Could a Government Program Actually Become a Rival to Banks?

The Bank of Ireland has recently announced plans for a government small business lending fund. But this article questions whether this will be good for small business lending or become a rival for the banks?

Over 2012, we have heard story after story from around the world of government’s implementing programs to help spur capital lending to small and medium-sized businesses. In the US, along with federal programs we also have a growing number state lending funds. While these new funds or plans are lauded with (cautious) praise, no one ever questions whether they could be detrimental to the banker.

That is exactly what this article’s author has done discussing the Central Bank of Ireland’s recent announcement of the National Pensions Reserve Fund (NPRF) entrance into small business lending. Details are few, but the fund will range in size from €100 million to €400 million, and could start senior securing lending in the first quarter of next year. The snippet of information the author focuses on is the expectation of the fund to deliver an annual return of 15% for its investors.

“At the risk of looking a gift horse in the mouth, it’s worth teasing out the rationale for the Government sponsoring such a scheme,” John McManus writes, “Senior secured lending to small and medium-sized enterprises is the bread and butter of the big commercial banks and, when you own one (AIB) and are a big shareholder and guarantor of the other (Bank of Ireland), why would you set yourself up in competition with them. Not only that, it is funding a rival that clearly plans on eating the Irish banks’ lunch if it is to return 15% annually to its backers.”

The announcement is still new, and more details have yet to be released, but McManus brings up an interesting question. What do you think? Let us know at our LinkedIn Discussion Group.

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