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International Financial Law Conference, Berlin Germany 2019
The difficulty of obtaining finance for the SME sector was under the spotlight at a panel discussion at the International Bar Association’s International Financial Law Conference in Berlin, Germany, on 16 May 2019, co-chaired by Matheson Financial Institutions Group partner Liam Flynn. The focus of the panel was alternative lending, which was broadly interpreted to cover lending by alternative finance providers, such as insurers and pension funds, and lending by non-traditional means, such as marketplace lending. Liam and fellow co-chair Giuseppe Schiavello, founding partner of Schiavello & Co, Rome, put together a panel representing various constituencies in the market, including Josefin Lindstrand, recently nominated to the board of Swedbank, Tom Parachini, of Funding Circle, Matteo Tarroni, of Workinvoice, Yasushi Shiina, of the Financial Stability Board and Rein van Helden, of Stibbe.
Panelists discussed the drift of financing of SMEs away from traditional banks and Matteo observed that it was unsurprising that SMEs had moved away from the bank sector, since in Italy it takes on average 65 days for a SME loan to be approved by a traditional bank, whereas a marketplace lender approves the same loan in 6 days. Yasushi noted that the non-bank financial sector has increased significantly since 2009 and that the FSB views the trend towards non-bank financial intermediation as positive and welcome. In absolute percentage terms, non-bank financial intermediation still provides a relatively small share of overall global financing needs but this is growing rapidly. Financial regulators are watching closely and monitoring possible build ups of leverage and maturity mismatch risks in these sectors. Matteo observed that there is a vast pool of untapped financing potential in the SME sector, since in Italy alone it is estimated that trade receivables average about Euro 500 billion per annum, and Workinvoice operates a marketplace permitting the standardisation and trading of these to facilitate businesses’ financing needs. Rein commented on the increasing trend towards infrastructure financing in the Netherlands by insurers and pension funds, noting the different cultural approaches of non-traditional lenders to such financings and their tendencies to rely heavily on traditional banks to conduct underwriting and due diligence activities.
There is no doubt that lending to the SME sector is under the spotlight. In Ireland, the regulatory trend has been towards increased conduct of business regulation of banks operating in this sector, which arguably simply raises the barriers to entry for new lenders and increases the operating costs for existing lenders. There is clearly a need for an increased supply of credit to the SME sector, but it is far from clear that relying on the “alternative lending” sector to provide that credit is a sensible public policy choice. Perhaps the regulators need to consider whether conduct of business standards put in place with the best of intentions post-global financial crisis are having unintended consequences?