[Recorded by Electronic Apparatus]
Wednesday, April 26, 1995
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[English]
The Chairman: I apologize for the delay, but as you know, we had a vote in the House and it's unavoidable.
The order of the day is pursuant to Standing Order 108(2) and pursuant to recommendations contained in our report Taking Care of Small Business and documents released with the 1995-96 budget. We shall resume a consideration of a study with the major banks to devise performance benchmarks for small business financing.
Today I'm pleased to advise that we're receiving the Canadian Federation of Independent Business. I understand that Mr. Gray, Mr. Cléroux and Mr. Whyte are here from the Canadian Federation of Independent Business.
Welcome, gentlemen. I understand you have some brief opening remarks.
Mr. Brien Gray (Senior Vice-President, Policy and Research, Canadian Federation of Independent Business): We're going to try to keep to our 10-minute allocation.
The Chairman: I want to remind members that it was at your suggestion that we agreed the Canadian Federation of Independent Business would come forward in attempting to round out the hearings we've held with the banks. I'd ask both the witnesses and the members to try to stay fairly focused on what the job at hand is. This isn't a wide-ranging discussion. It is a very focused discussion on the issue of performance benchmarks in both behavioural and statistical terms. I'd appreciate it if both the witnesses and the questioners could do that.
Please, Mr. Gray, proceed.
Mr. Gray: Before I begin, you have met Mr. Cléroux. He's our vice-president in Quebec. Garth Whyte is executive director of national affairs and operates out of Toronto.
The Canadian Federation of Independent Business, which represents 85,000 small and medium-sized businesses, is very supportive of the principle that we must collect more relevant statistics on the financing needs of the small business sector in the country.
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What exists today is woefully inadequate.
You will recall that we appeared before this very committee almost one year ago. At that time, we made a specific recommendation on the issue to you. It was that government and the banks should provide more and better data to assist all players better to understand and serve the needs of the small business sector.
The present debate on small business financing has demonstrated the need for clear data on bank lending by age, size, sector, loan size and institution so there is no argument as to what is happening in the marketplace, what is in and what is out. The data must be disaggregated into units of under $500,000 and under $200,000. Also, service charge information needs to be disaggregated. This message was not new. We had been calling for this kind of action for some time.
What was new in 1994, however, is that we witnessed no fewer than five major reports, which dealt in whole or in part with financing problems faced by small business: the Toriel report, the Mitchell report, CFIB's own report, the industry committee report and the Small Business Working Committee report. The common theme evident in all of those reports was that there was indeed a serious small business financing problem in the country contributed to in large part by the banks. Indeed, the problem continues. CFIB's recent survey of 19,000 small business owners shows that almost one-third of the respondents, 32%, identified the availability of financing as a high priority. In some provinces the concern is over 50%, for example in Newfoundland and P.E.I.
I might just ask Garth Whyte to explain very quickly the tables at the back of the remarks.
Mr. Garth Whyte (Executive Director, National Affairs, Canadian Federation of Independent Business): If you could, just go to the tables at the back. We put this in here to put in context why we feel you need performance measures, or to measure banks.
Quite frankly, from our perspective, it is a job creation issue. Small business, firms of less than 20 employees, over the years have created virtually all the new jobs across Canada. We survey our members on a regular basis and historically the number one issue - no surprise to anyone here - is the tax burden. Second is the paper burden.
Another concern that keeps popping up year after year is small business financing. In our recent survey, which had, as Brien pointed out, 19,000 members replying, a third of our members identified this as an issue. Last year it was as high as 38%. So it varies from year to year.
In the next chart we just split out that problem by looking at it provincially. If you look provincially, it varies from region to region and it varies from year to year. If you look at Newfoundland and P.E.I., over 50% of our members identified this as an issue.
Again, to put it in context, later Brien will say how we want the information broken out. Of course, we'll want it by province and by region.
Finally, we broke it out just by size of firm in gross sales and thousands of dollars. Again, not surprisingly - but it doesn't seem that most people present here have brought this forward as a consideration - but the smaller the firm, the higher the concern with small business financing.
It is very important. It is one thing to say we're going to measure loans of $1 million or less or $500,000 or less. Our membership's average loan is $50,000. The SBLA average loan is $60,000. It is critical that you realize it is the smaller firms that are creating most of the new jobs and therefore we have to bring it down to a certain size so you can measure the problem.
Mr. Gray: At least three of the reports in 1994 called for more extensive and meaningful statistics on what is going on; your own committee report, our report and the Small Business Working Committee report.
CFIB is very pleased to have the opportunity to appear before you today to discuss the very important issue of statistics for small business. We are encouraged that you are pursuing the issue and that the Minister of Finance sees it as important as well.
On the other hand, we find the government's response to your own committee's recommendations in this area weak and disappointing. The response appears to buy the bank's predictable argument that provisions of this needed data will be too expensive to produce and difficult to interpret and the data collected through surveys was a better way. With respect, we feel that response is a cop-out. It will do very little to address the problems this committee has identified.
The argument over benchmark quotas is, from our perspective, a bit of a red herring.
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The real issue is that of data, not terminology. There are severe data limitations. We can't get at the data and we can't meaningfully disaggregate it for any particular point in time.
As a result, we witness the frustration that all parties have had in getting to the root of the problem. More time is spent over whether our members' numbers are accurate or the banks' numbers tell the true story, than time is spent resolving the real issues at the base of it.
[Translation]
Mr. Pierre Cléroux (Vice-President, Quebec, Canadian Federation of Independant Business): Why is it important to obtain real data? Because it would benefit small businesses, public policy makers and the banks themselves. The banks argue daily about ``the need to permit free market forces to work''. Few would argue with that principle.
However, for market forces to truly work there needs to be true competition and useful consumer information. Free markets don't work if the consumer is not informed and right now the consumer cannot obtain meaningful information.
From the public policy perspective, the data are required in order for governments to make decisions on critical public policy issues such as Bank Act Revisions, Small Businesses Loans Act expenditures and the like.
As for the banks, despite their indications to the contrary, much of the information is currently collected. Further compilation of the data would provide them with better information to more effectively and appropriately serve the needs of their small business customers.
For years collective bargainings suffered from endless disputes over data, over whose numbers were right. Today, the data are collected in a manner acceptable to business and labour and, as a result, negotiations can concentrate on the bargaining issues.
What do we require? From CFIB's perspective we feel that the following items are important: build an appropriate base and give parties a reasonable time to gear up, build a data history over time which would allow us to appraise the situation over a given period, use data to track trends in small business lending and financing.
The data should be broken out along these lines: by sales, assets, type of loan, loan size, turn downs and gender of the owner; by institution, province and sector; by whether the loan is government assisted or not, like under the SBLA or the program established by Minister Paillé in Quebec.
There is also a need to unbundle service charge data related to business services. The Hatch/Wynant report underscored this need by indicating that these charges push up effective interest rates.
The banks have responded to these debates in the same way they did during the service charges debate - ``no need, can't do it, too costly to provide, what's its usefulness anyway?'' The reality is that the banks will not accede easily to any consumer demands for better real information. Although the bank service charge environment still requires much improvement, consumers are in a much better position to make informed decisions than they were in the past.
[English]
Mr. Gray: The banks complain that they do not want quotas. The irony of that position is that many of these institutions establish quotas in their lending practices by sector and by region.
The CFIB urges the committee not to fall into the trap of quotas or using the benchmark term. Relevant statistics are required on a quarterly or half-yearly basis, to be used to monitor and evaluate bank performance and market demand and supply factors properly at a point in time, and over time.
The information is largely there. If the banks were truly forthcoming they would agree that currently they ask entrepreneurs for extensive information, which includes complete financials, usually for a minimum of three years, balance sheets, income statements, cash flows, equity positions, spousal financials, detailed lists of assets, numbers of employees, growth rate information, personal financial information, business sector, and in many cases the gender of the firm owner.
The banks cannot argue that they don't collect the data. They may, however, justifiably argue that it is not in a form that would be useful to this committee. Therefore they should be given some time to gear up.
This issue is of critical importance. When the industry committee released its report last year, we spoke publicly that perhaps the most underrated or underappreciated recommendation was that of number two, which dealt with the compilation and publication of statistics on bank lending to small business. We argued that small entrepreneurs armed with better information would be able to make informed decisions in terms of which financial services institution or institutions best served small business in Canada across a range of services. Better information in this area is indispensable to an improved functioning of this market.
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The response of the government to this committee and others on this issue is unacceptable.
In addition, what has been done so far by the banks and the federal government on statistics has been inadequate or misleading. This is an issue of responsibility and accountability. Although this committee and the minister have recently been criticized in some quarters for pursuing the statistical data issue, we would encourage you, in the interest of small businesses in every party of Canada, to respond positively to this vital need expressed by the small business community.
Mr. Chairman, I'd like to finish by saying that I fully recognize what happened yesterday. Our remarks were made before those announcements. I congratulate the CBA, and through them the banks, for their forthcoming proposal. I must say that to some extent - I'm from Missouri - I'd like to see the details of the proposal.
The Chairman: You and Mr. Discepola.
Mr. Gray: I would like to re-emphasize that this is a significant move and I think you should all be congratulated. I think we should take some credit as well. We've pushed for this for a long time. But what it does is it points to the validity and the importance of your deliberations here. I am absolutely convinced that had you not pushed for this kind of measure, it never would have occurred.
Thank you, Mr. Chairman.
The Chairman: Thank you, Mr. Gray. Let me publicly say that the CFIB has been an important source of inspiration to a lot of the members around this table. It becomes important in this public debate that we have balance. I think a lot of us, particularly our new members of Parliament, were hearing things from constituents that were different from what was coming forward. Certainly the CFIB has been very helpful.
I'm not as sceptical as my colleague, Mr. Discepola. I think the CBA will come forward with some very positive numbers. I'm very hopeful that our child that we've hatched here is growing up a little.
Mr. Schmidt.
Mr. Schmidt (Okanagan Centre): I would like to commend your page 2, the paragraph that says the argument over benchmarks, quotas, etc., is a red herring. I think you've articulated extremely well the core issue on the debate. I would like to ask you exactly how you could avoid misusing or abusing the information so that indeed they don't become quotas or benchmarks and it is data that is constantly updated and that can be used as information to make new and meaningful decisions. Too often quotas and benchmarks are abused. They do become either ceilings or bases which are really artificial because they do not take into account the particular economic cycle or whatever else was operating to establish those particular reference points.
How would you propose that we interpret this data so we don't fall into that difficulty?
Mr. Gray: Thank you, Mr. Schmidt. First of all, I must emphasize that the federation has never called for quotas.
Mr. Schmidt: I didn't say you did.
Mr. Gray: No, but I'm just using that as a preamble.
We have now been generating statistical information on the banks since at least 1978. The reason we do it is that we feel it's an important element in contributing to the public policy knowledge in this country on small business financing. Certainly at times the banks haven't really enjoyed it, but I think it does keep them accountable.
I think this time last year when we appeared before the committee we talked about this a little. What we said at the time was we thought it was important, as we reflect here, to keep the data in order to have a trend over time and so you can see factors working with each other and whether there's a correlation. I know that Mr. Mitchell has talked a little about these kinds of issues. But if you don't have any data, which is what the case has been to date, I think the consumer is ill-informed and policy makers are horribly informed.
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Take the SBLA data, which the minister has just had to make decisions on in the last several months. In order to collect relevant data for understanding the policy implications of that, we helped Industry Canada, along with the CBA, derive the data. Now, that was long and tedious and frankly ought not to have had to be done. But it's in that kind of context I would say that the generation of this data, to me, has a lot more up side than down side in terms of the possible abuse. I think it's incumbent upon all parties to act responsibly in the interpretation of the data.
I don't know any better answer than that.
Mr. Schmidt: May I perhaps approach it from another point of view then. A benchmark, by whatever definition, is often used as a sort of performance indicator or a reference point against which you compare past performance and anticipate future performance. That doesn't mean it's a quota, but it is a performance measure. Would you agree it could be used as a performance measure?
Mr. Gray: Yes, I suppose it can.
Mr. Schmidt: Okay. If you agree that's the case, would you then also be able to interpret from that either better or poorer performance, and so on down the line, with not only the value of the loans or the loan volume, but also in terms of service and the handling of complaints?
Mr. Gray: It's an imperfect science. Take satisfaction, for example. I read that one of the banks said most of their customers were satisfied and if they were generally satisfying their customers we shouldn't be worrying about them. The question I had reading that testimony would be whether 30% dissatisfaction is an acceptable measure of satisfaction. I would say no. I think a lot of this is, frankly, just a way of watching the market. We watch the market through price stock indicators and so on. They become forms of benchmarks over time.
Mr. Schmidt: Yes.
Mr. Gray: You have to start somewhere. If you can get the parties, and I would suggest small business ought to be involved in the figuring out of which data we are actually getting out, the banks, of course and the government, and I would say the things should be kept and monitored by a third party that's independent so we don't get into possible abuse.
Mr. Schmidt: So would you ever place a label such as adequate or inadequate performance on these performance indicators?
Mr. Gray: I'd have to see the data. We generate our own data. If we find that only 25% of our members who seek a loan are getting it, is that adequate or inadequate? You have to, at some point, interpret the data.
Mr. Schmidt: Let me go back one step further. On the first page you suggest that aggregating the data on $200,000 would be adequate. Is that correct?
Mr. Gray: No. I think you have to go beneath that.
Mr. Schmidt: So where would you cut the adequacy level then?
Mr. Gray: In terms of what the break outs would be?
Mr. Schmidt: Yes.
Mr. Gray: As Garth mentioned a minute ago, the median loan in our last survey was $50,000.
Mr. Schmidt: Median?
Mr. Gray: Median. That means half of the loans in our constituency were beneath that and half were above it. So I would argue that you probably should have at least $0-$25,000, $25,000-$50,000, maybe $50,000-$100,000, and so on, because otherwise you're not getting at the true, as Garth shows here.
The other thing about statistics is this. Take SBLA; the banks would say they have really done the job on SBLA using dollar volume statistics. Now, dollar volumes are a really misleading indicator, because the threshold went from $100,000 to $250,000.
Mr. Schmidt: That's right. Precisely.
Mr. Gray: An awful lot of activity can go on there making it look as if the banks are doing an awful lot more. What I argued with the minister was there should be statistics on the number of loans put out, not just the volumes.
Mr. Whyte: If I could just throw in a comment, I think some banks will look at this as a threat; others will look at it as an opportunity. Really, from a policy decision maker's point of view, an MP's point of view, or even a consumer's point of view, you want comparative data so you can ask the questions why, and how can we fix it.
You're from B.C. It's the lowest level of concern among our membership. Why? Compared to your neighbour next door it's almost 10 percentage points higher. Why?
If you look at linking with job creation, that's the major plank of all parties, and you want to look at how small business financing impacts on that, the question is why? We don't have a lot of the information. We can give you our information on small business concerns and break it out, and we can try to answer those questions, but sometimes it's like hitting a black hole.
There is a dearth of statistical information from the banking community on some of these issues.
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So we're trying to push it.
Mr. Gray: Let me take another example. I believe the CBA shared some data with you that said $39 billion was available to small business and there was only $27 billion taken up. That creates as many questions as anything else because you have this big number underneath which anything could fall. Does Magna have a bunch of loans in under there? Do you have a lot of big businesses with loans under there? It is not broken out or it is not clear.
Most small firms have to go and get a lot more than they need on a line of credit, if they indeed can get it, in order to fudge, to have a buffer. If they kept going back only if they needed it, to get a little more, they would probably be seen as poor managers. I submit Mr. Mitchell, as a former banker, will probably agree to that.
There are a lot of reasons why there's not the same take-up. I would suggest that number is not really a relevant number, certainly not in the form it has right now.
The Chairman: I am just watching our time because I know, Mr. Schmidt, we have another vote. Are you aware of that?
Mr. Schmidt: Yes.
The Chairman: Mr. Mitchell.
Mr. Mitchell (Parry Sound - Muskoka): Welcome, gentlemen. I appreciate your testimony.
First of all, I didn't notice when you were asking for the type of data that you indicated industry type. Is that an oversight or is that something you don't think is relevant?
Mr. Gray: I think we said sector, which suggests industry.
Mr. Mitchell: So you do believe getting it by industry?
Mr. Gray: Yes.
Mr. Mitchell: I just wanted to make sure of that.
One of the things you said, and it is something I agree with, is that you need the data. You need to have the information form a trend line and you need to be able to make comparisons. In your view are those comparisons and evaluations appropriately done strictly by the consumer, your members, or is it appropriate that those evaluations be done and commented upon by politicians?
Mr. Gray: I think it's also useful. Again, I go back to my final comments in my statement. Without a public forum where you discussed this whole issue, I don't think there would have been movement by the banks. To take that further, if you people aren't watching the generation of the statistics and their relevance in a fair way, then I would submit the public will not be as informed consumers as they could be.
Mr. Mitchell: Would you believe it would be fair if we looked at year-over-year statistics and we saw that bank A had increased 20% in a particular sector and bank B had only increased 5% or declined 5%, that it would be an appropriate thing for us as politicians, in an open session, to ask bank B to explain why they weren't performing at the same industry level?
Mr. Gray: I think that's fair. There may very well be fundamental underlying factors that are fully justifiable, that relate specifically to the market situation of that bank, and that are differentiated. I think it's a legitimate question.
Mr. Mitchell: One of the things the CBA talked to us about yesterday, I think they used the term approval ratio and I use the term turn downs. They were going to provide some information on it. Now, if you go through their presentation, that information is going to be provided by way of survey as opposed to by way of hard data. Do you have some concerns over that or are you satisfied with the survey methodology to provide that information?
Mr. Gray: The data we have used have been by survey and I think our data are pretty darn good.
There's another way, perhaps. The code of conduct kind of requires the banks to keep track of turn downs. Maybe there's a way through the code of conduct to be able to gather that information. The banks, it seems to me, have said they are going to keep track of complaints under the code of conduct. If they're keeping that kind of information, maybe it's a natural to gather the stuff on turn downs and the reasons for the turndowns. That's an expense already incurred.
Mr. Whyte: There's another issue that hasn't been brought forward, and I guess you'll be thinking about it. The question is who collects it? Who interprets it and delivers it? I believe in the CBA's presentation they were offering to deliver it. It's like the fox guarding the chicken house, isn't it?
I don't know if the CBA includes other groups, such as coops or credit unions or other things that may want to be brought into this informational collection process. I think that's another consideration the committee will have to look at.
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The Chairman: Correct me if I'm wrong. Didn't they indicate they were going to try to do that?
Mr. Schmidt: Yes, they did.
The Chairman: Whether they will do it or not, yesterday I think Ms Sinclair did say it was one of their items. Yes, here it is right here. It says ``bring in smaller banks and non-bank lenders'' and then it says ``where possible''.
Mr. Gray: That's great. I think the real issue here is the method of collection and verification by a third party. I think it has to be at arm's distance from the banks themselves.
Mr. Mitchell: On that point, the banks, the CBA, also indicated in their presentation that they were going to undertake some long-term and in-depth research. Of course, one of the questions that comes to mind is just the one you are bringing forward. There has to be some credibility to that type of research.
Do you see the value in the CBA undertaking that? Do you think it should be somebody else undertaking it? Is there a way to protect the credibility of that information? Would you, for instance, go in cooperation with the CBA to do some of that research?
Mr. Gray: Listen, I don't think I should say to the CBA they ought not to do a study on their perspective of the market and how it's being served, nor should they have any concern about me doing it. Both pieces of research contribute to the debate. I wouldn't like to see the kind of interference that says the only information that's relevant is that coming from a joint research study of the CBA and CFIB. There are many other people who do fine research in small business financing. I think we have to look at all the sources.
Frankly, the innovation and some of the stuff that's come forward in terms of all the things that have been delivered in 1994 are an accumulation of a lot of fine research from a lot of different sources.
Mr. Mitchell: I have one last question. Mr. Schmidt was talking about it and I want to make it clear in my mind.
Do you believe the issue of looking at service, be that the complaint resolution, you said sure; the ombudsman, you said sure; or a number of other service related things the banks have put forward are appropriate benchmarks? Do they really demonstrate the effectiveness the banks are having in servicing the small business sector?
Mr. Gray: We do some of that ourselves. I think it's important to a point. But I differ on, for example, contentment with the code of conduct or the ADR process. I guess my view is that those two vehicles are important to some degree, but the bottom line is availability of credit. If you don't have it you're not in business in many cases.
About service, I think it's worthwhile collecting it. I think the most valuable information is where you ask the respondent if they feel they are getting value for money. At the end of the day, that's what counts for the entrepreneur.
The Chairman: Ms Bethel.
Ms Bethel (Edmonton East): That covers all my questions. I just want to say that I appreciated this particular research. I think it was very helpful during the debate.
They talk about how they're going to measure customer satisfaction in a number of areas. I guess my question to you is going to be what are those areas? Value for money is one. Are there any others?
Mr. Gray: Yes, service charges. We've made a point of saying that we think you should be looking at the disaggregation of service charge information. The banks argue that we should unbundle service charges. Maybe we should unbundle the information related to service charges by banks, so again we can track it a little. There's no scientific evidence of this, because again, we can't get to the data.
Our members would tell us, and we believe, that service charges, although they had a freeze for a bit in the late 1980s, and again they are starting now a bit, were a huge growth market for the banks. The banks got burned somewhat in the early 1980s recession and I think they've gone to using service charges as a real money maker. Even Hatch-Wynant pointed out that if you look at effective rates, service charges are a component of effective rates, and that has propped them up.
So I think you have to request that this come forward, because I think it's an important element of the debate. It is an important element of the relationship between the small business entrepreneur and his or her banker. I would really encourage you to track it, because right now it is in a big glob that includes interest income, stuff from mergers and acquisitions, some of that big ticket of fee-for-service information, and it's all lost in there. I'd like to see a much better tracking of that kind of information.
Ms Bethel: The other thing that didn't come up under approval rates, your research indicated that women entrepreneurs pay more in rate of interest. How and where would that be tracked?
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Mr. Cléroux: We did a very extensive study on that. What we did to compare women entrepreneurs and men entrepreneurs was we took similar businesses according to six different factors, for example, the same sector, the same size of business, the same age of business, etc. We compared two similar businesses, with one owned by a woman and one owned by a man. What we realized is if you are a woman, you pay more in interest rates than if you are a man. Actually, 50% of them pay more than one percentage point more. For example, if a man would pay 8.5%, the woman would pay 9.5%.
Ms Bethel: So how do we pick this off? Is that under approval rates? Here they've said that for approval rates they'll conduct an annual survey which determines loan approval rates and causes for turn down. Is that where...?
Mr. Cléroux: That's why in one of the places we ask for the sex of the owner. If you have the data on what you've just mentioned and the sex of the owner, with the cross-data you will be able to find out if women entrepreneurs are getting the same treatment as men entrepreneurs.
Ms Bethel: They've told us they'll provide break-outs for gender of owner, sales level, number of employees, age of business and industry sector. Will that enable us to track whether in fact women are being charged a higher rate of interest?
Mr. Gray: It should, because if you take the matrix cross tabulations you should have as a base, ownership of the firm, male-female. Then you go against all the others, loan size, turn downs and so on and you compare across a whole bunch of interest rates.
Ms Bethel: Mr. Chairman, I'd just like to flag that as an issue for this committee. We need to determine if there is systemic discrimination in the way women entrepreneurs are treated. I think that's a really important issue we need to deal with.
The Chairman: Thank you, Ms Bethel. I'd like to speak on that, before we invite Mr. Schmidt for another round of questions.
If you followed the hearings of the banks, you may remember a number of our colleagues - Ms Bethel was one of the more prominent ones - asked questions of the bank about your CFIB study specifically. Did you want to comment on their response to the study? I'm trying to be fair here. The bank said to us - and I think I see some bank types out there, so they can tell me if I'm wrong. They questioned the survey. They questioned whether it was anecdotal.
Did you want to make a comment? I think the study was kind of thrown out the window a bit by the banks. So we'd like to know, do you do good studies?
Mr. Gray: Mr. Chairman, as much as I'd like to take that question, I think it's only fair because the person who did the original research is here, and I think it's incredibly good work. He works directly for Pierre. He would probably feel very good about answering that question.
Mr. Cléroux: Yes, the study was done in our office in Montreal. It's a national study, but we do our research in every part of the country.
I can assure you we knew the subject was extremely sensitive, so we decided to make a very extensive effort to do very good research. We used two different statistical models. Although the banks criticized our study, they never criticized the study technically, obviously because they couldn't find anything.
As I explained a little before, we used the fact that when you receive financial conditions, it depends on the size of your business. It depends on the sector of your business. It depends on how long you have been in business. So we really made an effort to compare similar firms. Since we had 11,000 - not 1,100 - firms in our sample, we were able to match exactly similar businesses owned by women and men. We strongly believe our results are extremely solid.
On top of that, there's a study done by Mr. Riding, a teacher at Carleton University. If you look closely at this research, one of its conclusions in the appendix says if you are a woman you are more likely to see a loan rejected than if you are a man.
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Our conclusion is exactly the same. We went further. We are saying if you are a woman you have a 20% greater chance to see a loan rejected than if you are a man.
For us, not only is it unacceptable and an insult to any woman in Canada, but it has a very important impact on the economy. Fifty per cent of all entrepreneurs under the age of 25 in Canada are women. That means that in 10 years 50% of the entrepreneurs will be women. If they don't have equal access to capital or to financing, you are reducing the potential of those companies. You are reducing their potential to create jobs and you are reducing the potential of the economy.
The Chairman: The reason I asked the question is that I think it becomes important for us in trying to put together our report to get that information on the record. I became worried afterMs Bethel and others were questioning these bankers and getting their responses, and I was looking forward to this opportunity to get you on the record. I think sample size was the issue, was it not, colleagues, they tried to argue. The bankers said sample size was an issue.
Ms Bethel: When we asked if they'd read it, some of them said no.
Mr. Cléroux: Obviously, we can't have a million firms -
The Chairman: No, but you're telling us how you did it, and I think -
Mr. Cléroux: - but we had 11,000 and we thought the sample was -
The Chairman: It sounds like a pretty serious study.
Mr. Cléroux: I think so.
Mr. Whyte: As a quick comment, we offer the banks to prove us wrong. Give us the detailed statistics, give you the detailed statistics on a whole bunch of issues, and prove us wrong.
The Chairman: That's an interesting challenge.
Mr. Schmidt.
Mr. Schmidt: I'd like to change the subject. I was very interested in this last piece of information, but before I get to that I have to give you a preamble.
I think what's happening here is there's a very salutary thing developing within the whole relationship as between small business and banks, and the willingness, it seems, to share information. I find that a very positive kind of thing.
But I'm from Missouri, like Nick Discepola over there. I want to see this actually happen. I think it will. Yesterday when we asked the question if it will really happen, we were assured it would. I'm very hopeful that it indeed will.
I want to get into some of the other substance as well. Somewhere along the line here we heard that about one-third of small businesses actually require access to capital in some kind of a loan form, be it equity or whatever. Roughly two-thirds then do not require that kind of access to capital.
You said earlier that maybe access to capital is much more important than satisfaction with the services provided by a bank. I'm just wondering if this two-thirds at any given point in time may not be using or needing access to capital, those thirds may shift around, so the group that wasn't needing that capital now does need the capital over here. Does the service satisfaction then not have a relationship to the need for access to capital at some other point in time, and is it not indeed a very necessary measure?
Mr. Gray: I'm not sure I followed the entire argument. First of all, I would dispute one-third. In our surveys I don't believe it was one-third; I think it was closer to one-half, at least.
The other thing is I think you're seeing lower numbers today than you might see in more prosperous times. One of the things that came out of our survey last summer was that a great many entrepreneurs have taken the position that they're not going to get a loan ever again because they've been burned too hard. They're not going to go back into the market easily. I think that's a huge indictment because the opportunity lost for the economy is very considerable.
About satisfaction and whether or not people are taking on loans, there are a whole lot of indicators of satisfaction. The critical one from our perspective was the one in terms of, if you need credit, did you get it. The reason I say that is it's vital to the operation of the firm. It's a depth issue as opposed to a breadth issue.
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You can go and get satisfaction as to whether or not the teller was polite. You can get satisfaction as to whether or not you have to do too much filing of financials for the bank. And so on. You can go through the whole list. But when you come right down to it, some are, in quality, far more important than others.
Mr. Schmidt: There's a little confusion in my mind now when you say that roughly half require access. I think it was the banks that told us it was roughly a third only that needed this capital. There's this discrepancy and we've heard this over and over again. Our constituents told us there was a problem. The banks told us there is no problem.
Mr. Gray: That's why you need the data.
Mr. Schmidt: Yes, exactly. I saw a coming together perhaps, with more cooperation. Maybe there isn't. I hope there will be after this because we certainly saw a very conciliatory, I thought, response from the bankers association yesterday, which I was very happy to see. If that can happen, I think it'll be great.
Mr. Gray: I think there's one part that the banks will have trouble giving you data on and that frankly, is one of the aspects of the study we did last summer. Some would say a rejection rate nationally of 17% or 18% doesn't sound like very much. What's inherent in the data is the fact that it is a very conservative number. The firms in our membership are generally a little more established, a little more mature, and so there is a bias, although we correct for that.
The fact is that those who were out of business, turned down and not in our membership - largely newer firms - all of those things weren't in that number. The banks won't be able to give you that number in the future because people who might have wanted to get along, but figured it's not even worth a try, you won't capture that data. It will be imperfect, but it will be a big improvement over what we currently have.
Mr. Schmidt: The one thing, and this is more of a philosophical nature than it is anything else yet I think it's fundamental to our discussion, is there seems almost to be a confrontational type of attitude between the bank on the one hand and the person who needs the money on the other. It seems to me that unless there is a symbiotic relationship where the two parties know they need one another, the banks need the business person to make money, the business person needs the bank to make money, if we take a confrontational attitude, the chances of that being a good cooperative relationship I think are diminished.
If we could come to a point where we say we need data, we are not going to take you to wherever to spank you with this data. We want this data so that we can make good policy decisions as business people and we want you to have the data so you can make good decisions about granting us credit.
Mr. Gray: I agree with you 100%. I would say that the most valuable aspect of a relationship with the bank is the relationship with the account manager. That gets into the turnover thing and everything.
In our statement, we talked about how the benefit of collecting the data, which isn't just for our members as consumers or policy makers such as yourselves, it's for the banks themselves to understand the market better and to serve it. Marketing 101 is what does the client need and how do we best service that? It seems to me the provision of better data will give them better information to make those initiatives.
Mr. Whyte: We also need the data, because I think part of the problem is definitional. A bank's definition of small business is much different from our definition of a small business loan. When you link it to job creation, five years from now 50% of the jobs will not only be created by women but by firms that aren't in existence today and in sectors. Some banks don't know how to lend to certain sectors. We need that information to see where the gaps are, not to punish the banks but to determine how we fill those gaps, how we deal with the alternatives.
Mr. Schmidt: The question I have ties right in with the last point Mr. Whyte made. I think you made a very careful point just a moment ago about how when you studied it, you compared men and women in similar industries so you didn't compare apples with oranges. You compared industries. If 50% of the businesses were by women who were under 25 years of age, 50% of new business were women and that would eventually bring it out there, are the sectors that are being developed in which businesses are pursuing entrepreneurial enterprises limited to a particular sector, or do they range the full gamut that you would find if you looked at all entrepreneurs in the area?
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Mr. Cléroux: You're talking about the women entrepreneurs?
Mr. Schmidt: Yes, I am.
Mr. Cléroux: They tend to be more in services and retail.
Mr. Schmidt: So there is a bias to a particular set of sectors?
Mr. Cléroux: Yes, for now, and we think there are two reasons. The first one is that most of the time you start a business in the sector you used to work in.
Mr. Schmidt: Of course.
Mr. Cléroux: Historically, because women tend to work more in services than the retail sector, they tend to start businesses more in that sector.
The second reason, which is probably the most important one, is women entrepreneurs are quite a new phenomenon. They have been starting businesses in the last 10 years, and the most progressive sectors in the last 10 years have been services. That's where the growth is. It's not strange that women are more present in this sector than in any other sector.
Mr. Schmidt: I'd like to pursue it one step further. The service sector is going to move more and more into the high-tech section. It's still going to be a service sector, but it's going to be very high technology. Will that still also include the women entrepreneurs? Will that be their primary interest?
Mr. Cléroux: I don't know. The only thing I know is -
Mr. Schmidt: Is it now?
Mr. Cléroux: - in our engineering schools there are more and more women. So I don't see why technology will frighten women. Who knows where women are going to be in 20 years? I think they are going to be in any sector and in any type of business.
Mr. Gray: I have one quick addition to that.
I think there is a problem of the banks - and they will admit it themselves; this isn't new information - of understanding the knowledge-based and high-tech sectors. There has been a lot of work done on that. I think we have to solve that. In solving that, whether it's a woman or a man in that sector, that will be enhanced. That's the first objective. If there's also gender discrimination, we'll get to that as well.
The Chairman: Mr. Discepola.
Mr. Discepola (Vaudreuil): With your survey you say that business financing is a priority. Among your members, is access to capital or the lack of access to capital a problem for them? Are they getting all the money they request?
Mr. Gray: About whether they're getting as much as they'd asked for, that's something we looked at very carefully in 1989. By and large they weren't. I don't have the data in my head right now. That is a study that is some years old.
We found there was a rejection rate, and then there was a situation of not reaching the goals you set out to get in terms of what you were asking for in the capital. So when we say access to credit, we're talking about both phenomena: whether they got capital at all or whether they got as much as they required.
Mr. Discepola: The thing on my mind is that you're from Missouri and I'm from Missouri, Quebec. I'm very sceptical. It's only because I've lived the experiences. I won't cite one bank, because recently, in the past four or five years, I've switched some of my small businesses to other banks. I put them all in the same boat.
If we can get beyond the definitions, and you've stated some here, and I think we're not even going to get to first base on the definitional issue. The banks are going to say that those people who want $25,000 or $50,000 - excuse the expression - are a pain in the ass for them and they are not prepared to service them. I really think they're not able to service that little niche of the $50,000 to $100,000, which is the majority of small businesses.
When you get beyond the size of the loan definitions, what constitutes a loan request, if I as a small entrepreneur have to mortgage my house and give that as collateral, or put on an extra loan, or lease versus finance some pieces of equipment, I don't think we're going to capture all these types of things in the data. So I'm sceptical of the usefulness of the data, especially when you tell me that your group didn't really ask for it.
Mr. Gray: We didn't ask for quotas; we did ask for data.
Mr. Discepola: Then I'll ask my question directly. How will the data help what I consider is the single most important issue here? Maybe I think the banks in the last week or so have sort of digressed the focus of the discussion. We're still on access to capital to small businesses. I don't see how the vast majority of the data is going to help the small business entrepreneurs in my riding to get that access to capital they desperately need. Knowing that bank A has x% satisfaction rate and bank B has x plus two or x minus five doesn't help put that access in the hands of the people who desperately need it.
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[English]
Mr. Gray: I think you make a very valid point, a very strong one. My understanding of the CBA's offer yesterday was that they were willing to look at a number of items but that there was going to be a lot more discussion and negotiation. I would hope that there would be before anybody decides what it is that people want.
I will refer you to our report in 1989 - and I will make sure you get copies - which looked at the very issue of not only were you turned down, but did you get as much as you required, and if not, why not, those kinds of issues.
Getting back to your earlier thing about the $25,000 loan, for years one of the things we've pushed for is that if the bank, as it has traditionally done, looks at the small business account simply in and of itself as a small business loan, then perhaps it isn't that profitable for the bank and let's not bother with it.
We've always submitted, and we're going to try to prove this point, and the banks surely can prove it because they phone me every night asking for information on my RRSP. They should be able to find out what the total value of that business relationship is, not just the business loan, but the car loan, the mortgage on the house, all of the spin-off accounts that come from that original business loan, the RRSPs, you name it. There's an awful lot of spin-off, and I think in order to measure the true value of the business account you have to look at all of that.
The Chairman: I'm going to jump in because I know Mr. Discepola would like his colleague Mr. Bélanger to have a quick question.
Mr. Discepola: Absolutely.
[Translation]
Mr. Bélanger (Ottawa - Vanier): That survey you are referring to is the one that was made in January 1995, is that correct?
Mr. Cléroux: In fact, the survey was done in July 1994 and the results were analyzed in January 1995.
Mr. Bélanger: And 19,000 members have been surveyed?
Mr. Cléroux: There were two surveys.
Mr. Gray: But the study on women was based on a data bank that was...
Mr. Bélanger: I am referring to the survey that you mention in your presentation.
Mr. Cléroux: There were 19,000 members surveyed.
Mr. Gray: We regularly and continuously poll our members.
Mr. Bélanger: Yes, but of those 19,000 people, how many responded? What was the participation rate?
Mr. Gray: During the renewal interview, each of our members are asked some specific questions and through that process, for that...
Mr. Bélanger: Let me first finish my question. What was the participation rate among the 19,000 members?
Mr. Gray: Of the 19,000 members?
Mr. Cléroux: There were 19,000 respondants.
Mr. Bélanger: Out of how many members?
Mr. Cléroux: Out of 85,000 members. But they did not all take part in the survey. This is a face to face interview process.
Mr. Bélanger: So that all those who are interviewed answer your questions. What approach did you use to select those 19,000 respondents out of your 85,000 members?
Mr. Cléroux: Over one year, the 85,000 members have been visited.
Mr. Bélanger: When you talked financing with your members, in your mind or in those people's minds did the concept of financing mean ``credit'' or ``credit and equity''?
Mr. Cléroux: I think that is part of a general question along the following lines; have you got the funds necessary to the growth or expansion of your business?
Mr. Bélanger: It does not necessarily deal with credit?
Mr. Cléroux: It does not necessarily deal with credit.
Mr. Bélanger: That does not refer exclusively to banks.
Mr. Cléroux: No, it does not.
Mr. Bélanger: If I understand correctly, 32% of those 19,000 respondents say it is a priority.
Mr. Cléroux: It is a high priority.
Mr. Bélanger: Therefore, 68% of them consider it is not a priority. What is the priority for those 68% of respondents?
Mr. Cléroux: One of the question was: what is your highest priority? Possible answers included tax burden, regulation, and among those major priorities, 32% said that access to financing was their highest priority. Therefore, that means that those people did not get the necessaray funds, whether it be a credit margin, a loan...
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Mr. Bélanger: Does that mean that in terms of access to financing the other 68% had no problems at all?
Mr. Cléroux: It simply means that they had less difficulty and do not consider that issue as an absolute priority because they have access to adequate financing.
Mr. Bélanger: But what is their priority?
Mr. Cléroux: A reduction of payroll taxes.
Mr. Bélanger: Thank you.
[English]
The Chairman: I want to thank you very much. I apologize for jamming you into two time votes.
One thing I know is that our committee does welcome the balance we get from the Canadian Federation of Independent Business, and on the issue of the turn down stats, I'd like you to maybe turn your thoughts to that and if you've got some suggestions, I see some of the colleagues from CBA and bank types out there, they'd be anxious to figure out if there is a way to put that idea together. I think, CFIB, we'd appreciate your doing that. So Mr. Gray, Mr. Cléroux, Mr. Whyte, thanks.
We are adjourned until our next meeting on Tuesday, May 2, when we'll hear from the Hon. David Dingwall, who will appear before us on the estimates for ACOA. Thank you.