When we last discussed this Bill two weeks ago I was expressing my views on the methods of financing enterprise. There is a macro-problem with the banking market, which is concentrated in too few institutions. The two pillar banks which share approximately 85% of the banking market are effectively an oligopoly. In other words, they exert extremely powerful supplier power, while the buyers in the market, namely, small and medium-sized enterprises and citizens, have extremely weak purchasing power. This market, which is a construct of Government policy, is at the heart of many of the problems in banking. Not only is it proving difficult to direct finance to enterprise, but there are problems with interest rates, mortgage arrears and legacy debt among small businesses. The way in which banks are treating rural branches and their approach to cash handling in small towns are also causing difficulties. Moreover, Bank of Ireland appears to be retreating from dealing with customers face to face. The Government's foremost task, therefore, is to fix these problems.
The Opposition has repeatedly raised the problem of funding for small business, yet even at the eleventh hour in the Government's term, access to credit remains a major problem. Research published recently by the Irish Small and Medium Enterprises Association, the quarterly Bank Watch survey, notes that the loan refusal rate has jumped from 33% to 45%. This means almost half of loan applications are being refused by the banks. Demand for bank credit by small and medium enterprises, at 41%, is still relatively static, and one fifth of all applications are still awaiting decisions. In general terms, the level of credit to small businesses has declined, because the banks are still in the process of deleveraging and many small businesses are still paying down debt. The effect of this is that a cohort of companies, many of which are indigenous businesses, are hamstrung by legacy debt and unable to function properly in the economy.
As the Minister of State is aware, the economy is extremely lopsided in the sense that we have few decent-sized indigenous businesses that are able to export. Of approximately 4,500 exporters in the State, 1,500 are foreign enterprises, meaning only 3,000 indigenous enterprises are exporting their goods. These figures do not compare well to other countries of similar size, such as Austria and Denmark. This structural problem in the enterprise sector can be attributed in part to the structural problems in the banks.
The credit guarantee scheme was designed to provide much-needed finance to job-creating small and medium enterprises that are struggling to obtain credit from banks. It was created to address market failure and the fact that we are revisiting the scheme is an admission that this market failure persists. The market is not providing credit to a sector that requires it.
The purpose of the scheme was to provide credit to viable businesses in two specific circumstances, namely, where a business has insufficient collateral or where it operates in a sector with which the banks are not familiar. In such circumstances, the State would provide a 75% guarantee against losses of qualifying loans. The scheme was intended to benefit 5,400 businesses and create 3,900 new jobs. Neither objective has been realised. Since 2012, approximately €20 million backed by the guarantee has been provided to only 156 businesses.
In his contribution the last time we debated the legislation, the Minister of State, Deputy Gerald Nash, spoke of sanctioned amounts, which are much different from drawn-down amounts. The regional distribution of drawn down amounts shows that the sums involved were paltry and illustrate just how weak this initiative has been. The most recent figures I have seen on the regional breakdown of drawn down amounts indicate that €9.9 million was drawn down in the east region, €2.7 million in the south-west region, €2.4 million in the south-east region, €1.86 million in the midlands, €1.2 million in the west, €800,000 in the north east, and €80,000 in the north west. The entire north west appears to have benefited from only a couple of loans, yet this scheme was designed to be the engine that would get funding back into small and medium enterprises.
When the legislation was introduced in 2012, I recall telling the Minister that the scheme had some merit and could solve some of the problems in the system. However, I also indicated that it was too complex, narrow and expensive and would prove unattractive to banks and customers. Business loans in this State are already more expensive than business loans elsewhere in Europe. Lending by the financial system to small businesses is uncompetitive in European terms. The credit guarantee scheme provided for the addition of a premium to already uncompetitive rates for loans to small and medium-sized businesses. Moreover, the scheme was to be operated through the pillar banks, which are, to some extent, withdrawing from the market and exercising undue supplier power. Another problem with the loan facility provided was that customers could not apply directly to the scheme, as applications had to be processed by the two banks in question.
In the period since the introduction of the credit guarantee scheme, Sinn Féin has repeatedly highlighted other opportunities for resolving the crisis small businesses are experiencing in accessing bank credit. I spent considerable time over the summer developing a model for a public banking system which could be used to direct credit to small businesses and citizens. This was not some radical red effort to remove private enterprise from the equation but one that was based on the network of local banks in Germany, known as Sparkassen, which are a major component of the German banking system. It would add a new dimension in terms of competitive behaviour among the banks and rebalance somewhat the relationship between the banking sector and those it is meant to serve. Our proposal envisaged the establishment of ten new regional banks, managed independently and supported by a centralised specialised unit that would provide auditing, risk management and procurement services to the network. The costs of these elements of banking would be reduced because they would be carried out centrally. Each bank would operate in a defined region, ensuring a balanced distribution of deposits and lending across the State and providing a greater incentive to invest in the sustainable development of a local banking region.
In other words, it would focus money back into the regions because it would be ring-fenced. It would also ensure that the management, staff and expertise of the bank were oriented to the needs of the region. They would get to know the needs of the region and be better able to serve them. What is happening in the general banking system now is quite the opposite. There is a retreat from the regions by the banks.
On Tuesday, we had a finance committee meeting at which representatives of the credit union movement made a presentation. The disconnect between the problems faced by society and the possible solutions was startling. We have a crisis in the property market. Supply is glacial for a number of reasons, a big one being that the relevant enterprise does not have access to funds. We have a serious problem with moneylenders across the State who are preying on low-income families and we have a serious problem with lending to small businesses. On the other side of the equation, we have a credit union sector with €13 billion in assets, which could be used to resolve some of these problems. The sector feels under threat due to the way they are being treated by the Central Bank and Government. They are not being allowed to do more. In other words, there is a break on their evolution to meet the needs of society. There is no doubt that robust regulation is a must. However, the credit union sector should be able to play a full and fruitful role in the lives of the community and should not be pushed to the margins. This is part of the problem. We have a number of stakeholders and an opportunity for public banking. The Government should be oriented towards creating more perfect competition as opposed to an oligopoly within the banking system, but that need is going unanswered.
I ask the Minister of State to deal with the following questions. Does he seek to include crowd-funding facilities within the definition of "lender"? Will all credit facilities be regulated fully by the Central Bank? There are problems with some of the credit facilities dealing with mortgage distress having dual regulation. While the operators in the State are being regulated, those that are located abroad are not subject to regulation. What will the balance of risk be between the State and commercial entities? What charge will be imposed on the new lending model? The original credit guarantee scheme had a role to play and we will not be found wanting in its reform to ensure that there is a significant beneficial effect. I do not want to be sitting here in two or three years having come back to the table with paltry results for the scheme which we must then try to reorient. Let us get it right now instead.
