SMALL AND MEDIUM Irish enterprises (SMEs) have been disproportionately exposed to potential weaknesses in the banking sector, relative to other European countries.

In the latest economic letter from the Central Bank, they state that both pre and post crisis, Irish SMEs are among the most reliant on banks in Europe.

Borrowing

This new research shows that Irish SME’s external funding is more reliant on commercial banks than almost all European countries, although the share of firms using bank borrowing to finance either capital or working investment fell by roughly 50 per cent between 2005 and 2012.

Now SMEs have replaced their bank credit with trade credit, equity and internal funding.

The Central Bank said a diversification away from reliance on bank funding would be desirable, adding “it is important that policy makers mitigate the risk that firms are turning to other, costly, forms of financing due to an inability to access bank credit”.

Over reliance

The report states:

Such a reliance on banks is likely to increase the vulnerability of the real economy to shocks to the banking sector.

The report adds that policy must aim to “stimulate the flow of credit and to create well-developed markets for a range of alternative financing sources to complement the role of banks in financing SMEs in Ireland”.

Read: Bank credit to businesses continues to fall>

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