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The ‘quest for stability’ in the financial system is detrimental to SME growth, says Ombudsman

The benefits small businesses derive from a competitive financial system are being reduced by the regulators in their “quest for stability”, the Productivity Commission (PC) has found.

The finding, contained in a draft PC report titled Competition in the Australian Financial System, is supported by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell.

“Australia’s prudential rules are focused on system stability, which results in limiting small business credit,” she said.

“It also motivates banks to focus lending against real property security, such as a business owner’s home.

“This can increase the cost of capital on other lending and to a large degree, limit the ability of SMEs to get funding against other business aspects, such as cash flow.

“Resounding feedback from the SME sector is that access to capital remains a significant barrier despite a healthy pipeline of businesses suitable for investment.”

The Ombudsman said ensuring small and medium enterprises SMEs have access to capital is critical to enable their businesses to grow.

“Australia’s 2.2 million SMEs employ two thirds of Australian workers and contribute $380 billion to the economy,” she said.

“While there should be a focus on stability, any policy being developed needs to look at the impact and unintended consequences on lending to SMEs. If there is no access to capital, then you can’t invest.

“I also note the report found that the institutional responsibility in the financial systems for supporting competition is loosely shared by the Australian Prudential Regulatory Authority, the Reserve Bank of Australia, The Australian Securities and Investment Commission and the Australian Competition and Consumer Commission. There is a danger of inadequate oversight of commercial lending practices for SMEs.”

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James Harkness

James Harkness

James Harnkess previous editor at Dynamic Business

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