Small and Micro-Business Borrowing

Lord Smith of Clifton Excerpts

Thursday 24th May 2012 Lords Chamber

[Lord Smith of Clifton]

My Lords, I, too, thank my noble friend Lady Kramer for securing this very timely debate. It is humbling to follow such a great expert as the noble Lord, Lord Myners. I cannot begin to compete with him but I, too, will attempt to put the issue in context.

It looks likely that some of the institutional giants in the world of banking may go the way of the dinosaurs. Nothing lasts for ever, and they resemble nothing so much as the cruise liner “Costa Concordia”, wallowing in the shallows of the Mediterranean and waiting to hit the rocks. Mindful of that, we must read the runes and suggest alternatives. It is a banal truism to say that financial services are vital to the health of the nation’s economy—and equally vital, as my noble friend suggested, to the prosperity of both community and region.

Project Merlin, which was referred to, was meant to increase the flow of bank loans to businesses, particularly small and medium-sized enterprises. Although the banks agreed to this, in practice little was achieved; there was no magic. Project Merlin would have been named more aptly, Project Tommy Cooper. The failure was symptomatic of how the banks are not serving the needs of the economy. We need to raise our sights and contemplate alternatives.

As the noble Lords, Lord Myners and Lord Popat, said, much of the western world, including the UK, are in for a protracted period of zero growth at best, or negative growth at worst. The UK will experience a society and economy similar—although, I hope, not with the same magnitudes—to that of the 19th century. The Victorian age, Dickensian and ghastly though it was for so many, nevertheless inspired the creation of a whole range of remedial initiatives. These included the rise of the co-operative movement, the formation of building societies, credit unions, mechanics institutes and the like. Self-help and mutuality constituted the operating principles of the time, with the main emphasis being on the local and communal. As my noble friend Lady Kramer said, the banks in those times were much more focused on serving the local and regional areas and were by no means all centred on London.

Globalisation has, of course, brought many economic benefits but also costs, including the recent disasters within the financial services industry. We need to recreate the local to offset the worst excesses of globalisation. We should learn from our Victorian predecessors. The Victorians, of course, inhabited an era of increasing economic growth, whereas for us it will be the reverse. That makes it all the more important. It would be sheer folly to think that existing arrangements and institutions will be able to adapt themselves. Already commentators are adding to the “too big to fail” character of banks a “too big to manage” dimension. It is interesting that in today’s FT there is a report which states that,

“pressure mounts for the break-up of US banks”.

This is why other options must be explored.

If history may be a guide, so, too, can comparative experience. I refer to the extraordinary example of Mondragon in Spain. Starting in 1956, a range of industrial co-operatives have developed. Central to their growth has been their own bank, to which they subscribe and from which they borrow capital. As co-ops, they are owned and controlled by their employees. They are also restrained in the size of their labour force, and above a defined limit the individual co-op has to split up and divide into two. There are now over 250 constituent co-ops in the Mondragon federation, employing nearly 84,000 people. It is the seventh largest enterprise in Spain.

Co-ownership, of course, has long been a much cherished Liberal Party and Liberal Democrat party policy. The late Lady Seear was an ardent advocate of co-ownership on these Benches. In the mid-19th century there was a good deal of cross-party support for wider share ownership. Now there has been a revival of interest, with talk of enterprises being created on the lines of the John Lewis Partnership model. It has been mooted, for example, for the re-organised Post Office.

The ground is becoming more fertile for the planting of the seeds of a new thinking. Some fruitful new signs have emerged. For example, there is the issuing of local currencies in Lewes, Brixton, Totnes and elsewhere; and the facilitating by Mr Ivan Massow’s “Business Angels”, whose peer-to-peer lending encourages companies with more than adequate cash reserves to make loans to credit-strapped companies. I am sorry that the noble Lord, Lord Myners, thinks this is small beer. I hope it will become catching and grow.

However, much more needs to be done. We need a champion along the lines of the late Lord Young of Dartington. Michael Young pioneered the rise of the consumer movement in the last half of the 20th century that unleashed a social and economic revolution. That is what we need here. Someone with that kind of vision, lateral thinking and organising flair is sorely needed now to address the pressing problems we face, none more so than in the area of the local provision of banking credit. There are, alas, too few Michael Youngs, which is why I suggest a co-operative of intelligent, like-minded pioneers to think up and bring about the radical changes that must be wrought.

We must not drift or sleep-walk into the future. As a response to the continuing crisis, mass protest, though wholly understandable, is not the answer. That answer will come only from radical and new ideas. The focus must be on the small scale and communal. If the Prime Minister’s advocacy of the big society is to have any chance of becoming a big deal, small and communal enterprises will form its essential components.

I have one question for the Minister: what evidence can he adduce that the necessary thinking and effort is being applied by the coalition to address this issue?