UK wants credit for small firms

Chancellor Darling seeks alternative lending sources to banks to make credit available to smaller companies.

Your country needs you: Alistair Darling, the chancellor of the exchequer, wants better access to funding for small companies.

The UK is looking at ways to make credit available to smaller companies so they could be less dependent on banks, which have tightened lending, Alistair Darling, the chancellor of the exchequer, said yesterday. The measures, which Mr Darling plans to announce in his annual pre-budget report in the autumn, will allow institutional investors to raise capital or package loans for small companies. "We are working on proposals to help broaden the sources of finance available to firms," Mr Darling wrote in The Observer newspaper.

"In the same way that big companies can access funding directly from capital markets, by issuing bonds or commercial paper, I want to start creating a different financial model in the future, in which small companies get funding from sources other than banks. "Our goal is to make finance the servant, not the master, of the real economy." Mr Darling also reiterated his forecast that growth would return to the British economy by the turn of the year but said some Group of 20 developing and emerging economies and other countries still needed to deliver their promised fiscal boosts.

The article was written to mark the first anniversary of the collapse of Lehman Brothers, which aggravated the credit crisis and helped create a deep economic recession around the world. Lehman's collapse further weakened already-fragile UK financial institutions, forcing the government to inject £37 billion (Dh226.41bn) into the sector. The government and Bank of England policy makers have said tight credit conditions for businesses and consumers are key impediments to a lasting UK economic recovery.

To address that, the government has signed detailed lending agreements with some of the banks that have received government support. But official data show that new lending to firms and consumers remains scarce and the cost of some loans remains high. The government has already said it was looking at ways to increase competition in the banking sector, which has become even more consolidated over the past two years because of the near collapse of several major lending institutions, such as Northern Rock and Halifax Bank of Scotland. Mr Darling has spoken in recent weeks of using the government's sale of its stakes in leading UK banks to improve competition and is considering ways to lower barriers to entry to the financial sector.

The European Commission, which must approve the government's support packages for the banks, has also warned about the level of competition in key banking markets. A key focus of the UK government's push has been increased competition in the small business lending market. Treasury data show that some 92 per cent of loans to small and medium-sized firms come from the big four UK banks: Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group.

"If there is one lesson to be learnt from this crisis, it is that credit must never be allowed to dry up because of reliance on a small number of banks," said Mr Darling. There were signs the global recession was coming to an end, but countries could not afford to take the recovery for granted and must ensure stimulus promises were followed through, he said. "Simply announcing a new policy is not enough," he said. "Some countries still have to implement much of their promised boost to their economies."

* with Agencies