Bill Jamieson: SNIB deserves success but will require patience

The bank, which envisages a full-time staff of 130 by 2027-28, and with former Tesco Bank supremo Benny Higgins at the helm, will finally open from next year. It aims to fulfil a long-held ambition of successive SNP administrations for such a bank to boost investment, improve Scotland’s infrastructure and lift our lacklustre growth rate.

So what will it do that is different to, or better than, private sector banks and lending institutions? And will it, as its advocates claim, make that much of a difference to Scotland’s economic performance?

Its aim is to provide longer-term, “patient” growth capital for businesses (loans over a term of ten to 15 years) where there is a perceived gap in the market, and to catalyse private sector investment, taking over from early investment activities such as the Building Scotland Fund and the Scottish Growth Scheme.

The SNIB has drawn on the experience of European countries where national investment banks provide long-term investment to support growth. It has been inspired by the work of Professor Mariana Mazzucato, a member of the Council of Economic Advisers. But is there really a need for a public sector bank, or rather, another one, as we already have such a bank – called, funnily enough, the Scottish Investment Bank? It’s been going for years. In the financial year 2017-18 it invested £43.5 million in 147 Scottish companies and leveraged more than £206m of investment. And it generated some £17.6m of income from its investments.

This bank has been run out of Scottish Enterprise. So why create another one? It could be that the SNP administration would like SNIB to be directly accountable to the government and aligned with its broader economic strategy. Thus, well-established though the existing bank has been, it is to be folded and its functions transferred to the new SNIB.

How big an impact is the new bank likely to make? A war chest of £2bn may sound muscular, even spread over ten years. But it is puny compared with RBS, for example, which claims a loan book to Scottish households and businesses totalling £14bn.

Across the financial sector generally, banks have been on a lending spree. Interest rates on bank loans have seldom been lower. Major central banks look set on further reductions and a resumption of quantitative easing.

But here at home, the Bank of England’s Financial Policy Committee expressed concern late last year about the rapid growth in lending to risky UK businesses. It said there had been £31bn of loans to companies that already had a high level of debt. Now there are signs that the banks are reining in business lending as companies buckle under excessive debt or fall into administration or bankruptcy. This rekindles fears that private sector banks can be fair-weather friends – over-lending in good times but pulling back when the economy slows.

Here we come to the asserted critical difference between a publicly owned and private sector bank: the SNIB’s loans can be offered over a longer period, and aimed at businesses it judges will have a knock-on growth effect and fulfil wider social aims, avoiding the pressures of short-termism. But financial returns from investment in innovative – and often necessarily riskier – activities are by no means assured. And they can take time to materialise. Achieving the bank’s goals will require patience as well as expertise in risk assessment. And this is not the only hurdle facing Scotland’s new bank. Its founders have also set a “mission–oriented” approach to investment. Each mission will work towards tackling a specific societal challenge.

The strategic direction of the bank also requires it to span the transition to a carbon-neutral economy, respond to demographic change, and to “regeneration and placemaking”. While the new bank may claim to be independent of political influence, the Holyrood administration wants to ensure that its culture, governance, and approach to businesses and individuals will define it as an ethical, inclusive and trusted institution.

The bank will be required to abide by the principles of equality, transparency, diversity and inclusion and to develop its own “Ethical Statement” setting out how it will observe these principles. Such laudable precepts can be a catch-all for all manner of social and behavioural requirements. Already the bank has been subject to an equality impact assessment, a child rights and wellbeing impact assessment, and a Fairer Scotland Duty Assessment, setting out a role for the bank in reducing inequalities of income arising out of socio-economic disadvantage.

In being obliged to address major societal challenges “in order to achieve transformative and inclusive change”, and with so many obligations, requirements and commitments, the bank may not only compromise its claim to operate commercially and to be independent from government, but also run the risk of losing focus.

The areas identified as opportunities for the bank are support for early-stage small and medium-sized enterprise (SME) investment; scaling up SME investment and “mission-led, patient long-term investment”. It is also seen as critical that the bank ensures SMEs have access to micro-loan finance.

With such a formidable list of objectives, no-one could argue that Scotland’s new national investment bank is lacking in ambition. Given so many laudable aims, it surely deserves to succeed. And it will need to do so to generate the funds for future investment.

Doing so across so many fronts, with the appetite for business investment as challenged as it is now, will require an equally formidable stewardship – and an administration committed to a bank that works.

This article first appeared in The Scotsman’s winter 2019 edition of Vision. A digital version can be found here.