As banks retreat from lending, innovative financing models are filling the void

HIGH inflation and rising interest rates have reduced the availability of credit around the world. Banks, in particular, are less willing to provide loans. This funding crisis exacerbates the current trend that sees banks adjust their business models – often under regulatory pressure – to a more conservative posture. They have primarily become custodians of client deposits and asset managers charging for a service.

In other words, the traditional banking sector is increasingly bidding farewell to its fundamental role of extending credit to businesses, which is necessary to keep our economies functioning. Hence businesses and projects in need of financing find it more difficult to get loans. They have to look elsewhere.

This industry shift has created space for new types of investment firms that are willing to take the risk that banks are no longer interested in bearing. Private equity (PE) and venture capital (VC) firms, angel investors and family offices have entered the lending space, acting as “shadow banks”. They seek to exercise more control over their creditors than banks. But they are also able to engage in riskier projects and transactions.