Rural Ireland not banking on funds to come from the pillar institutions

Despite the Government’s claims, it seems small businesses are still struggling to secure funding from banks, writes Michael Clifford.

Kevin McSherry was driving into Limerick when he saw the future. What he actually saw was a shuttered premises — idle since the days when the Celtic Tiger stalked the land. But his entrepreneurial eye saw an opportunity to expand the business he had run in Nenagh for more than 20 years.

The premises on the outskirts of the city would be ideal for his outdoor clothing and equipment retail business. With the economy back on its feet, the time had come for small rural businesses like his to expand and consolidate.

The unit was available at rent savings of €90,000 per annum compared to what it cost at the height of the boom. As such, it was a once-off opportunity for someone with an eye to the future and a good business head.

He applied to his local AIB branch in Nenagh for a loan of €135,000. Circumstances were on his side: He had a perfect credit rating; his business survived the recession’; and the government had made a big play in purporting to support small businesses.

To this end, funding had been earmarked specifically for small business through the Strategic Banking Corporation of Ireland, to be administered by the pillar banks.

Mr McSherry submitted a business plan in support of his loan in April 2016. Over the following six months the application was considered at head office in Dublin. Further documentation was requested. Twice Mr McSherry lowered the amount being sought at the request of the bank.

He produced the further documentation. At no point did anybody in Dublin pick up the phone and look to ask him direct questions about his plan and forecasts.

“This went on for months,” remembers Mr McSherry.

“You give them A and then they want B and then later C and D. Each time, after each request for more information, a few more weeks go by. An accountant friend of mine calls it the ‘slow no’.”

On August 23, 2016, he received a letter from AIB refusing the application on the basis that he might not be able to repay it. This was despite his perfect credit rating and a comprehensive business plan. The letter was generic and made no mention of any specific difficulties the bank saw in his plan.

Mr McSherry appealed the decision to the Credit Review Office, a body set up by the Government in 2010 to deal with appeals for refusals of loans for small business.

In December 2016, the CRO granted the appeal, writing to AIB to ask that it provide the full original amount requested. The loan was still not forthcoming.

Later that month, Mr McSherry ran into a senior figure in banking and public service and outlined his travails. On March 15, 2017, a loan offer was made. Mr McSherry believes this came directly as a result of the intervention of the senior figure with whom he had met.

By then, it didn’t matter. More than a year after he spotted the shuttered premises, somebody else had got in on the act. A new lease had been taken out on it by a major insurance company the previous January. The whole process set him back around €7,000.

“We believe we were strung along throughout 2016,” says Mr McSherry.

“We don’t think they had any intention of giving us the loan.”

“We have received independent accounting advice that the amount of documentation required was on a forensic level and far beyond what any SME could, or should, be reasonably expected to provide for a loan application of that size.”

Three vacant premises side by side just a few doors away from Kevin McSherry’s shop at the top of the main street in Nenagh, Co Tipperary. Picture: Moya Nolan

In small business circles, particularly outside the major cities, Kevin McSherry’s experience is regarded as typical. The banks, this narrative has it, are making all the right noises about lending to small business, but the reality is starkly different. The narrative is also prominent in farming.

In this analysis, the banks simply don’t want to go to the bother of lending relatively small amounts to small business because it’s far easier to turn a buck dealing with big business and particularly the mortgage market.

The latest figures from the Central Bank for the month of May show that the mortgage lending rate in this country is 3.81%, the highest in the EU, where the average rate is 1.8%.

Business and farming organisations believe that following the exposure of the frailties in lending practices during the 2000s, banks are now being ultra cautious which, in turn, is impeding small business.

“There is a reluctance among farmers to go to the pillar banks,” according to Martin Stapleton, who farms in Limerick and is chair of the IFA business committee.

“There is an extraordinary amount of paperwork and the interest rates being charged, for small loans in particular, are completely excessive. It is a market failure in that people who should be borrowing and using bank money as working capital are reluctant to go near the banks.”

The latest quarterly survey from Isme, the small firms body, would appear to concur. It found that loan refusals for small business have increased from 24% to 36% and that more than half of the respondents to its survey state that banks are making it more difficult to access finance.

Isme chief executive Neil McDonnell points out that the waiting time for decisions on loans has also increased. “We are encouraging SMEs to tap into alternative sources of finance,” he says.

 “Our reliance on the main pillar banks is unhealthy and that needs to change.”

The official line from Government is that there is no problem. Earlier this month, the Government published a long-awaited report, Local Public Banking In Ireland.

The report, which was a commitment in the programme for government, was compiled to examine in particular the difficulties for small businesses in rural Ireland in accessing finance. It is widely acknowledged that the economic recovery has been two-track, with rural Ireland emerging from the recession in rag order.

The report concludes that “there is not a compelling case for the State to establish a new local public banking system”. In an apparent contradiction, the report goes on to say that “alternative means of establishing local public banks may have the potential to bring additional competition to the financial services market and the Government is committed to examining this”.

The pillar banks claim they are putting the shoulder to the wheel when it comes to funding small businesses.

Jillian Heffernan, of representative body the Irish Banking and Payments Federation, disputes the figures about rates of refusal for loans. 

“There is a notable subdued demand for credit generally in the SME sector for bank and non-bank finance,” she says, pointing to a Department of Finance study which shows that refusal rates for finance were at just 14% last year.

 “Irish SMEs face serious challenges but access to credit is not among them.”

Accessing working capital, as far as the banks are concerned, is not an issue. Ms Heffernan references a European Central Bank survey which she says illustrates that “SMEs in Ireland and other euro area countries face similar challenges and these are less to do with location or credit and more to do with other challenges such as finding customers or the availability of skilled staff.”

The two narratives — one from small business and farming, the other from Government and the banks — are simply irreconcilable. But the question might well be asked: Why would anybody be complaining about lack of access to finance if everything is as open and rosy as portrayed by Government and banks?

Seamus Boland put a lot of time into coming up with the correct formula to fund rural Ireland. The chief executive of Irish Rural Link was, and is, convinced the pillar banks have no interest in servicing rural Ireland.

To that end, he got in touch with SBFIC, the advisory arm of the German community bank, Sparkassen. The publicly owned bank is one of a number of public financial institutions which account for around 70% of banking in Germany and is regarded as a huge success.

“We looked around a lot and tried to find out what was working elsewhere in Europe and we came across Sparkassen,” says Mr Boland. “We met them and they said they’d work with us in an advisory capacity.”

Mr Boland pines for aspects of the old banking relationship that served rural Ireland back in the days of the State-owned ACC and ICC. “They were nationalised banks,” he says.

“What they brought was much more than a relationship-based banking policy. They often attracted customers who were refused by the big banks and their job was to work with you in terms of a business plan and judge your ability to carry out the plan and then work with you afterwards. That’s the difference with what we currently have to deal with in the pillar banks.”

Mr Boland’s organisation compiled a submission with the help of SBFIC to set up a network of public banks. These banks would each require a population of at least 250,000 in an area in which to function. Lending and borrowing would be done on a local basis with a head office offering centralised functions.

Irish Rural Link proposed a pilot project be set up in the midlands. In total, the whole network of banks could be up and running with an exchequer input of €170m.

The authors of the Public Banking In Ireland report were not impressed by the proposed model. The report, compiled jointly by the Departments of Finance and Rural and Community Development, concludes that public banking is not what the country needs right now.

In particular, the estimated cost to establish a community bank is something of a hurdle. “Investing in local public banks runs contrary to present Government policy on State ownership of financial institutions,” concludes the report.

“It is important to consider the consequences and implications of this risk and liability to the State of taking on the cost of a local public banking system, particularly from a financial stability perspective. There is no guarantee that if there were further economic difficulties that the State would not be called upon to bail out local public banks.

“It is not outlined in the proposal how this could be avoided with certainty or how the success of the Sparkassen in Germany during the global financial crisis and recession would be replicated.”

The report was published after long delays. The public consultation element concluded in March of last year. This has led some to claim that the report was an exercise in going through the motions in order to tick off a commitment in the programme for government.

Fianna Fáil TD John McGuinness, chair of the Oireachtas finance committee, had been calling for the publication since last year. “In the end they had to publish it,” he says. “Our committee is favourable towards community banking but we couldn’t go any further with it until that was published.

“Now that it’s out it doesn’t offer much hope. The Government is supporting the pillar banks at all costs and their preference is to continue down that route. It’s the same with the attitudes towards the credit unions, which have between €7bn and €10bn that could be put to better use. The Government and Central Bank won’t allow it because that’s €10bn that would be taken out of the pillar banks.”

On July 12, Mr McGuinness secured agreement in the finance committee for a round-table discussion with all stakeholders in the area of community and public banking. It will place in October.

Despite claims the whole economy is now being properly serviced with working capital, many disparate interests in the area remain convinced there is a requirement for a lending institution beyond the pillar banks.

This is particularly the case in rural Ireland, which remains in the slow lane of the economic recovery.

“We put in the work,” Seamus Boland says of Irish Rural Link’s submission. “We are a community-based group that put together a proposal rather than scream and shout on the sidelines. They don’t like the specifics of it but I think they’re not against the concept.

“All we’re saying is give the concept the kind of air it needs. We want to show that the concept is 300 years old in Germany and its still going strong so what’s wrong with doing it in Ireland?”


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