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Ireland needs more banks, says ESRI

Exodus of non-Irish banks during crisis hit the SME sector hard.

ACCESS TO CREDIT would be less of an ordeal for Irish companies if there were more banks active in the market, a study by the Economic and Social Research Institute (ESRI) has found.

As banks gain more ‘market power’-i.e control more of the lending in a country-, the degree of competition falls, meaning that SMEs have restricted choices when it comes to finance providers.

The study looked at a sample of approximately 118,000 SMEs across 20 European countries, and concluded that the mass exodus of foreign banks from the Irish market during the financial crisis hit our SME sector particularly hard.

The report said: This has substantially lessened competition for business credit in Ireland…(and) poses serious questions regarding the ability of the financial system to transmit credit to SME borrowers in a recovery scenario.

Options on the table

Non-bank financing options, such as incentives and grants from government, can mitigate the worst effects of the credit crunch facing SMEs.

The ESRI paper, which was co-authored by academics from Trinity College Dublin, said that an increase in the number of financing choices would result in a “more diversified financial structure”, and more competition and choice for business owners.

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The report welcomed the government’s commitment in the recent Medium Term Economic Strategy to broaden the financing landscape for SMEs.

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About the author:

Jack Horgan-Jones

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