Global Spotlight: Ireland

The European Union stands as a massive market for alternative lending, and small business lending remains a hot political topic. EU policymakers are in the midst of working on legislation that would establish a Capital Markets Union aimed squarely at facilitating cross-border investment in small businesses. While the kinks are ironed out to make sure that investors can safeguard where they put their money — regardless of country — individual member states are all enjoying their own alt-finance booms.

Research published earlier this year found that by the end of 2015, Europe’s alternative lending market will likely hit a value of nearly $8 billion, nearly doubling its value from last year. The United Kingdom leads the EU’s alt-finance sector with a market valuation nearly four times larger than the rest of the EU’s combined.

Even when it comes to traditional bank lending, the latest figures suggest that U.K. banks are fueling more funds into small businesses. The Bank of England reported last May that through the government-backed Funding for Lending scheme, SMEs saw nearly $975 million more in funding in 2015’s first quarter.

But new findings reveal that the U.K.’s brother, Ireland, is having a less than jubilant time in its small business lending market.

According to the Central Bank of Ireland in its newest SME Market Report, Irish small businesses are burdened with the highest loan interest rates in the Eurozone, with small business owners charged an average of 5.5 percent a year. That compares with the EU’s average of just 3.6 percent.

Researchers also found that Ireland’s small business community has experienced interest rate hikes more than they have benefited from interest decreases in the last six months ending in June. But in the rest of the European Union, borrowing costs are falling across the board, researchers found.

These higher borrowing costs are no mistake. According to reports, they are a direct result of the high loan default and distressed loan rates in Ireland following the financial crisis. More than 20 percent of business loans in Ireland are in default, reports said, while nearly 40 percent of all bank-owned business loan value is distressed.

These statistics have all led to higher business loan rejection rates than the rest of the EU, too.

Still, the Central Bank found that SME lending rates have seen a steady increase since 2014 and currently stand at their highest value since 2011 — €2.6 billion ($2.9 billion).

And while default rates remain high, researchers found an improvement compared to earlier reports, while outstanding credit to small businesses fell by 41 percent between the first quarter of 2010 and the first quarter of 2015.

The Central Bank found that the rate of decline in SME loan applications “appears to have stabilized,” with the latest figures showing a modest uptick in demand for financing. The majority of small businesses are applying for financing to be used as working capital, the Central Bank found, with nearly half of SMEs reporting this as their reason for applying for a loan. When broken down by industry, researchers found that agriculture received the largest share of new loans, followed by retail and wholesale. All industries except manufacturing reported an increase in annualized new lending in the first quarter of last year.

While Irish businesses can benefit from the slew of U.K. alternative lenders, on its own, its alt-finance market is less robust. Some new market entrants are beginning to build up the sector, and policy markets are starting to pay attention to the opportunity alternative finance can provide.

Less than a year ago, for example, Ireland’s Central Bank announced plans to remove its ban on alternative investment fund lending, introducing regulation and acceptance of the alt-finance market in the nation. Earlier this month, the Oireachtas Joint Committee on Jobs, Enterprise and Innovation gave its recommendation that Ireland replicate the U.K.’s government lending scheme that facilitated SME financing through alternative lending platform Funding Circle.

But as in many jurisdictions around the globe, Ireland’s regulators are struggling to bring alternative lending out of the shadows and to balance a crackdown on bad SME loans without hampering small businesses’ ability to access this financing. According to reports, Ireland has the EU’s third-largest shadow banking sector, with assets worth $3.2 trillion. The European Central Bank, experts said, is now focusing on Ireland’s shadow banking sector to ensure that alternative lending develops in the nation without fueling threats to its economic stability.

“We do have a team of economists that is looking at what I would call the regulatory perimeter — activity that is not quite in the regulatory spotlight but is in the penumbra,” said Gareth Murphy, who is head of the Irish Central Bank’s markets supervision, in an interview with CNBC in March.

Facilitating the growth of Ireland’s alternative finance sector will be crucial to ensuring small businesses can access the financing they need, especially as they face rising interest costs.

But today, Murphy said, Ireland is far from sorting out its investment markets, making this a reality. “We are a good way down the road in terms of understanding the challenges of mapping this area,” he said.