As we all know, lack of competition is liable to drive up the price of goods. This is also true for the price of money , i.e. the interest rate you pay to the bank for having a loan. As banks are the main outlet of this good, lack of competition amongst them will inevitably result in higher interest rates. This is bad for a number of obvious reasons: we have to pay more for borrowing and so have less money to spend on other goods thus stifling the economy in other sectors, which of course impacts upon job creation etc.
Higher interest rates and lack of competition between lenders is also bad for businesses as outlined here in the Economist. Small and Medium Enterprises (SME’s) have a hard time getting loans for their businesses, and when they at last find a lender who will lend them money, a lack of competition ensures high costs. This consequently means that SME’s are less prepared for a potential economic upturn than they could be, as they don’t have the capacity needed, and face the threat of over-trading. Competition amongst banks is therefore vital to ensure the possible build up of the SME’s capacity so they can undertake new orders and create new jobs.
Why then are there only four big lenders back on the money market? The reason is principally a problem of entrance costs, excessive bureaucracy and regulation that keep newcomers out in the cold.
Lowering these entrance costs to increase the number of lenders will benefit everyone and it is about time government looked seriously into the problem.