Mr. Mark Fielding:

I thank the joint committee for inviting me to attend. ISME is the independent body that represents small and medium enterprises throughout Ireland. As members know, it is not funded by banks either through membership or sponsorship, which is an important fact when one talks to representative bodies Compared with larger companies which have options, small and medium businesses have always faced great difficulties in accessing credit on a non-punitive basis. Even the Governor of the Central Bank has made the same point a number of times recently. It is clear that banks are primarily interested in lending to safe SMEs, whereas the real difficulties in the current environment are faced by SMEs that are not what we would call safe in the eyes of banks. There is strong evidence that the number of refusals is higher in Ireland than in other eurozone countries. I would like to address in the short time allotted to me a number of issues relating to refusal rates on the part of banks, late payments in commercial transactions which create a need to go to banks to raise funding, the training of small and medium business owners, personal guarantees and the conditionality of loans, alternative sources of finance, peer to peer lending, asset bank lending, private investment and a third banking force.

I will commence by nailing down the fact that access to finance has been difficult, despite what members will have heard from different people. The most up-to-date Central Bank statistics for money and banking, dated March 2014, indicate that lending to Irish non-financial corporations showed a year to year decline of 6.1% in March, following an annual decrease of 5.8% in February. All categories of loans recorded a decline over the year. This represents the 16th consecutive monthly decline in lending. Also, the headline from the CSO's access to finance survey that compared the 2007 figures with those for 2010 reads, "Successful loan applications dropped from 90% in 2007 to 50% in 2010".

The ISME Bank Watch survey figures confirm higher refusal rates than the banks admit to. The figures are at variance in a number of areas. ISME has been carrying out periodic Bank Watch surveys since 1993. Never, even in the heady and crazy days of 2004 to 2008, did we see a success rate of more than 82%. The average refusal rate throughout the 1990s and up to May 2008 was 20%, a figure never disputed by the banks in those days. In November 2008, the refusal rate jumped to 57% and has fluctuated around the 50% since then. Currently, the refusal rate is at 54%. Much is made of the banks' assertions of 90% of credit applications being granted - by definition, a refusal rate of 10%. We need to know what constitutes a credit refusal. To an owner-manager, a refusal is very plain in that they do not get the credit requested. From the bank’s perspective, they talk about sanctions and agreement to give credit, whether it is accepted or not. Initially, the banks count fully completed formal applications. Being discouraged over the phone or at a meeting is not counted by the bank but is counted by the SME. A collateral request or any other requirement that the SME cannot fulfil, such as deposits to be placed with the bank, is not counted, but the SME sees it as a refusal. Where a customer requests €50,000 and the bank offers €20,000, which is useless and which the customer does not take, the bank counts it as a success but the SME sees it as a refusal.
We hear the banks talking about success rate figures of 85% for Bank of Ireland, 92% for AIB and 94% for Ulster Bank. I quote from a response from AIB to the Securities and Exchange Commission on 31 October 2012. The Securities and Exchange Commission asked AIB about the 90% credit sanctions, and the response stated:

AIB sanctioned 90% of formal credit applications (note: only formal applications captured). This measurement does not take into account any informal discussions between AIB and SME customers that did not result in formal applications.

By its own admission to the Securities and Exchange Commission, it is not counting informal applications. The first Mazars report on SME lending finds that the banks failed to adequately record the level of SME lending and that they also failed to adequately record all business inquiries for finance. They could not differentiate between new and existing customer loan applications and between requests for overdrafts and requests for term loans. When those representing the bailed-out banks talk about figures of 84%, 93% and 92%, they are counting fully completed formal applications. They are not counting all applications. They are guilty of what Churchill called terminological inexactitude.
ISME carries out the Bank Watch survey every quarter; the latest was carried out at the end of February. I will not go through all the figures. The response rate was 9.5%, with 924 owner-managers responding. Fifty-four percent of SMEs that had applied for funding from banks in the three months to the end of February were refused credit by the banks, a deterioration from the 50% refusal rate in the previous quarter. We hear from the banks that demand for credit has decreased, but in that quarter, 39% of respondents had requested additional or new bank funding, an increase from 37% in the previous quarter. The requests have increased rather than decreased. A reduction in overdraft was demanded of 35% of SMEs. This is an increase from 28% in the previous quarter. Not only are the banks refusing requests, they are demanding reductions in existing overdraft facilities. Seventy-eight percent of owner-managers were in favour of an alternative strategic investment bank. Of course they would be if they are being refused at a rate of 54%.
Late payments in commercial transactions is a major issue for small businesses. Some small businesses act as banks by extending trade credit to companies turned down by banks. That leads me to the issue of late payments, which has a bearing on access to finance. If businesses were paid on time, their need for finance would reduce dramatically. I will not dwell on the topic but I ask the committee, which is very busy, to examine the situation in which small and medium-sized enterprises are waiting an average of 60 days to be paid, despite prompt payment legislation introduced in 2002. The legislation has not worked. I will leave that matter to the committee. If we are waiting an average of 60 days beyond the credit period, it means we must go to our banks to get funding.
With regard to training, I listen to the banks and some of their cheerleaders in other organisations talking about the lack of expertise of SMEs when it comes to the presentation of a case for credit. Time and again, the lack of expertise in putting a plan together is used as an excuse by the banks. I am the first to promote and advocate for management training for SME owners, which is important, but it is much too easy to blame the shortcomings of an SME because it lets the banks off the hook. I have been working with SMEs since the 1970s and have been assisting them with loan and credit applications for 40 years. In the 70s, 80s and 90s, small business owners were successfully getting credit from banks at a rate of eight loan applications out of ten. How is it that, in the six years since 2008, the calibre and abilities of these same SME owners have deteriorated so drastically? Have we suddenly come across a generation of people who cannot count? The truth is that it is not so much the ability of the SME that has deteriorated but the calibre of yellow-pack relationship managers in banks who, between them, cannot read a set of figures, are frightened by the word "risk" and are scared to make a lending decision for fear of career reprisal. In addition, their ability to act as advocates for SMEs when decisions are pushed upstairs is abysmal due to a combination of ignorance, fear and career protection. In 2009 we pointed out the lack of expertise in the banking sector, to be met with the usual denials from the banks. Now we hear they are training their staff - better late than never. The Skillnets ManagementWorks initiative is currently advertising a training programme entitled "Building Financial Capabilities of SMEs" to upskill owner managers in basic finance. ISME recommends this initiative as part of the Government’s efforts to get credit moving. While it is not the be-all and end-all, it is an important initiative and we commend it.
The conditionality surrounding the securing of loans is a cause for concern. Since 2003, the incidence of demands for personal guarantees against loans has increased from 51% to 72%. Many of these personal guarantees and conditions are worth twice the amount of the loan. This negates the banks’ argument that high rates are derived from the risk involved. Another major issue is the discussion about the family home being used as collateral. Recent surveys show the family home was brought into discussions in 15% of cases, while banks asked for the family home as collateral in 11% of cases. That is another worrying trend, and there also a growth in the retention of personal guarantees and collateral deeds by banks after the loans have been finally paid.
Alternative sources of finance to traditional bank lending for SMEs have increased in importance in Ireland and across Europe since the economic crisis began.

This increase in importance was not a natural progression; rather, it has arisen out of necessity, as bank loans became more difficult to acquire due to the unwillingness of banks to lend. Start-ups are finding it especially difficult to obtain traditional bank lending as they lack the essential criteria such as cashflow, history and collateral.

In the alternative area I see the Government playing a part. It has introduced a range of measures which are intended to correct market shortcomings. The microenterprise loan fund and the credit guarantee scheme have yet to prove themselves, while the Credit Review Office, after a shaky start, is having some effect, but needs more promotion. The tax incentives of employment incentive and investment scheme and the seed capital scheme are not working sufficiently due to red tape and major constraints. In fact, the seed capital scheme has been availed of by fewer than 66 businesses in the past year, which is disastrous. The development capital scheme, Innovation Fund Ireland and the National Pension Reserve Fund all are aimed at the medium and large business sector and are having an effect but, again, at the higher end.

Alternative financing activities such as crowd-funding, peer-to-peer lending and invoice trading have emerged as a significant funding mechanism and source of capital, especially in the UK in recent years. Meeting the capital needs of both individuals and businesses and facilitating fundraising activities for civic projects and social causes, alternative finance intermediaries have become online marketplaces where individuals, rather than institutions, work collaboratively to form capital. It is having an effect. However, little information is available regarding the overall size of the finance market. While there has been some industry reporting by for-profit organisations on crowd-funding, there is very little independent, reliable, academic research. We see that as a way of getting funding into SMEs and we would certainly promote it. The initial success of linked finance bodes well for peer-to-peer lending initiatives in Ireland. The boost that the UK Government gave to the sector by investing directly into it is encouraging. We would recommend similar investment in the Irish sector.

The arrival and revival of some finance houses in the asset-backed arena is encouraging. Old fashioned leasing and hire-purchase finance together with invoice discounting and factoring have begun to gain a foothold in the finance space. Again, this is badly needed, and we have a long way to go.

The success of the SSIA scheme shows how Irish people can be incentivised to save or invest their money in certain ways. Currently there is more than €90 billion in personal savings lying in deposit accounts earning negligible returns. If just a small proportion of this total were invested into Irish SMEs, the results could be transformative in terms of jobs and wealth creation as well as in the overall economy. If savers were allowed to invest in an account which would be lent to or invested in SMEs and get tax relief for it in the way that EIIS investors do, this could divert billions of euro in funding into the sector at effectively no direct cost to the State. Alternatively, tax relief could be allowed on the interest earned up to a maximum of, say, €10,000. This is open for discussion and everybody would win under such a scheme. Savers would potentially get a far better return, SMEs would benefit through a new line of funding, the need for bank lending would be reduced at a time when they are deleveraging and the country would benefit through job creation and an overall boost to the economy. Obviously, savers would have to understand that there would always be a risk associated with this, but they would at least have the cushion of the tax relief to mitigate that. With certain constraints similar to those already in play in peer-to-peer lending, such as maximum loans and maximum individual lending, it should be a quick due diligence procedure to establish that the proposal is reasonably sound and that the facts contained in the documentation are correct. This could be administered through a third banking force or a banking fund. On that issue, we propose the establishment of a State-sponsored SME development fund or third bank to support the recovery of the economy by providing the funding and finance services needed by businesses, particularly Irish-owned SMEs. Specifically, the fund could focus on providing loans and trade finances to Irish businesses to meet the gaps in the banking market, support the development of SMEs, support exports, support the many IBRC and Danske Bank customers in refinancing their loans, and support growth sectors using a system of funding based more on future cashflow than the quality of the promoter. This is preferable to being over-reliant on property and collateral.

Irish small and medium-sized businesses are significantly more reliant on bank overdrafts and short-term debt - in the region of 60% - than their counterparts in the 28 EU states, where the rate is approximately 39%. This reliance has led to financial fragility, especially when the banking system has let us down and the length of debtor days is extended. It is, therefore, important that alternative sources of finance and alternative methods of financing are encouraged. In essence, as well as right-sizing their businesses, small and medium-size businesses have to begin to right-size their finances. In the short to medium term, Irish small and medium-sized businesses are stuck with a small number of banks, and the responsibility falls on Government, through the Central Bank, to oversee and regulate the bailed out banks that remain.

I thank the Chairman and the committee for the opportunity to make this presentation. Our association will co-operate with the committee in whatever way it decides to advance the solutions.