Recent media reports paint a fairly bleak picture of the retail industry. The British Retail Consortium reported that one in 10 high street shops now stand empty in the UK, and The City doesn't hold much faith for the future of the sector either. Hedge funds are betting huge sums against retail stocks, predicting tough times ahead for even some of the biggest names on the high street like WH Smith, Home Retail Group, Ocado, Sainsbury's, Tesco and Dixons.
So what can a finance system whose roots lie in third world economic development do to help stem the tide of further business failures in a developed country like the UK? A lot I would argue. That same microfinance system that's designed to lift people out of poverty in underdeveloped countries is exactly what is needed to help small businesses to compete and give the sector a badly needed lift.
Microfinance in its modern form took off about 30 years ago when the banker and economist Muhammad Yunus founded the Grameen Bank in Bangladesh with the intention of providing small loans to the poor to enable them to invest in their own livelihoods. A few years on, Yunus still argues that "credit is a human right" and that present lending systems do little to support this. The under-privileged still find themselves in a catch-22 situation where banks will not give them credit because they lack collateral, they don't have steady employment and no certifiable credit history, so they remain stuck in their rut.
What makes this social business model so relevant to the commercial sector is that this predicament is precisely where many small retailers and small business entrepreneurs find themselves in the UK. An independent study by BDRC Continental into SME finance showed that the main reason small businesses had credit applications turned down by banks was because of a lack of credit history or a poor credit history. According to Federation of Small Businesses (FSB) data, "around four in 10 small firms in the UK were refused loans in the third quarter, and independent data shows businesses looking for finance for the first time are more likely to be refused". The FSA Chairman, John Walker, also criticised last week the government's much hyped 'funding for lending plan', saying it is fundamentally failing in its quest to address this problem: "the scheme does not help firms access credit, it only makes credit cheaper to those who are successful in their loan application."
It calls for change. The way retailers access finance needs to change, just as retail as an industry has had to change. More and more consumers do their shopping online - either outright or as part of the so-called RoBo trend (Research offline, Buy online) - and any retailer that doesn't focus efforts online does so at its peril. Add high rents into the mix and it goes some way to explain the changing face of UK High Streets that I outlined earlier, and why traditional 'bricks and mortar' retailers are losing out to the internet. But with these new horizons comes new hope, none more so for smaller businesses who have a chance to again compete thanks to lower overheads, along with a much wider customer base to tap into now.
As the internet-driven economy continues its exponential growth, credit-lending systems need to adjust too, to keep pace with this changing business model. Traditional banks need to wake up to the fact that online businesses operate at a different pace to offline businesses. Taking more than two weeks to approve a loan is unacceptable for an online business that needs access to cash quickly, and with short repayment terms. Furthermore, banks need to loosen their approach to lending that relies too heavily on credit history, which as Yunus argues, is too narrow and stifling for the smaller enterprises. Banks need to take into account things like customer satisfaction ratings and take a closer look at a seller's operating performance and their ability to service debts. It is changes like this that are going to help revive the sector and bring the notion of "credit as a human right" closer to reality in a developed country like the UK.
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