Lack of banking competition affecting Ireland's SME credit issues

The lack of competition among Ireland’s post-recession banking sector is one of the key reasons behind its SMEs’ credit issues, according to new research by the Economic and Social Research Institute (ESRI).
 
Many small firms are still struggling to gain access to credit with the ESRI suggesting a direct link between bank market competition and SME access to finance.
 
The study, ‘Does Bank Market Power Affect SME Financing Constraints?’ analysed the financial constraints faced by 118,000 SMEs in 20 European countries during 2005-2008.
 
The ESRI claimed that as “market power” increased i.e. weakening competition within the banking sector, SMEs faced tougher financing constraints.
 
The research concurs with economist, Morgan Kelly’s recent warning that any stress-testing of Ireland’s banks will only further serve to tighten lending conditions, potentially leaving many SMEs hamstrung with debt from the property boom era.
 
The ESRI study claimed the financial crises on domestic banks throughout Europe had led to “a retrenchment towards domestic activity”.
 
This scenario is particularly relevant to Ireland which has seen enormous contraction of its retail banking sector since the global recession, resulting in vast market exit by foreign banks as well as a consolidation of Irish entities.
 
The report adds: “This reduction in competition poses serious questions regarding the ability of the financial system to transmit credit to SME borrowers in a recovery scenario.
 
“If competition between financial institutions in Ireland is lacking, the risk of increased SME credit constraints heightens.”
 
There is a general feeling that policy measures to restore competition within Ireland’s banking sector are required, giving small businesses the confidence to grow.

Date published 12 Mar 2014 | Last updated 12 Mar 2014