Samantha Bamert is the Founder of WillowHouse Partners, a firm committed to delivering ethical solutions to the finance sector. Previously, Sam worked for 19 years for a major global bank. Here she writes about the availability of loans for small businesses and innovative solutions for filling the funding gap.
For the past year, on behalf of the Archbishop’s Task Group on Responsible Credit and Savings, I’ve been looking at the availability of loan funding for small and micro UK businesses. I like solving problems, particularly where the outcome might be a help to others and this has been a fascinating journey with much achieved.
As I began the project I came across research confirming the significant funding gap that exists for borrowers outside the traditional banking system (a gap of many billions that continues to grow) and the challenges arising from lack of financial inclusion. I became fascinated by the opportunity for solutions this presented.
Many have undertaken research showing that significant economic and social benefits are foregone by the economy and society where there is insufficient funding available for small businesses. Empowering small businesses with responsible loan funding can be transformative, particularly for deprived communities. Community benefits include new services, employment and social mobility, not to mention the economic benefits resulting from lower benefit payment liabilities and positive tax receipts where businesses flourish.
It struck me that there is a ‘win-win’ for many if we could find a way to narrow the funding gap for small and medium sized enterprises (SMEs) and micro enterprises.
Banks are unlikely to step in soon due to the tremendous challenges faced as they restructure to accommodate regulatory change in the wake of the financial crisis, so I began to look more closely at financial services outside the traditional bank market. It was here that I discovered an area of the finance industry that was entirely unfamiliar to me despite many years experience in banking.
I looked in detail at the evolution of peer to peer lending and Crowdfunding, whose business models are transforming the finance industry landscape. Peer to peer lenders are already stepping in to finance some borrowers and many of these organisations have truly ‘state of the art’ platforms. However their business models rely upon low default rates and automated decision-making to appeal to their lenders, so their capacity to lend will always be limited by lender risk appetite.
Credit Unions provide a credible and ethical alternative for borrowers, although their focus is mostly upon personal banking with very limited offering for small and micro enterprises.
So I then began to look at the community finance industry. I became aware of Community Development Finance Organisations (CDFI’s) for the first time; their mandate being to lend where traditional banks won’t. Being largely non-profit, I was impressed by how they provide ‘hands on’ support to borrowers to ensure loans are fair and affordable and give them the greatest chance of success.
Although they have lending practices very much aligned with the demands and needs of those underserved by the national banks, the CDFIs have not yet scaled up to fill the funding gap. Even with a national network of over 60 organisations, CDFIs lend, in aggregate, less than £200m. By comparison, the equivalent American CDFI industry (similarly providing financial products and services to those underserved by traditional financial markets), is over 30 times the size of the UK industry in terms of assets relative to the size of the economy.
If there was a way to exponentially scale the CDFI industry, then that could have a transformational impact upon the funding gap and bring the social and economic benefits so needed to the UK.
We then set about understanding why the industry has not yet grown to fill the funding gap, working with several CDFIs, the CDFA (the ‘Community Development Finance Association’, the industry association for CDFIs), the Archbishop’s Task Group on Responsible Credit and with support from the management consultancy, Oliver Wyman. We found strong engagement and support from the CDFA and the CDFIs who quickly recognized the opportunity and brought appetite to embrace change.
Through fascinating and comprehensive discussion and analysis, we identified the ‘blocks’ to scaling the industry and then moved on to develop an elegant solution to remove these blocks and enable the transformative industry growth required. Moreover, with such strong industry sponsorship and partnership, we’ve been able to ensure the solution is complementary to other initiatives impacting the community finance sector thereby optimising our chance for success and minimising duplication of effort; crucial in a world of limited resource!
The project plan for implementation has been pulled together and discussions are ongoing with potential financial sponsors for the programme of work.
It’s been a fascinating journey so far and one with much further to go. We really are taking great strides towards an exciting goal…. I’m looking forward to where we’re headed!
Do get in touch if you would like to know more, or await the next blog entry!
Samantha Bamert is the Founder of WillowHouse Partners, a firm committed to delivering ethical solutions to the finance sector. Previously, Sam worked for 19 years for a major global bank. More information can be found at www.willowhousepartners.com or by email to Sam at firstname.lastname@example.org.