Beyond Banking: How Traditional Finance Institutions Are Failing Small Business

Recent reports of the U.K. economy emerging from recession offer a glimmer of economic optimism. However, finding this positive market feedback felt like a financial odyssey — a long and arduous journey with more trials and tribulations ahead.

That is why it's no surprise that recent findings from the Parliament Treasury Committee assessing the financial health of the U.K. economy have arrived at the following conclusion — unfair banking practices and lack of regulatory supervision harm small businesses, putting innovation and growth at risk.

Here We Go Again — The Lawmakers have stepped in.

While this report's findings are being plastered all over digital and print media, it's a narrative we know all too well. The banks' detrimental actions have once again caught the ire of lawmakers, forcing them to step in to protect the health of a fragile U.K. economy that is only just beginning to recover from a prolonged recession.

It's like Groundhog Day—we are all waiting for some remedy that will once again usher in Bullish Economic Times, but the prescription never seems to work.

At this point, it's normal to ask ourselves: If traditional finance institutions constantly require oversight to remedy a weak U.K. economy, when will they be equipped with the proper regulations to foster long-term economic prosperity?

Examining the findings of this Parliamentary Report and its recommendations will help us explore this question from a different perspective.

Parliament Treasury Committee Gives Financial Institutions a Damaging Report Card

Under the backdrop of an economy still reeling from a global pandemic, soaring energy prices, and a U.K. political environment as divisive as a premiership football match — the committee highlighted many banking practices and regulations compounding the struggles of small businesses.

Specifically, the report detailed how banks unfairly forced many small business owners to pledge their homes as collateral to obtain financing. It also pointed out a significant decline in loan approval rates for small businesses over the last five years, eroding the SME communities' trust in banks.

Data sourced from UK Finance's Business Finance Review, 2023. Available at: UK Finance.

Exacerbating this already precarious situation is the rise of "debanking" — the practice of banks closing over 140,000 small business accounts this year alone without explanation. While some closures are necessary for due diligence reasons, the report concluded that regulators had not provided a robust appeal system, enabling legitimate SMEs to question these closures.

A Different Perspective — Regulations and Oversight is not Enough.

To create a more conducive environment for small businesses, the committee has put forward a list of recommendations that include new regulations that will make the banks more fair in their small business loan requirements and transparent in their decisions to close SME customers' accounts.

The report believes this fair and transparent behavior is necessary for economic growth. However, if this good behavior by the banks is essential to foster financial development, then perhaps we should look at things from a different perspective.

Instead of asking how long it will take for banks to implement proper regulations to deliver consistent economic growth, we should ask whether regulations alone are sufficient to deliver financial prosperity.

Government oversight, while necessary, has limitations.

Regulations can only create a baseline of acceptable financial behavior, making sustainable economic growth difficult. To build a resilient financial system, we need to look beyond supervision. Our financial institutions must be rooted in solid values that aim to create a new accommodating economic landscape that caters to all.

Instead of waiting for regulations and governing standards to equip our banks to provide economic success, we should look at alternative financial institutions — steeped with values of delivering empowerment for all.

A New Way Forward — Values Will Steer Us Towards Financial Success

At Nester, we understand the importance of fostering a financial landscape that accommodates small businesses.

Established in 2018, we are the first FCA-regulated Peer-to-Peer Real Estate platform adhering to Islamic Financial Values based on the principles of inclusivity. Beyond our commitment to financial regulations, we actively adhere to a code of values that aims to carve out a new economic space that provides financial empowerment for all.

Our financing solutions support local businesses, safeguard at-risk homes, and strengthen local communities across the U.K.

At Nester, the most empowering financial journeys are those that uplift everyone.

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