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Banking and Business

Bank lending to SMEs in the Channel Islands was hit by the financial crisis, bringing high margins and tough terms

“And there has been much tightening by banks, which are now very prudent when looking at applications. They are lending – but lending against stronger propositions.”

Scope for new players The need for alternative SME

financing in the Channel Islands, and the shape or form it could take, is, however, still not clear.

The islands’ offshore financial centre status has meant that the major banks present are huge generators of liquidity, but, on this, Warr points out: “The level of liquidity we attract is not necessarily the issue. What is though, is the Head Office philosophy of banks, and the fact that it is no longer possible to simply approach a bank manager for a loan. There is a huge focus on credit terms and a business’s trade record.”

Strict bank licensing laws in Jersey would also make it difficult for newer small banks, such as the UK’s Metro Bank, to set up shop on the island. The Jersey Financial Services Commission (JFSC) requires all deposit-taking banks seeking licenses to operate within its jurisdiction to be ranked – or be part of banking groups that are ranked – among the world’s top 500 banks.

Mark Sumner, Director of Banking and Insurance at the JFSC, explains that this will disallow the establishment of small banks if they want to raise money locally. “Any hedge fund looking to move into deposit-taking, as defined in the Banking Business (Jersey) Law 1991, would also have to meet licensing policy requirements, which I would not expect to be likely,” he explains.

However, there are a number of independent secondary lenders based in

Jersey, such as Close Finance and Acorn Finance, which, according to Pritchard, have become highly active since the financial crisis escalated. As these lenders don’t generate retail deposits

locally, they aren’t affected by the jurisdiction’s bank

licensing laws, and instead comply with a voluntary code which sets minimum standards for good lending practice.

The way forward One major lender in this space claims that his firm is now seeing unprecedented levels of new business. “There is much more scope for traditional lenders to open up and stop receding. There should be a softening and they should support the market more,” he says. “However, this is a very niche market, and may be too small for them. They will have to deploy teams to understand and get to know people personally when making loan decisions.” And Jersey Enterprise’s Pritchard adds:

“There is a finite market in Jersey – but access to finance is currently a major barrier to entry for would-be entrepreneurs and new businesses. He adds that, as a result of this, many business start-ups are also increasingly looking to tap private equity investment from both high-net-worth individuals and funds to raise the capital they need. Even the Jersey Bankers Association believes there is case for more competition in the market, although it favours attracting more major banks to the jurisdiction. “The number of bank license holders has gone down on the island as a result of consolidation within the banking industry,” says Martyn

24 December 2010/January 2011

Scriven, Secretary at the Association. “And the Jersey Bankers Association, alongside the JFSC, is keen to encourage more license holders in. There is nothing wrong with competition.” In Guernsey, meanwhile, new bank entrants, which do recognise a potential new business opportunity, will be assessed on their merits, according to the Guernsey Financial Services Commission. “When it comes to new players, we are looking for private banks, as this is the main area of business that the islands are in. However, we always look at potential new players, and assess their business plans, and if they can find a niche then that’s fine by us,” says Philip Marr. However, Marr also questions whether specialist SME lenders will be attracted to the Channel Islands, given the scale of their economies, and the fact that the SME industry represents a small ‘niche’ market. According to Nigel Strachan, Chairman of the Jersey Funds Association, there may be a clearer case for credit funds to fill any gaps in the availability of finance to SMEs. “Generally, there may be a need for credit funds to invest where banks are no longer happy to do so,” he says. “Lending has become much more conservative because of the losses that the banks have suffered and this has led to a more tightened credit policy. Credit conditions may remain conservative.” Here, Carley adds that BLM, as a specialist alternative lender, remains interested. “We are a small fund, and the Channel Islands are within our remit. We are certainly interested in the Channel Islands, and have been approached by SMEs there interested in talking to us about alternative financing. We want to attract a variety of companies that offer good risk-adjusted returns, and these companies deserve financing,” he says. One can’t help but get the sense that we are at the beginning of a long game. Are the large corporates going to relax lending criteria that will help SMEs? Will niche lenders steal a march and corner the market? Maybe the typical inertia of some Jersey businesses will mean that Guernsey can get ahead of the game. It poses some interesting questions with the answers yet to be seen. But one can’t help but think that the SMEs don’t really care who the funding comes from as long as they can lay their hands on it. n

LIZ SALECKA is the former Editor of European Banker

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