As of 2021, small businesses employed 8.2 million Canadians – 67.7 per cent of the private labour force.Ammar Bowaihl/the Globe and Mail
Patricia Meredith is a Centre for International Governance Innovation senior fellow and was the chair of the task force for the federal government’s payments system review. Robert McGarvey is a founding director of Rethinking Capital. They are currently writing Canada’s Time to Lead, a book on the digital revolution.
One of the primary reasons cited by the government of Sir John A. Macdonald when it granted charters to private banks in 1871 was to support economic development with loans to small and medium-sized businesses.
But ever since, these businesses have nonetheless complained about the lack of available credit. Commercial loans as a percentage of bank assets have steadily declined, especially since the 1970s, when banks were permitted to make residential mortgage loans. The problem has become particularly acute for modern digital companies that do not hold physical assets, as banks are only comfortable lending to companies with real estate, or other hard assets, for security.
This is very unfortunate. Small and medium-sized businesses are the foundation of our economy, after all. As of 2021, small businesses employed 8.2 million Canadians – 67.7 per cent of the private labour force. Medium-sized businesses employed 2.5 million or 20.4 per cent. In 2019, small businesses contributed 36.7 per cent of GDP generated by the private sector, whereas medium-sized businesses contributed 13.7 per cent.
Thankfully, there is a solution to this problem: a dedicated federal government insurer/lender, not unlike the Canada Mortgage and Housing Corp. (CMHC), for loans for small and medium enterprises (SMEs).
While this country does have the Business Development Bank of Canada (BDC), the large corporation has been a major contributor to the old economy, not the new, digital economy – just as commercial banks have.
First, we need to understand a bit more about CMHC. It was created in 1946 to foster home ownership in Canada and has withstood the test of time. In the early 2000s, the agency set the underwriting standards for residential mortgages. Its prudent approach restricted commercial banks’ exposure to subprime mortgages, which was a tremendous support when that market collapsed in 2007. CMHC also introduced innovative funding vehicles, such as its mortgage-backed bonds, to improve liquidity in the residential mortgage market. During the financial crisis of 2008, the Bank of Canada used those funding vehicles to keep Canadian banks afloat.
In 2024, to address the country’s immediate need for financing and economic growth, a hypothetical new SME Loan Corp. could start with two approaches – one shorter-term, the other longer-term. First, it could build a team of accountants and underwriters to modify accounting and assurance standards to recognize intangible assets on the balance sheets of SMEs and lenders (BDC and/or Canadian banks) and develop underwriting standards for traditional, asset-based lending against intangible assets. Such an approach could start immediately.
Second, the government could create a longer-term digital data and payments solution resembling China’s approach to SME lending. Essentially, in that country Alipay’s MyBank and Tencent’s WeBank use a company’s transaction data to model and monitor performance in real time. This approach would rapidly complete the modernization of Canada’s payments system and the collection of raw material – data – necessary to support Canada’s digital economy.
As the real-time payments system is rolled out over the next couple of years, the SME Loan Corp. could work with Payments Canada to create a database of transaction information (similar to that used by Alipay and Tencent) to support generative AI-based forecasting of future value creation. CPA Canada would be required to develop measurement, assurance and disclosure frameworks and standards to support this new approach.
The end result would be the transition of Canada’s economy from the industrial age to the digital age.
The creation of the SME Loan Corp. would accomplish three critical objectives for that transition. First, it would bring badly needed financial support for the country’s growth engine – small and medium-sized businesses. Second, it would provide, for the first time, formal recognition of the intangible assets that underpin value creation in the digital age. And third, it would see the conversion of the country’s payment system to a real-time, information-rich one that provides the data essential for economic growth and effective lending standards.
Does the federal government currently have the wherewithal, or the political will, to bring this about? That is a different matter. But it should. Digitalization of the global economy is proceeding at a breakneck pace. If Canada is to remain prosperous, the institutions of finance have no choice but to keep up.