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  • EIB loans for SMEs: Nul points for UK Posted on 02 May 2016

    In its 2015 Annual Statistical Review, published last week, the European Investment Bank reports that it lent €8 billion to projects and programmes in the UK in 2015 - but none of that money was directly targeted at helping small and medium-sized businesses. The UK was the only country in the European Union to have zero EIB financing support specifically for SMEs.

    Overall the EIB provided €19 billion of low-cost funding to SMEs in Europe, including €0.7m for leasing-specific programmes, in its fourth year of major operations to support European SMEs. Most of the €19 billion goes to countries where the needs of SMEs are likely to be more severe than in the UK, for example €8.0bn to Spain and €4.1bn to Italy. Yet Germany received €1.6bn and France €0.7bn, so why is the UK scoring ‘Nul Points’ in the EIB’s league table for 2015, and only 1% of the EU total for the last five years (see table)?

    EIB Financing provided within the EU for SME and Mid-Caps (€ million)

     

    2011

    2012

    2013

    2014

    2015

    5-year total

    % of total

    UK

    -

    188

    284

    62

    -

    534

    1%

    France

    -

    770

    1,300

    1,300

    723

    4,093

    6%

    Germany

    -

    850

    1,427

    1,747

    1,628

    5,652

    8%

    All others

    345

    8,708

    14,329

    19,046

    17,470

    59,898

    85%

    Total

    345

    10,516

    17,340

    22,155

    19,821

    70,177

    100%

    Source: AFP analysis of EIB Statistical Reports

    It is partly a quirk of the statistics. The EIB’s 2014 agreement with SG Equipment Finance covered a two-year lending programme. In addition to its loans for SMEs the EIB Group also provides guarantee support for borrowing by finance companies. There were several such guarantees in the UK last year, including £50m for Hitachi Business Finance arranged through the British Business Bank and £50m for Kennet Equipment Leasing arranged through Commerzbank.  

    Even allowing for these factors it’s clear UK banks and finance companies (not least lessors, as the EIB has already supported at least 20 lessor programmes across Europe) haven’t made much use of the EIB’s loans for SMEs. Why is this?

    As the bank owned by the EU member states the EIB can borrow on the international market at rock-bottom rates. It then lends to financial intermediaries for onward lending to SMEs on a shared basis i.e. for every €1 the EIB throws in, the intermediary lends €1 of its own. The intermediary doesn’t need to match the rate provided by the EIB, it just has to pass on the benefit of the EIB’s contribution to the SMEs. It’s a straightforward arrangement without the bureaucracy usually associated with schemes run by official bodies.  

    The problem isn’t that the EIB doesn’t want to lend in the UK - far from it, as the EIB has an objective to get more low-cost funding to SMEs in all EU countries. It’s more that the largest UK banks are too big to need the EIB support, while smaller UK banks and other finance companies can’t access it because they are too small.

    Having borrowed money at a very low rate using the security of the EC member states including the UK, the EIB aims to lend this money out to highly-rated counterparties. The largest banks that have strong ratings already have plenty of low-cost capital, including through the UK Government’s Funding for Lending Scheme. Other banks and (in particular) non-bank lenders may need the low-cost funds but don’t have the required credit ratings.

    If there is a solution, it’s likely to involve cooperation between smaller finance companies and other organisations that have strong ratings. This could involve banks, perhaps those with experience of working with the EIB elsewhere in Europe. It’s also likely to involve local government, universities and large companies. Collaboration might lead to schemes that work either at regional level in the UK or for particular sectors such as for suppliers of low-carbon technology (one of the EIB’s four priority areas for investments).

    With the referendum on Europe coming up, is the UK’s apparent failure to attract EIB loan support for SMEs a small example of why the UK can’t benefit from being part of the EC? Perhaps it’s better to see it as an example of how much more we could benefit from membership - if only we could find smarter ways to work the European system.

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