How can banks better support ethnic minority-led businesses?

Ethnic minority businesses (EMBs) contribute an estimated £25bn to the UK economy annually, yet according to a new report from the UK Lending Standards Board (LSB), a ‘one-size-fits-all’ approach to lending results in disengagement, a lack of access to business banking, and limited opportunities for EMBs to flourish.

The LSB’s October 2023 report, ‘Increasing access to finance for ethnic minority led businesses’, highlights the barriers EMBs face in requesting or accessing finance. Finding a lack of confidence in the banking and lending sector from EMBs who are typically dissuaded from accessing finance, the LSB looks to the role of banks and lenders in unlocking the economic potential of minority ethnic talent and entrepreneurship.

The 250,000 ethnic minority-led firms that contribute to the UK economy have a gross value added (GVA) — a measure of productivity — that matches or exceeds that of key domestic cities and sectors.

According to NatWest’s May 2023 Time to Change report, published in partnership with Aston University’s Centre for Research in Ethnic Minority Entrepreneurship, tackling the barriers facing EMBs could increase their GVA contribution four-fold to reach £100bn.

Barriers for EMBs

Yet, despite their significant economic impact — both actual and potential — multiple barriers remain for EMBs seeking access to financial support.

Areas of concern raised in the LSB report include varying lending practices, challenging eligibility requirements, obstacles to accessing business banking services, and limited alternative options for applicants rejected for finance.

Additionally, the report highlights instances of “mistrust and demoralisation” among EMB owners, which was exacerbated during the Covid-19 pandemic when numerous business owners encountered difficulties in accessing government support.

Banks and lenders were perceived to be ignorant of religious or cultural differences, the LSB’s report found, pointing to the need to build better understanding between EMBs and prospective financers.

“Having the confidence to engage in those uncomfortable conversations is key to shifting the dial and addressing discrimination — perceived and actual,” says Blessing Mutamba, NatWest’s business inclusion programme manager.

Credit references were seen as a further stumbling block for some EMBs, which may not affect other applicants. Those who do not necessarily have a low credit score, but lack a credit history, are particularly affected — which can be the case for newcomers to the UK or EMBs whose finances stem from savings or family and friends.

With the immigrant population being among the fastest-growing UK demographics, firms must work “constructively and creatively” with EMBs to avoid a ‘one-size-fits-all’ approach, the LSB advises. For example, HSBC UK recently launched a partnership with cross-border credit bureau Nova Credit to address such credit challenges.

Black and Afro-Caribbean talent can face greater barriers than other ethnic minority group when trying to access finance, says Michael Barrington-Hibbert, founder and CEO of Barrington Hibbert Associates, a London-based leadership development, executive search and diversity advisory firm. Lack of representation is a big problem, he says.

Between 2023 and 2035, a potential GVA contribution of £18.7bn could be missed due to limited progression and participation of black employees in the financial sector alone, according to Barrington Hibbert Associates.

Greater representation within business banking to reflect the diverse nature of both the UK and its small and medium-sized enterprises is needed, says the LSB. “The reason I chose my current bank was because someone walked into the room that looked like me,” Mr Barrington-Hibbert says. “That’s what ethnic minority talent needs.”

Indeed, Barrington Hibbert Associates reported in 2023 that high street banks that disclosed their pay gaps in 2022 — including HSBC, NatWest and Lloyds Banking Group — revealed that black employees remain largely underrepresented in senior positions.

More diverse workforces also bring forth the power of lived experience, which “can’t be underestimated”, according to Anna Roughley, head of insights at the LSB.

The first bank that “gets this right” will win a vast market share simply by having representatives that look like them. “The business case is clear,” says Mr Barrington-Hibbert.

Through interviews, the LSB report also revealed an overall perception from EMBs that “the system doesn’t support us”. The report uncovered a wider feeling that some lending practices are unhelpfully “explained away”, blaming “the system” or the rules for not allowing certain decisions, which suggests a need for better explanation or engagement from finance providers.

Firms signed up to the LSB’s business standards have committed to — as a minimum — providing customers in writing with the primary reason why their finance application has been declined. In such cases, offering relevant signposting to alternative sources of finance can help build trust between EMBs and their lenders, says the LSB report.

There are currently 17 registered firms comprising 34 brands signed up to these standards, including the largest retail banking groups, specialist lenders and debt collection firms.

Focus on untapped potential

Relationship managers can be a valuable tool when it comes to informing and supporting EMBs, Ms Roughley says. Despite an increasingly online and remote working culture, the LSB found relationship managers’ “personal touch” important for EMBs.

Although relationship managers may not be practical for all banks and lenders, and dependent on business strategy, the LSB says this demonstrates how firms can differentiate themselves from competitors while building EMBs’ confidence.

Building local community hubs to help firms better engage with EMBs and support access to finance may also be advantageous. Ms Mutamba says that, while traditionally the expectation is that “banks’ doors are open”, there’s a growing realisation about the responsibility of financial services providers to get into the community and open up dialogues.

The “right way” for the banking sector to focus on EMBs is to focus on reaching EMBs’ untapped potential, rather than taking action purely through the lens of inclusion, according to the LSB, acknowledging how ethnic minority groups may be affected differently.

Allyship — the support for marginalised groups from those who may not share the same characteristics — is also critical, Ms Mutamba says: ethnic minority communities can often feel not only on the receiving end of challenges and barriers, but also that they’re expected to be the ones to resolve issues and speak up.

In the absence of diversity, banks and lenders must ensure the “onus is not just on the EMB community, but that allies are there to champion their agenda”, Ms Mutamba adds.