Tag: GDP

Banks see that the future of lending to SMEs is Alternative

Author
Angus Dent
Date

The Bank of England revealed last week that lending to SME’s had dropped in the final three months of 2015 to £599 billion, down from £755 billion last September. Tradition dictates that businesses do not tend to borrow money around Christmas, and those that try are viewed as desperate. Yet these are big numbers: the £156 billion difference from Q3 to Q4 is over 31 times the £4.94 billion all-time figure Nesta estimations that P2P Lenders had facilitated for SMEs. The fact of the matter is that the banks aren’t lending to up and coming businesses that drive the economy, and an increasingly large vacuum is emerging.

The government, keen to plug this gap, had put the “Funding for Lending” scheme in place, in which the banks are offered cheap loans from the Bank of England that are aimed to reach small businesses. Clearly the scheme isn’t working: the Bank of England’s data for the Q4 of 2015 revealed that £6.3 billion (an increase of 262% on the previous quarter) had been borrowed by the bank in the same period. Unless that is going to filter through to all the SME’s in Q1 2016, where is that money going?

The emergence of challenger banks such as Aldermore, Shawbrook and Metro Bank has seen the big banks distance themselves further from SMEs. Aldermore announced that they’ve lent £6.1 billion in 2015, making them the third largest lender on the Funding for Lending scheme. Similarly Shawbrook’s loan book grew 44% to £3.36 billion in 2015 (to put that into perspective, that’s more than the entire P2P Lending industry managed in 2015). These figures are still just a drop in the ocean, however, and it is still very much a case of “if” not “when” UK SMEs are receiving the kind of funding that can help them drive GDP in the near future. In the long term, however, it will be alternative finance that steps in alongside the banks, providing a stable working relationship between the two is maintained.

The banks are already starting to turn to alternative finance platforms who are keen to facilitate funding to both consumers UK SMEs. Funding Circle, for instance, receive referrals from RBS and Sanatander and back in May, Zopa and Metro Bank announced a deal whereby the bank would lend money across their platform to consumers. The trend will continue but the traditionally clunky banking processes are reflected in building the working relationships: banks like to take their time and tend to cherry pick. It is no surprise that only the two bigger players in the UK market have formal partnerships. The emergence of so many Peer to Peer lending platforms, though, specialising in such diverse and niche products, has meant they simply can’t keep up. And if they can’t beat them, they will start to join them in swathes.

Zopa CEO Giles Andrews has said in the past that they don’t allow any institutions to do their own credit analysis on those customers, something that seems unbelievable, given the depth the banks go into even just to set the relationship up in the first place. Furthermore, it’s not as if Zopa can stop anybody carrying out their own credit analysis, especially one of their potentially biggest institutional lenders. But his attitude in general is right: if the banks want to lend to consumers and businesses through alternative finance providers they should be treated the same as all other lenders. It is a democratic process after all.

The lull in funding for SMEs since the credit crunch of 2009 continues, but not for long. Alternative Finance is here to help, and if the banks want a piece of the action they will have to do so on the same terms as everybody else.

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.

A Response to Robert Reoch’s article on The Growth Outlook for Market Place Lending

Author
Angus Dent
Date

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Thomson Reuters recently published an informative blog post in which Robert Reoch offered his views on the “growth outlook for marketplace lending.”

In his role as Global Head of Products and Strategy at Crowdnetic, a provider of technology and market data solutions to marketplace lending companies (MPLs), Robert is part of a team which aims to educate investors and institutions on the direction in which the  alternative finance industry is moving. MPLs have been quick to offer an alternative finance source to SMEs, providing a service distinct from the antiquated and costly financing options that banks in particular had been providing. And as the industry has grown, innovation by FinTech companies has seen the provision of increasingly niche and bespoke services, as competitors attempt to stand out from the crowd and bid to woo investors. Yet I agree with Robert’s statement that “there is real economic benefit for banks to actively collaborate with MPLs” in order to attract prospective borrowers.

MPL subsets

The MPLs that are most successful could be those that actively maintain a symbiotic relationship with a specific bank or banks. The banks would provide the MPL with a network of suitable borrowers who at the moment just aren’t aware of the opportunities out there.In return, as pointed out by Robert, banks can keep their fee-paying client “without the associated balance sheet and the capital cost”. In light of such exposure, the cost is minimal for the MPL, who would also save on often unnecessary and expensive advertising campaigns, especially as a much smaller group of institutions rather than a large pack of individuals is increasingly seen as the future of the ‘crowd’. This in turn helps Borrowers, who can receive funding faster and with a lessened prospect of a project going unfunded.

MPL bank lending

As Robert alluded to, it remains to be seen how much of the enormous market MPLs can gain access to. After all, a percentage point or two would transform the MPL industry and create a flood of funding to SMEs. The timing couldn’t be better. UK business lending from banks in June 2015 saw the sharpest fall – almost £5.5 billion – in at least four years (since records began). And with SMEs positioned as the main drivers of UK GDP, it is in the best interest of all involved that these businesses receive the finance they need to grow. Marketplace lending companies will be chomping at the bit to fill the void left by the banks; it remains to be seen when the shift happens.

Grexit or Gerxit?

Author
Angus Dent
Date

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Greece is saddled with debts on a scale that, when compared with its GDP, no nation has ever repaid. There seem to be only two possible outcomes: default and become the new Albania (a country locked in isolation and spiralling into decline for the next 50+ years) or devalue.

 

When the Euro Zone was formed, the economies of the joining countries should have fitted within certain economic parameters; the failure to enforce stringent “convergence criteria” has come to haunt the Euro area, worsened by the economic calamities of 2007 / 08. Today, while the Greek economy is a basket case, it is perhaps most closely aligned with the economies of Italy, Spain, Portugal the Balkan members of the EU and maybe even France. The countries that are most clearly out of step with the economies of Greece and its neighbours are those of Germany, Holland, the smaller countries such as Luxembourg. Germany has been able to use the Euro’s weakness to export goods to the weaker European nations at cheap prices, but without much foresight into how they would recover the IOUs.

 

The European Coal and Steel Community agreement of 1952 is the cornerstone of the EU and the Euro Zone. It was ostensibly an agreement to prevent any further wars between France and West Germany. It achieved its primary objective, but it was far from flawless. The community had little effect economically; coal and steel production was influenced more by global trends. The crisis in Greece may yet prove that the European Union is inherently flawed from an economic standpoint; it remains to be seen whether its political advantages can help rescue the Euro Zone or prove so strong that it wrecks the whole European Project. Could the radical option of a German exit from the EU be the most sensible alternative solution? The theory is certainly not as stupid as the inevitable copy-cat portmanteau.

 

Grexit gerxit

 

“Gerxit” might not only address Greece’s problems but also help many other countries begin to address their trade imbalances. As a soaring Deutsche Mark would make imports from Germany more expensive, other countries would be able to export at competitive prices. The cheap currency would make importing goods from the PIIGS (Portugal, Italy, Ireland, Greece, Spain) an attractive proposition, and prevent the need to cut high labour costs by reducing the minimum wage – particularly an issue in Italy. The PIIGS would grow at the same pace until it would be economically viable for Germany to re-join a balanced single currency. Germany, in the interim, would benefit from a strong and stable economy.

 

If Gerxit is the answer, it would require a huge expenditure of political will and a readiness, on the part of the Germans, to take the pain of a contracting economy. Merkel is not going to give up on the Eurozone just yet. And, aside from the political stumbling blocks, Gerxit has its fair share of economic barriers as well. In 2012 a Bertelsmann Foundation study found that leaving the European Union would cost Germany around 0.5 basis points of GDP percentage growth over a period of 13 years, or €1.2 trillion. An estimated 200,000 people would have to be made redundant. There would be trade slowdown as a result of currency conversion and exchange rate fluctuations.

 

But pondering the effects of Gerxit remains an academic exercise. For following considerable and far from unanimous debate, the Bundestag have decided to allow negotiations on a €86 billion Greek bailout deal, kicking the can down the road and probably the wrong road at that. At best, Judgement Day has been adjourned; Europe’s political and economic future again hangs in the balance and the UK remains disengaged. Even though the UK is outside the Eurozone, complete disengagement from next door’s crisis seems incredibly foolish. As the UK has little exposure to Greece it would be in a good position to broker a deal to resolve the crisis. Leadership, rather than intimidation and self-serving diplomacy, is called for.

 

I was recently reminded of a joke that alludes to the Germans’ handling of Greece’s fate as similar to the doctor who gave a patient six months to live. When the patient failed to pay up the doctor gave him six more months. Merkel has recognised that “death”, in this case, is the “chaos” of Grexit, a move that has next to no winners and millions of losers. Perhaps a more relevant cry would be “Physician heal thy self”.