will only ask us “‘should the United Kingdom remain a member of the European Union or leave the European Union?”. In age where, for better or worse, the public needs politics to be made more understandable and politicians more approachable, this is a vote that should not be put to the public in such stark wording that belies the delicate, yet far-reaching, intricacies of the result.

Alternative Finance: the Outlook for 2016

Author
Angus Dent
Date

The Alternative Finance sector in general, and the P2P crowdlending platforms in particular, had everything going their way in 2015: low interest rates, traditional banks still dabbing their wounds, economy picking up, helpful new legislation (e.g. Innovative Finance ISA) from a newly-elected Tory Government, no major ‘car crashes’ in the industry and dramatically heightened interest from institutional investors. It is hardly surprising that the industry grew to a cumulative total of £4.6 billion lent (source: AIR) – indeed, it would have been more surprising if it hadn’t.

However, 2016 is likely to be a lot more challenging and will, I believe, start to “sort the men from the boys” – those who are in it for a quick opportunist buck and those who are in it for the longer haul. Interest rate increases cannot be far away now that America has made the first move in an upward direction. The big question is what impact is that likely to have on the savers who have been turning away from the banks and building societies in pursuit of a better return. In my opinion, this may affect consumers concerned about safety, but will have little effect on the outlook of HNW investors or institutions more used to balancing risk against reward.

Centre stage next year will be the FCA in its key role of granting authorisation to the scores of platforms that have applied – a vital step in stimulating the hugely influential IFA community to get behind P2P after the new Innovative ISA goes live in April 2016.

Finally, the scramble by the big institutional battalions to grab a piece of the Alternative Finance action is also set to gather pace. One of the final corporate actions of 2015 was the sudden departure of CEO Geoff Miller from GLI Finance, one of the great Altfi consolidators – a sure portent of things to come in an industry where the struggle for dominance has only just begun.

The other slightly disturbing question is whether in time, though not necessarily in 2016, the dis-intermediation brought about by the P2P revolution will fade away in the face of restored institutional dominance – bringing with it the need, once more, to pay the middle man at the expense of the ordinary punter. I do hope that does not come to pass. Then again, it is not always easy to turn away institutional money.