by Seema Malhotra; 19 November 2012

A radical change in banking is needed to rebuild the British economy so that is works for entrepreneurs and small businesses. The Government has failed to get lending going to small and medium sized firms, holding them back from expanding and taking on extra workers. Despite promises from Ministers to sort the problem out, firms are still struggling to get access to the finance they need.

Figures from the Bank of England show that lending to businesses has contracted in nine out of the past twelve months and fallen by more than £13 billion over the period, while the Ernst & Young ITEM club has predicted that bank lending has fallen to its lowest level since 2006. And, according to Insolvency Service statistics, over 37,000 businesses have gone bust since the 2010 general election. But what have we seen from this Government? Its Project Merlin scheme has failed, credit easing has been abandoned, and there is a question mark against the Funding for Lending scheme with the initial signs that it is doing little.

What can help? At the very least, there needs to be a return to the best traditions of British banking where local banks serve local business and support them in their development. A sea change will only really be seen with greater diversity in our banking sector – a key current national debate which Labour has been leading. This led to a clear ultimatum to banks from Ed Miliband – change so you back British business or the next Labour government will legislate to break you up.

The idea of rebuilding banking to support local economies and enterprises is something which I have recently seen in action, and welcome. As Chair of the Parliamentary Labour Party Backbench Business Group, I was one of a cross party group of MPs who recently met with David Fishwick, also known as ‘Bank of Dave’ at the APPG on Economics, Money and Banking. He talked about a model of community banking that he has initiated.

A local entrepreneur who has wanted to do something about the lack of lending by the high street banks, he set up his own community bank Burnley Savings & Loans a year ago. Over the last 12 months this has overseen £700,000 of loans granted to local small and medium enterprises in the North West. The key distinctive feature I took away from the discussion was the importance of relationships in his banking model. Knowing the entrepreneur and the business as part of the assessment of risk – a much more personalized risk assessment than a centrally driven formula that arguably disadvantages the local small florists or other community businesses, many of which are being set up and run by women.

Last month I also attended a welcome evening at Metro Bank in Hounslow, which is Britain’s first new High Street bank in over 100 years. Metro Bank prides itself on being friendly and accessible, and changing the way we conceive our local bank manager. They have decided to open 7 days a week, early and late. It means you can go in after dinner to open a bank account or get a statement, or after you close the office. You can have the time to have a conversation. And you can also take in your dog, who will receive a biscuit for having gone to the bank with you.

Labour has a vision for our country of a more competitive banking industry, where small businesses know that there is a banking system working for them. What we are starting to see with ‘Bank of Dave’ and Metro bank is exactly the change in the relationship between branches and community businesses which Labour is calling for – a streamlined relationship based access to finance to support local enterprises.

We do however need more than just individual entrepreneurs helping businesses in pockets of Britain: we need action from this Government to encourage and support entrepreneurs across the nation in all communities by providing access to finance.

Labour is also developing plans for a proper British Investment Bank, and has commissioned a report that has laid out the case for such a bank, looking at comparisons abroad and how to boost finance to SMEs, such as high growth firms, and to infrastructure too. The UK is alone amongst the G8 countries without such a state investment institution.

The Chancellor’s autumn statement next month is crucial for our economy and for British business. With long-term unemployment rising, and business lending falling, we need a radical change. The Government should learn from ‘Bank of Dave’, Metro Bank, and listen to Labour and create a British Investment Bank to kick-start local economies and helping businesses to employ many more people across the nation.

Seema Malhotra is Chair of the Parliamentary Labour Party Backbench Business Group and MP for Feltham and Heston

Reinventing Community Banking, Supporting Local Business
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