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It has long been a contention of mine
that Banks to do not lend money to Small Business. It was thus
encouraging this week to see Derek
Kudsee, Director of SAP SME Africa, say similar statements at
SAP's world road show. Consumer Assist CEO Andre Snyman also came
out this week with the fact that Banks
are Throttling the Economy. They join a line of commentators
from myself to Barack Obama and Tito Mboweni that feel that the
credit crunch can be laid at the feet of the Banks.
Well Hello! Where have these guys been?
Small businesses have known this for the last 5 years. Banks do not
lend money to Small Business. They lend money to house owners. The
house owner, borrows the money and it is then the house owner who
lends money to the business. The idea that you can prepare an Open
Office Impress presentation, pull some data from your TurboCASH
program, extend it in a Spreadsheet, export it to PDF and take it off
to your Bank and get a rational meeting about finance? Buddy you have
obviously never tried it!
Banks will get into lending small
amounts to consumers, where they can end up charging a 20% premium
over borrowing rate on credit cards, with all sorts of
opportunities to add almost usurious charges. Now because the asset
class of house prices has stopped rising, even this line of credit is
closed to consumers. The time to wake up to the problem is not now
that consumers can't go put for lunch, but 5 years ago when the
restaurant owner was trying to borrow money to open a new branch of
the restaurant.
However, Derek Kudsee put it over more
succinctly than I have previously done. Banks can make more money
running costs through their network than they can lending you money.
It is a whole lot easier and a whole lot cheaper to dispense to you
your own money through an ATM than it is to try get their own money
back from you. That is why Banks have started to look a whole lot
more like cellphone or software companies. It is much easier to
invent transactions based on new products and technologies and sell
them to your network than it is to figure out what some small
business owner has in their warped entrepreneurial mind. With few
exceptions the concept of a Bank Manager empowered to make credit
decisions at Branch level has all but disappeared.
Along the way in this process the Small
Business has got screwed. If you have followed my previous blogs you
will have gleaned that I hold little empathy for the consumer. If you
are not producing output, you have very little right under the
classical model to demand access to goods and services. Borrowing
money to do so can only have an unhappy ending. But this does not
mean that the small business should not have access to credit. The
SME owner does not borrow for themselves. They borrow to purchases
the resources that will create tomorrows output. This si a very
different requirement to a consumer looking to buy a lunch.
Where I live in Cape Town, in South
Africa, we even have laws to prevent consumers over borrowing.
However this tool originally aimed to protect consumers, has been
perverted as a means to not lend to SME business. The National Credit
Act was introduced in July 2007. From that moment the loans to Small
Business moved from a trickle to a drip. Effectively the NCA says
that no financial institution, may lend to an individual, unless he
clearly has the “income to repay it”. Now if I am trying to
borrow money to finance my new machine or realize my new idea in the
future, how can I possibly already have the guaranteed income to
repay the loan – Duh?
So why should we blame Banks for today?
They have every right to chose just exactly who they lend to an
exactly how much profit they make for their shareholders. That
Capitalism right?
Well that is not strictly true. The
macroeconomic use of banks is that they are an extension of the
Reserve bank. So yes they do report to their shareholders, but the
license granted to them that gives them the oligopoly opportunity to
accept deposits extract fees in the first place, is simply a public
asset created by the people. Commercial Banks are licensed agents of
the Government's Reserve Bank. In this role they are minders of the
countries currency and an important instrument in both monetary and
fiscal policy. They literally have a “licence to print money”.
So they are not entirely risking their own funds, but rather being
asked to risk the profits that we grant them through a banking
license.
When they fail in that role, it is
either a chance to free up the market by appointing banks that will
lend, or to start taxing the right to take deposits and provide these
taxed funds to institutions that are capable of fulfilling this
function. Perhaps a simple short term solution is to force banks to
have a percentage of their assets in SME Loans rather like we
legislate their asset portfolios.
Small Business is a vital function of
any economy. Small Business is not seeking subsidies or handouts, We
are not even seeking funds for ourselves. Credit is a vital component
to oil the wheels of commerce. Sort this out or the whole car comes
to a stop.
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