It is an old adage that banks will lend you an umbrella in fair weather and ask for it back again when it begins to rain. Sadly, despite the commonly accepted importance of SMEs to our economy and our free market system, this is too often the case in practice.

During the critical post-recession period of 2008 to 2013, total bank lending to non-financial businesses in the UK dropped by around 25%, during the same period in Germany, lending by the thousands of regional mutual banks (Sparkassen) and co-operatives increased by around 20%. Similar dynamics were in evidence in the US, Switzerland and Japan, all of whom have effective and established not-for-profit banking sectors. In fact, the UK is unique in the G7 in having no such sector presence.

Experts including Mark Carney and the Chancellor, Rishi Sunak, have also remarked upon the £22bn UK funding gap for SMEs and its considerable negative economic consequences. In the UK 99% of companies are classed as small, and they play an essential role in strengthening our regional economies, supplying jobs and introducing innovation to their local communities.

The provision of SME finance in the UK is hugely concentrated and largely shared amongst the ‘Big Four’ banks, all of whom are primarily responsible to their shareholders. Understandably, at times of crisis the commercial imperatives of the banks themselves is the overriding concern, often at the expense of their customers, however loyal or competent they are.

On top of this, evidence shows that ‘big banks lend to big businesses’. As a result of the consolidation of UK banks over many decades, this has led to a critical shortage of finance for many SMEs and also a lack of trust between banks and businesses which has significantly reduced the borrowing appetite amongst SMEs. A significant proportion (73%) of SMEs would rather grow more slowly than borrow, which is clearly bad for the business itself, for the jobs that could be created and, when multiplied millions of times, for UK plc. This lack of finance is a particular barrier to the Government’s ambition to level up opportunities across the country, as a lack of availability is less of a problem in prosperous areas such as London and the south east.

However, where there is no profit imperative, such as in a mutual bank, there is no reason to pull the plug on a business that will return to profit shortly after a crisis ends. So called ‘patient capital’ gives businesses the time and space to grow steadily, eventually providing stable jobs and contributing to the local economy.

At a regional level, Regional Mutual Banks have been allowed to establish themselves in the UK since 2014 and a number of mutuals have taken advantage of this and are currently pre-trading as they await regulatory approval. Their focus on the small business market as well as their patient capital approach could be a crucial step in the direction of tackling the huge SME funding gap. In places such as Germany they have proven highly successful in keeping economies stable through financial crises. However, the UK does not have the same purpose-driven finance network as in other countries.

Evidence from the APPG on Fair Business Banking’s inquiry into SME funding highlighted that once mutuals do begin to trade, there is also the question of competition law and how this would hamper the ways in which mutuals are able to share the administrative load – as they do in other countries.

The good news is that the solutions are in our gift; removing those regulatory and competition barriers for mutuals and providing pump-prime capital from big banks and dormant assets in the form of a loan of around £30m for each regional bank would spark a boom in long-term local investments.

As we ‘Build Back Better’ from the pandemic and redesign the rules on financial regulation following Brexit, we have the opportunity to develop a new financial system. Relying on institutions with regional and local expertise will unleash untapped potential productivity across the country to transform the whole of the UK into one of the best places in the world to start, maintain and grow a business.