Lending a hand : an exploration of Toronto's values-based Lenders, and the role of relationships in SME lending

Abstract

In the financial services industry, especially in the wake of the financial crisis, there has been a call for financial institutions to employ their capital for positive impact. While banks have traditionally worked to maximize value for shareholders, this movement has sparked interest in alternative banking models that incorporate social and environmental values. There are numerous names for this view of banking, among them, values-based, regenerative, ethical, sustainable, social, alternative, development and solidarity banking. Many values-based institutions have smaller, more local footprints when compared to traditional banks, which makes them well-suited to lend to small and medium-sized businesses ("SMEs"). While SMEs are a vital component of any local economy, they often face challenges obtaining credit from traditional banks. There is an opportunity for values-based lenders to provide credit to SME borrowers that are unserved or underserved by traditional lenders, and in doing so support the social, environmental, and economic sustainability of local communities. This thesis explores the current state of values-based lending to SMEs in Toronto, Canada. The Toronto financial market is dominated by a handful of large domestic banks; however, there is a gap between the credit requirements of SMEs, and what the traditional banking market is willing and able to supply. The author concludes that values-based lenders serve an important role in the Toronto SME lending market, filling numerous gaps left by traditional banks. These lenders are able to employ more qualitative, subjective and relationship-based methods in credit risk assessment and lending decisions.