The Importance of Banks in SME Financing: Ireland in a European Context

Financing for working capital and investment is essential for the survival and growth of Small and Medium Enterprises (SMEs). The recent financial crisis has provoked much debate in Ireland and Europe around the provision of bank financing to SMEs. This article provides empirical evidence, using both pre- and post-crisis data, that Irish SMEs' external funding mix is more reliant on commercial banks than almost all other European countries. Such a reliance on banks is likely to increase the vulnerability of the real economy to shocks to the banking sector. We note that the share of firms using bank borrowing to finance either working capital or investment has fallen by roughly 50 per cent between 2005 and 2012, reflecting both supply and demand factors. Continuation and expansion of policy initiatives to widen the range of financing options available to SMEs are crucial in order to facilitate investment and employment growth as the Irish economy moves toward recovery.