Study reveals severe post-Brexit reduction in lending to SMEs in rural areas  

The research, conducted by experts at Bangor University and University of Liverpool, also revealed a significant 4.8% annual lending contraction to SMEs in the UK following the Brexit vote compared to similar European countries. 

The paper, which has been published in the Journal of Rural Studies, suggests this potentially contributed to the UK’s sluggish post-Brexit economic growth. 

This impact persisted in several quarters, particularly during key Brexit milestones, such as Article 50 and the EU Withdrawal Bill, reflecting the prolonged uncertainty induced by the withdrawal from the European Union.   

Within-country analysis, using postcode-level data, is the first to unveil severe loan contractions in rural and peripheral areas, as well as in regions with high EU export proportions, highlighting regional disparities in Brexit's impact on SME lending. 

The new findings demonstrate how effects of Brexit are unevenly distributed across the UK. Peripheral and rural Local Authority Districts and regions with high EU exports per capita experienced a disproportionate decline in SME lending.  

Also uncovered is the fact that regional disparities in access to finance highlight how Brexit has intensified the UK’s entrenched issue of regional inequality, further disadvantaging already vulnerable areas. 

The 5 worst hit Local Authority Districts in the UK in 2016-2017 are: Derbyshire Dales, Hambleton, Mid Suffolk, Stratford-on-Avon, and Dumfries and Galloway.  

Cem Soner, Doctoral Researcher at Bangor Business School said, “The initial impacts of Brexit, such as the plummeting pound and stock market, were immediate; however, the medium- and long-term effects at country and regional levels remain uncertain. Our findings emphasise the importance of economic geography and the role of local conditions in shaping access to finance during shocks.  

“These results call for regionally tailored policies that specifically address the resilience and financial challenges faced by SMEs in rural and peripheral regions, in order to address these imbalances and foster economic recovery across the UK in the post-Brexit era. They are essential to ensure that all regions, especially those hardest hit, can access the finance they need to grow and thrive. 

The researchers made use of a pioneering dataset from UK Finance, detailing SME lending data across more than 10,000 postcode sectors. 

The data showed peripheral and rural Local Authority Districts experiencing lending contractions of 5.15%, 3.28%, and 1.97% in 2016, 2017, and 2018, respectively. 

Professor Rasha Alsakka leads the Credit Risk Research Group within the Institute of European Finance (IEF) at Bangor Business School said, “It’s important to remember that SMEs form the backbone of the global economy, including the UK, accounting for the majority of businesses and jobs. This is particularly the case in peripheral and rural areas. With the Government's intention to address regional economic inequalities and boost growth in the UK, this study provides a solid foundation for designing effective, evidence-based policies that promote economic stability, regional resilience and cohesion across all areas.”  

Dr Noemi Mantovan,  Senior Lecturer in Economics at the University of Liverpool added, “We know that improved access to finance for SMEs can drive their resilience, economic growth, create jobs, and foster a stable economy. However, many SMEs face challenges in securing loans due to their size, limited collateral, and perceived risk. This is despite evidence that rural SMEs can perform similarly or better than their urban counterparts in terms of operational performance, innovation capacity, and export capabilities.” 

The paper can be read here: https://www.sciencedirect.com/science/article/pii/S0743016725001238