The Welsh Government may wish to consider several options as to how to take forward the findings of the access to finance review.

For example, whilst there have been calls for a new state-owned bank, it could be argued that the foundations for such an organisation already exist in the form of Finance Wales.

However, unlike other state-owned financial institutions that have been examined as part of this review, the main focus of Finance Wales has, for the last five years, been on establishing its reputation as a leading fund manager rather than on directly promoting economic development in Wales. In this respect, the Welsh Government could give Finance Wales a more direct remit so that economic development becomes its main priority, especially as questions clearly remain about its commitment to directly supporting SMEs in Wales, despite the presence of new board members. However, it is the conclusion of this review that, in its current form, Finance Wales is no longer fit for purpose in supporting Welsh SMEs and helping to deliver growth to the Welsh economy.

In addition, with the Welsh Government’s own finance programmes, such as the Economic Growth Fund, also being utilised to support SMEs in Wales, there remains confusion amongst businesses as to the different types of support that are available from publicly funded bodies. Given this, the evidence from the review suggests that there is now an opportunity to develop a new approach that can bring together all the different sources of government funding for SMEs in Wales under one umbrella, works with other institutions in the public and private sector to add real value, and puts the Welsh SME at the core of what it does as an organisation.

The Development Bank for Wales

The review therefore concludes that the Welsh Government needs to examine the feasibility of creating a new Development Bank for Wales. This would be achieved not by creating a wholly new entity but by bringing together, under one organisation, all the financial support schemes for SMEs within the Welsh Government (which are estimated to be around £70 million per annum), the funds managed by Finance Wales and elements of Business Wales.

It is also proposed that, by agreement with the UK Government, this new organisation takes responsibility for the export functions of the UK Export Finance within Wales  so as to drive forward internationalisation in the economy and discussion should take place over whether the Business Growth Fund should also be located here for its Welsh operations.

This would create a financial institution that would not only have funding of over £100 million per annum at its disposal but this could, working with banks and other organisations, leverage in considerable amount of further funding for Welsh SMEs. For example, RBS has informed the review that, by working closely with the Regional Growth Fund in England, it has leveraged £300 million of investment from £70 million of public funding. In contrast, the JEREMIE Fund has invested £48 million in loans against which it has recorded £31 million of private sector leverage. In addition, only 45 per cent of these loan deals have attracted other funding from private sources.

A recent review by the National Audit Office (NAO)  into improving access to finance for SMEs found that many of the individual funding schemes run by the UK Government have been delivering against their individual targets. However, BIS and HM Treasury have not managed the range of initiatives sufficiently as a unified programme, and have not clearly articulated what the schemes were intended to achieve as a whole, given the resources available. There is therefore an opportunity for the Welsh Government to achieve a more coherent approach to supporting SMEs in Wales to gain access to finance.

Mission and objectives

The mission of the new Development Bank for Wales will be to “to utilise public and private funds to support and encourage SME growth to help grow the Welsh economy”.

To achieve this, the Development Bank for Wales will:

  • Act as a gateway for business and financial support, some of which will be provided by the bank and some through public and private sector partners. 
  • Provide loans, guarantees, grants and other financial instruments, all of which will maximise the state aid exemptions available to provide affordable debt finance to Welsh business. Indeed, as one of Welsh Government’s industry panels noted, access to debt funding was the most important area for consideration because most financing needs would be for working capital not for equity or ring-fenced project financing.
  • Access the different types of funding that is available from the UK Government. As the first report noted, there were concerns that the UK Government’s financial instruments would be focused on firms in the South East of England. This has been confirmed by the recent NAO report into access to finance, which showed that more than half of the support available under the Enterprise Capital Funds and the Business Angel Co-investment Fund benefits businesses in London and the South East.
  • Develop specific consultancy and business support services for Welsh SMEs, as found in exemplar organisations such as the SBA and BDC. This could not only include services currently provided through Business Wales but also elements of skills development currently managed within the Department for Education and Skills.
  • Gather, collate and provide detailed information on the SME sector in Wales, as the Sparkassen do in their local area in Germany. This would enable the Welsh Government and the Development Bank to understand the dynamics of the Welsh economy in more detail, especially if it worked alongside other financial institutions to generate the necessary data, and then responded appropriately through its services.
  • Establish close relationships with Welsh Government economic bodies, including the sector panels, the enterprise zone boards, city regions and Industry Wales. This will be key in ensuring that the Bank works closely with those organisations that have been established to provide policy guidance for the Welsh Government. 


It is not the intention of this report to consider in detail how this new organisation will be funded. However, there remain a number of different sources of funding available to the Welsh Government in examining future options.

EST has its own budget for the financial support of businesses that can serve as the foundation for the new body, along with the remaining funds within Finance Wales. In addition, a new bid for further European Structural Funding is possible under the 2014-2020 programme although safeguards must be put into place to ensure that full advantage is taken of the highest level of aid available to SMEs within any such arrangement. Whilst matched funds could be available again from the EIB to support ERDF and Welsh Government finance, the UK Business Bank may also be a potential source of funding, especially as the Welsh Government could make a strong case for a number of new funds to be created to support the development of the poorest region of the UK. It is also worth noting that with the Silk Commission recommending borrowing powers for the Welsh Government, there may be an opportunity for the new Development Bank for Wales to use this new status to borrow money from the financial markets cheaply to support Welsh firms, as currently happens with other state-own funding bodies such as Finnvera and the BDC in Canada.


In ensuring that the Development Bank for Wales delivers to its key customers, one of the models that could be followed is that which has been established with considerable success, in Finland where the state-owned financial institution Finnvera has three main markets which its serves. These are: (a) local microenterprises, (b) regional SMEs and (c) SMEs aiming at growth and internationalisation, all of which have been identified as having specific financial and business support needs and none of which are adequately served at the moment (Figure 1). There could also be a specific focus on supporting social enterprises in Wales through the same approach and Welsh Government may wish to discuss the potential models in more detail with the Co-operatives and Mutuals Commission.

Figure 1. The Development Bank for Wales

Local micro-businesses 

The Welsh Government’s Task and Finish Group made a number of recommendations regarding financial and business support to this sector, including facilitating accessible finance of between £1,000 and £20,000 that are simple and reflect the level of investment required; supporting micro-businesses with application processes to access wider appropriate finance options; proactively promoting access and awareness of business support services for micro-businesses; and creating a single well recognised brand for access to business support. Whilst the micro-business fund is being managed by Finance Wales, there is a consensus that most lending to micro-businesses should take place at a local level.

The Welsh Government, through Business Wales, already delivers support programmes to micro-businesses across Wales. More importantly, the Business Wales providers work closely with these businesses to develop their potential and, as such, have a detailed understanding of the firm and their funding needs. An alternative model to the delivery of this type of funding could take place through Community Development Finance Institutions (CDFIs). Whilst these are well developed in Scotland and England, there is one such organisation within Wales (Robert Owen Community Robert Owen Community Banking Fund) .

It is therefore proposed that all micro-business lending is devolved to Business Wales providers, under the Development Bank for Wales brand, to provide funding to those local businesses they support. This would streamline the current process and create an effective and efficient means by which affordable funding is distributed to micro-businesses across Wales. As with other micro-business loan programmes elsewhere, the funding would be fixed at an affordable rate, to be determined by the Development Bank which would oversee the governance of this scheme and be responsible for reviewing the cost of borrowing regularly. This principle has already been adopted with regard to the new Start-Up Loans programme in Wales where a number of providers have been given the authority to approve loans to local start-ups. Such an approach could also be extended to programmes such as the Welsh Government’s Digital Development Fund (DDF), which supports the development of new creative products and services that can be exploited across multiple digital platforms and in international markets.

Regional SMEs

These would be financial and business services oriented towards providing financial and business support for the growth of those larger regional SMEs across Wales that largely serve the Welsh and UK markets, and require largely debt finance to grow their business. Similar to other state-owned funding bodies across the World, it will work in partnership with different providers of funding (including the banks, invoice discounters, leasing companies) to ensure information on, and access to, the right type of support. For example, it could grant associate status to Commercial Finance Brokers as well as asset finance providers to deliver specific finance solutions to Welsh businesses.

In this respect, the role of the Development Bank will be complementary in supporting the banks when there is a situation when they cannot lend to businesses, and acting as a publicly funded gap lender to ensure that SMEs obtain the capital they require. This will be in the form of guarantees but could also take the form of subordinated loans to established lenders. This ensures that the risk is not only borne by the state but in partnership with the private sector, enabling funding mechanisms to be used more effectively. It also ensures that the cost of lending to be substantially reduced as the risk is being supported by the state. As one member of a sector panel noted, “the general theme of the Welsh Government providing a guarantee scheme to enable banks to support smaller businesses would be of enormous benefit. Any such scheme must be simple, transparent and encourage faster decisions”.

It will also deliver specific business support, mainly through external intermediaries and consultants, to help these businesses to grow and develop. As the FSB noted in their response to the review, its members have suggested that there is an inherent benefit in government-supported finance schemes that couples business support with finance. Business Wales therefore needs to be fully engaged with financial support mechanisms to ensure that weaknesses in business management are addressed at the same time as financial concerns. This concept is not new to Wales as, in its original business plan, Finance Wales stated that “money with management” was an important element in improving investment opportunities for businesses in Wales although this approach was quietly discontinued several years ago.

High growth firms

There is also an increasing consensus that there should be more specific and targeted support for the small number of businesses that have potential for growth. A recent study by Demos  concluded that if most SMEs had no immediate ambitions to grow, efforts should be focused on those businesses with the potential to deliver significant growth in the future regardless of size. Similarly, Bain and Co’s review of funding in Europe suggested that the emphasis should be on building stronger SMEs for a more challenging future – export and growth-oriented, globally competitive and highly productive firms – supported by an SME funding structure with a different mix of bank lending and alternative funding sources than is currently available .  Yet as previous research has indicated, smaller, younger, and higher-growth businesses find it harder to access finance than more established firms.

Whilst the Welsh economy is not in the position to focus its efforts solely on growth firms, there could be a more coherent approach in supporting this type of firm that, as NESTA has shown , is a significant job creator across all sectors. Currently, there is no specific support structure that is in place to direct business and financial support towards this type of enterprise. However, many of the individual elements are already present in Wales including a business angel network (xĂ©nos), mezzanine and equity funding from Finance Wales, private sector-led sector panels (especially those in life sciences, energy and environment, creative industries and ICT), Business Wales’ high potential start-up programme and Welsh Government funding for innovation. Yet, the evidence suggests that there is little co-ordination between these elements to create a coherent and cohesive support mechanism for high growth firms. In addition, there has been little effort to link in with other entities including venture capitalists, the various equity-funding schemes supported through the UK Government, and new forms of financial support such as crowdfunding.

Therefore, there is a requirement for an increased focus on lending to new innovative high-growth businesses, especially those unable to obtain finance from the commercial banking sector. This could, as in some economies, be a standalone body for growth and innovation or could be integrated as a specialist division of the Development Bank for Wales. Alternatively, it could build upon the successful partnerships currently operating the high growth start-ups programme for the Welsh Government. The structure for this entity will be examined in more detail as the Welsh Government considers the way forward for the creation of a Development Bank for Wales.


During the last ten months, this review has examined access to finance to SMEs in Wales. It has concluded that whilst the lending from the banks has fallen, alternative sources of finance have yet to fill this funding gap. In addition, it can be shown that public sector financial support in Wales seems to be fragmented and more relevantly, the organisation tasked with providing debt and equity finance to SMEs is not specifically focused on developing the Welsh economy.

Given this, the Welsh Government needs to develop an approach where public funding for SMEs is affordable, is focused on economic development, is supplemented by business support and is oriented towards the needs of the business customer. It is also critical that the public sector does not displace the private sector but works alongside the banks and other stakeholders to address a market failure in the provision of finance to SMEs.

The review believes that the most appropriate way in achieving this is through the creation of a Development Bank for Wales that will draw together the various sources of public sector funding in Wales and utilise these efficiently alongside private sector finance solutions. Therefore, the review recommends that the Welsh Government examines the feasibility of this approach as soon as possible to ensure that a viable and coherent solution that supports SMEs in Wales is put into place as quickly as possible.

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