Bring back post-war aid for firms.

Byline: SARAH GREEN 

SMALL and medium-sized enterprises (SMEs) are the engines of economic recovery. They create the most jobs, develop innovative products and services and put the creativity into creative destruction.

But there's a problem. The UK banking system is likely to take years to heal after its major surgery and meantime will tend to be risk-averse.

Although our banks are increasing lending to business, there is still a sizeable funding gap to be filled, left by the departure of foreign banks and other non-traditional lenders.

In a more hostile economic environment, SMEs are going to need more equity in their balance sheets, and the Stock Exchange is not always an easy pathway. Funding pressures may get even more intense when recovery actually gets going.

Companies have been running down working capital aggressively in the past six months, and once order books start to fill again, they will need fresh sources of capital.

All this explains discussions now under way in Whitehall and the City about recreating something like the Industrial and Commercial Finance Corporation (ICFC), a financial institution launched at the end of the Second World War that for decades provided long-term growth capital that helped small firms flourish.

ICFC was initially funded by the clearing banks and the Bank of England and took a highly commercial approach. But it did not seek to maximise profits in the short term, and pro bono publico was a (largely unspoken) part of its philosophy.

Its success was partly built on regional offices with good local knowledge. Its original mission was to start funding where the banks left off and to end at the point where the Stock Exchange could take over. In its first 50 years it was reckoned to have helped more than 11,000 businesses.

Now would be a good time for such an institution to come into the market. But funding may be tricky - the institution's funding. Up to half would come from the taxpayer at a favourable rate, so reducing the cost of capital for private investors. The rest would come from the private sector. Ideal investors would be pension and insurance funds, looking for long-term, equity-type returns from relatively low-risk investment (thanks to taxpayer support).

If that was not practical, maybe the banks could be persuaded to chip in - providing funding for some years in which the new institution could show its worth. A new ICFC would not be a quick fix: it would take time to have an impact. But the gap its predecessor left has not been filled and is very obvious today. This is an idea that could gather momentum.

Sarah Green is CBI regional director