Introduction

This submission has been prepared by the Australian Centre for Co-operative Research and Development (ACCORD) in response to the Terms of Reference developed by the above Parliamentary Joint Committee on Corporations and Financial Services ("the Committee") for the Inquiry into the Options for Banking and Financial Services in Rural, Regional and Remote Areas of Australia ("the Inquiry"). ACCORD is centrally concerned with research and development in relation to co-operatives, mutuals, and the broader social economy.

This submission broadly addresses the approach set out in the Inquiry's four areas of interest as set out in the Committee's Terms of Reference such as the options for the provision of additional and expanded banking services, as well as the current level of banking services in rural and regional communities and some international best practice banking developments. Our comments are based on research conducted by ACCORD over the past 18 months. This research has centred on the role of co-operative and other social economy organisations in building sustainable rural communities, the significance and potential for community development finance institutions, and the potential for social enterprise in Australia.

ACCORD understands that the Committee is intending to build on work of the former House of Representative Standing Committee on Economics, Finance and Public Administration ("former Committee") March 1999 report, Regional Services: Money Too Far Away ("previous report"). In particular, the Committee's purpose as stated in its press release is to assess the level of services currently being provided to rural, regional and remote areas of Australia and then to explore ways in which this service can be improved.

Areas of Concern

In particular, ACCORD urges the Committee to pay particular attention to the needs, level and types of financial services being provided to business and community enterprises in rural and remote areas, and focus its recommendations to addressing these service needs.

• The lack of available information on business and enterprise lending services in rural areas;
• The failure of the previous report to specifically address and provide recommendations on business and enterprise banking and financial needs (apart from section 2.74);
• The need for detailed review and consideration of the regulatory obstacles to the development, expansion and establishment of credit unions, especially since implementation of the Wallis reforms, current prudential and capital adequacy controls on credit unions and friendly societies in rural and regional areas in Australia;
• The previous report's consideration of banking as an essential service (refer to sections 2.78 and 2.87), and yet its failure to provide any recommendations on the need for banks and financial institutions to have community service obligations; and
• The previous report's brief but unsubstantial consideration of community banking in the USA (refer to sections 2.83), especially in view of the policy initiatives occurring in the UK and USA to encourage community reinvestment and financial inclusion, and the effect that these policies have had on the creation of community development finance institutions.

On the matter of encouraging local business and enterprise capacity, it is necessary that business, including social or community enterprises, have access to finance. Rural and regional communities have faced declining financial services, which has had negative multiplier effects on local and regional businesses. Small business and social enterprises continually face difficulties accessing finance because of lending and collateral requirements, lack of institutional understanding of their businesses and decreasing financial services. In response to these concerns, we would make the following observations and recommendations.

1. Local financial institutions that understand enterprise needs

The capacity of locally owned businesses and social enterprises can be enabled by locally based and supported financial institutions that understand and help their business customers (e.g develop business plans or look at alternative sources of finance to expand and invest and overcome collateral difficulties, and business cash flow difficulties). Recent years have seen a huge decline in rural banking services that have not been replaced by services that understand or cater for the financial needs of rural businesses and community enterprises. Community Banks, Rural Transaction Centres and Giro Post institutions do not cater for the specific needs of small business and community enterprise needs; nor do they attempt to understand what they are.

The previous report did not specifically examine the financial needs and demands that rural and remote businesses and community enterprises might have and whether existing or new financial institutions could cater for these needs.

As well, there may be a number of legal and regulatory obstacles to the creation of banking and financial institutions that understand the needs of and cater for small business and community enterprises that require further investigation and consideration by government.

These obstacles are most evident in the near impossibility of forming new locally based credit unions. This is a consequence of the demanding nature of current capital adequacy and prudential requirements imposed on large and small banking and financial institutions.

Recommendation 1:
It is recommended that the Committee should fully consider the extent to which existing financial institutions serve local and regional business needs, with the view to expanding available services for business and community enterprise finance in regional and remote communities.

As well, the Committee should thoroughly investigate the impact of existing financial and banking regulatory requirements on the establishment of new financial institutions to meet business and community enterprise needs.

2. Reinvesting in our regions:

The previous report detailed the decline of regional banking services. It should be noted that these trends have continued to the detriment of regional and local business communities.

The previous report also mentioned, but failed to fully consider and provide recommendations on the policy initiatives in the USA with regard to community reinvestment. Both the UK and the USA governments have developed a range of policies to promote community development finance initiatives and combat financial exclusion of disadvantaged regions, groups and enterprises.

In the USA, the 1977 Community Reinvestment Act has been successful in leveraging private capital into disadvantaged communities. In addition, the creation of a Community Development Finance Institution (CDFIs) fund in 1994 and various other tax and venture capital programs have provided resources for community development finance. The policy initiatives have also created a strong set of institutions that are commonly referred to as CDFIs that provide finance to a range of financially excluded regional businesses and community enterprises.

In October 2000, the UK Treasury accepted the Social Investment Taskforce's ¹ five key recommendations to create wealth, economic growth, employment in its under-invested and poorest communities through the adoption of a Community Development Tax Credit, a Community Development Venture Fund, greater disclosure of lending by banks, greater latitude and encouragement for charitable trusts and foundations, and support for CDFIs. As well, these policy initiatives have directly assisted the development a number of CDFIs that provide a range of finance alternatives to traditionally excluded regional businesses and community enterprises.

The USA and United Kingdom community development finance initiatives should be further investigated with respect to prevailing social and business financial exclusion experienced in Australian rural and regional communities.

Recommendation 2:
We recommend that the Committee give serious consideration to community development finance policy initiatives occurring in the United States and the United Kingdom, especially supportive tax incentives, regulations to encourage social banking, and financial institutions rating systems to measure lending arrangements with traditionally excluded community and regional enterprises.

As well, the Committee should investigate the transferability of some of these policy initiatives to the Australian context, especially in order to facilitate the creation of opportunities and institutions aimed at providing community development finance.

3. Community service obligations for existing financial institutions

The previous report drew a number of conclusions but failed to provide recommendations on the social and community service obligations that banks and financial institutions have towards their local communities and business customers. These conclusions should be followed up with proactive policy recommendations to ensure that financial institutions have community service obligations written into their charters and business and lending objectives.

Recommendation 3:
It is recommended that the Committee consider the need for financial and banking institutions to have community service obligations imposed by either regulation or voluntary disclosure.

4. Data on rural and remote businesses and their financing arrangements

The capacity for accurate and relevant business and government planning is limited by the absence of small area and regional data on the economic characteristics (size, assets and employment) of businesses and enterprises. Such information could be obtained by a regular census of businesses, such as some of the business surveys undertaken by the US Census Bureau, including County Business Patterns (annual statistics on the number of business establishments, number of employees, payroll and employment for every county), Economic Census and Related Surveys (census of American business conducted every 5 years gathering data on number of establishments, sales and receipts, value added, number of employees), Nonemployer Statistics, and Zip Business Patterns (annual information for every zip code in the nation).

Secondly, business and government planning would also be assisted by the availability of information on loans and general services provided by banks and other financial institutions to enterprises in regional areas or particular post codes. In the first instance, this information might focus on disadvantaged or deprived rural and remote areas. The Bank of England now reports regularly on finance for business in deprived areas and for groups within deprived communities as part of their annual review of finance for small and medium sized businesses ².

It is suggested that the Committee may have the opportunity to provide recommendations on how these data problems might be rectified to assist planning and strategies to increase, harness and create local community financial capacity. One option might be for the Commonwealth to investigate the possibility of obtaining better data from banks and non-bank financial institutions regarding business loan and non-loan data, by postcode and local areas from sources such as the Australian Bureau of Statistics, the Reserve Bank and the Australian Prudential Regulation Authority.

Recommendation 4:
We recommend that greater government resources be devoted to collecting information about businesses and financial information at the local and regional level and from banks and other financial institutions regarding loans and equity provided to small business and regional enterprises.

References

1. Social Investment Task Force 2000 Enterprising Communities: Wealth Beyond Welfare Report to the Chancellor of the Exchequer. Social Investment Forum, London
2. Refer to the Bank of England, April 2002, Finance for Small Firms - a Ninth Report available at http://www.bankofengland.co.uk/Links/setframe.html