Is bank finance the Achilles' heel of Irish SMEs?

The purpose of this research paper is to examine the implications of new banking regulations (Basel II) for the Irish SME sector. Training gaps are identified and recommendations to advance social capital networks are provided.

The Irish SME dependence on external (bank) finance and their susceptibility to legislative changes in that sector is explored through a survey of Irish SMEs. Additionally, banks' preparedness is investigated through semi‐structured interviews of five major banks, all serving the Irish SME sector.

The results show a high degree of Irish SME dependence on banks as a source of funding. Furthermore, there is evidence of increases in bank rates/charges over the past two years with limited switching between banks to avail of better rates. Moreover, the findings indicate that, while banks operating in the SME sector are on target for Basel II adoption, Irish SMEs remain unaware and unprepared for the possible implications of this change. The future competitive consequences for Irish banks that are slow to achieve sophisticated compliance with the new regulations are also discussed, in relation to their secondary effect on the SME sector.

The key contribution of this paper is that it highlights the need for Irish SMEs to proactively manage their potential funding sources. As part of the development of the necessary management skills, various training recommendations are made for Irish SMEs facing a more sophisticated global financial regulatory environment.