Friday, September 5, 1997
"Canadian banks have boasted that their performance in financing small business has improved during the past year," said Duff Conacher, Chairperson of the CCRC, "Unfortunately, their own statistics show no improvement in their support of this job-creating sector."
The CCRC analysis examined numbers in the Business Credit Statistics reports the Canadian Bankers Association (CBA) produced each quarter for Canada's largest seven banks from December 31, 1995 to December 31, 1996. As well, the CCRC analysed the two surveys the CBA conducted in 1996 and 1997 on small and medium size-business financing.
The CBA reports show that while the number of big business customers (with loans of $5 million or more) decreased to 1.25% of total bank business customers, they received $15 billion of the $18 billion increase in total business credit extended during 1996 (increasing their share of business credit to 75% of the total). In contrast, the amount of credit in loans of under $25,000 decreased by 10%, and the number of customers in the under $25,000 category also decreased. And while 85% of business customers are small businesses with credit of under $250,000, their share of total credit remained stagnant at 6.9%.
"In 1996, while continuing their cash squeeze on job-creating small businesses, the Big Seven banks extended more credit to those who need it least," said Conacher, "Our economy cannot afford to wait any longer for the banks to do their part to support job creation in Canada."
According to the Government of Canada, 98% of all businesses have less than 50 employees (88% have less than five employees), 53% of all Canadians working in the private sector are self-employed or employed by a business with less than 100 employees), small businesses created over 80% of all growth in employment in the past 15 years, and small businesses created 38% of Canada's gross domestic product in 1991.
It is widely agreed, based upon both Canadian Bankers Association (CBA) and Canadian Federation of Independent Business (CFIB) surveys, that small businesses need at most $250,000 in business credit. According to the CBA business credit reports, customers with authorizations of $100,0000 or less comprise 69% of the business customer base while 85% of business credit users have authorizations of under $250,000.
CFIB member surveys have shown "access to capital" to be an ongoing problem, especially when compared to the U.S. It is consistently ranked in respondents' top 10 concerns, and the number of small businesses reporting problems with access to capital doubled from 20% in 1990 to 40% in 1996 (their June 1996 survey ranked "access to capital" as the 6th concern). In contrast, respondents to the U.S. National Federation of Independent Business (NFIB) surveys over the past 10 years have never ranked access to capital higher than 43rd (in their 1996 survey it ranked 63rd).
The two annual surveys the CBA has commissioned (conducted by Thompson Lightstone & Company Ltd.) resulted in claims that over 80% of loan requests for small business financing are approved. However, their survey is flawed in several significant ways. First, the CBA surveyed businesses which have sales of less than $50 million and fewer than 500 employees, a definition that extends far beyond the small business sector. Second, the survey sample size is very small, weighted to larger businesses, and statistically insignificant in the category of start-up businesses. Specifically, results were based on responses of mostly larger existing businesses (more than 50 employees) and at most 200 start-up businesses that had approached banks for financing. This represents a very small portion of the 720,000 business credit customers of the Big Seven Canadian banks. Third, the survey was conducted in conjunction with the Canadian Chamber of Commerce, whose membership includes banks.
These flaws make it clear that a CBA-commissioned survey is an inadequate and invalid means of tracking small business demand for capital, and loan approvals and rejections. Systematic disclosure by the banks of total number of business loan applicants, approvals and rejections, categorized by size and type of business and other factors would be a much more valid and complete means of documenting the access to capital situation.
(Royal Bank, CIBC, Bank of Montreal, Bank of Nova Scotia, Toronto Dominion Bank, National Bank, and Hong Kong Bank of Canada)
An analysis of the Business Credit Statistics reports the Canadian Bankers Association (CBA) has produced each quarter from December 31, 1995 up to the most recently available report of the statistics as at December 31, 1996 produced the following results:
A comparison of authorizations to small business at December 31,1995 with December 31, 1996 reveals that support for small business in 1996 decreased, as follows:
This means that the small business sector, while creating over 35% of Canada's gross domestic product, is receiving at most 7% of the total business credit extended by the banks.
At a time when federal government is claiming to be encouraging microenterprises, and when demographers are theorizing about self-employment significantly increasing in the future as a job market sector, the banks' 1996 lending figures illustrate a persistent unwillingness to support the job-creating small business sector.
Of the $18 billion increase in total business credit in 1996, $15 billion (83%) of the credit was loaned out in amounts in excess of $5 million (an increase in this loan category of 4.8%). However, during the year customers with credit in excess of $5 million declined by 13%. As a result, as of December 1996 customers with credit authorizations in excess of $5 million represented only 1.25 % of total customers, but received 75% of extended credit (compared to 1.47% of total customers and 74% of total credit as of December 31,1995). In essence, the banks extended more credit to fewer big business clients in 1996.
Of significance is the amount of credit authorized compared to the amount of credit utilized (outstanding) by different sizes of business. For small businesses with credit of under $250,000 the utilization rate is 70%, while for big businesses with authorized limits of over $5 million the utilization rate is 28%. It is clear that any increase in total credit authorized in 1996 for both sizes of business could have been covered from the un-utilized portion of existing authorizations. Therefore, in essence, no new money was made available to small- and medium-sized business during 1996, while the Big Seven banks extended more credit to those who needed it least.
The banks' statistics indicate that they are failing in their role as financial intermediaries because they are not providing capital where it can create the most employment and have the most positive impact on the Canadian economy.
At a time when three of Canada's Big Seven banks are among the top 25 most profitable banks in the world, in part because their profitable business divisions have been protected from domestic and foreign competition for decades by the federal government, this lending pattern is unjustifiable.
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