As an active and fairly successful member of the Small and Medium Enterprises (SME) community I have, over the years, used the money I have made to nurture new, small and not-so-small businesses.
I am not, of course, in the league of the eminent investors from BBC's Dragons' Den; for that I work far too hard. But I do my bit.
The businesses I get behind not only benefit from my cash but from my time, expertise, contacts and genuine wanting for it to succeed.
The reason I bring this up is that I recently had a conversation with a senior banking official (who shall remain anonymous in this piece) who spent a bit of time outlining the truly parlous state of the banking system: The structural faults that ripped the economy apart have really only been papered over.
Without fully understanding the implications at the time, we discussed 'Basel ll' along with the forthcoming "Basel lll" (recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision) and the role of what sounds suspiciously like self-certification currently being operated by certain banks being stamped out. Apparently this means that there is going to be a further contraction in credit availability about 18 months from now. It sounds to me like we are heading back into recession. Robert Peston, where are you now?
My contact at the bank told me that they are increasingly suggesting to swap debt for equity when customers are facing default; a strategy to try and satisfy their 'Tier 1 capital requirements." This is not an attempt to win back public sympathy, nor does it come from a suddenly developed social conscience. No, banks are making these swaps to avoid writing off debt by foreclosure as this would substantially reduce the amount of money they are allowed to lend.
Now I might sound simplistic but is there a reason why the banks couldn't simply change their business model: issue stock-based loan notes or just outright buy equity instead of lending money on traditional lines. In this fashion the bank would share in the profits of a business until it was able to buy back its shares. Of course it would also share the losses. From reading the FSA rules, such an investment could even qualify as Tier 1 capital and thereby drive additional lending.
Banks are in a position to provide more than just money such as sound financial advice and additional financial services. And as an entrepreneur I would welcome the introductions which a bank manager could make to help my business flourish.
So what's the problem? To start with such a model would force the banking industry to seriously up its game -- improving the skills and resources that it already has while investing in developing new ones. If banks were investors, the whole approach to risk and manner in which it is evaluated would change. My banking friend doubts that the banks have this capacity. I say they don't have a choice if they want to survive.
Rather inconveniently, banking legislation restricts the way in which banks are able to operate under this investment model. This legislation needs to be reframed to allow it to operate in safety.
This is not the first time I have dabbled with economic models. But this isn't simply the rambling of a 50-something bloke who a long time ago graduated with a degree in economics. The banking model I am outlining already exists, and it works. The modern Shariah-compliant model based on shared profit and loss has been around since the 1970s when it was introduced in Egypt. Following this success it has been rolled out to both Islamic and non-Islamic countries worldwide including the Michigan based university bank in the USA. According to Standard & Poor's it is the largest growing segment of the banking industry. Even the Vatican has labelled it "the cure for ailing markets."
Shall we give it a try? Here is how it would work.
In December last year the government announced its Business Finance Partnership and is currently seeking proposals. This fund is part of the government's credit easing scheme -- designed to promote alternative financing and investment models. It provides up to £250 million of investment on a 50/50 basis which in my estimation is enough to at east start a small bank. With the right leadership it could grow incredibly quickly and, in doing so, begin to take the pressure off the banking system. I hope someone makes the connection.
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