Companies are reluctant to borrow for investment purposes with the trend limiting ‘the scope for productivity’
“The decline in net lending to SMEs continued in Q3 of 2025, standing at 6.9pc year-on-year,” its latest Quarterly Bulletin says.
New lending from non-banks to Irish businesses stood at €910m in the second quarter of 2025, down from €972m in the same quarter of 2024.
While there have been many calls for the State to reduce its dependence on foreign direct investment and build up the indigenous sector, the reality is that many Irish firms are reluctant to borrow for investment purposes and the trend is becoming more pronounced.
Martin O’Brien, in the Irish Economic Analysis Division of the Central Bank, said the investment rate of domestic businesses is only three-fifths of the eurozone average.
“This low rate of business investment constrains future growth and potentially limits the scope for productivity gains in the domestic economy,” he writes in an analysis published with the Quarterly Bulletin.
“Evidence shows that businesses in Ireland have been investing less on a per-employee basis than European peers, at about three-quarters the rate of the EU average (€7,600 v €10,300), and less than half the rate of other small, open economies in northern Europe (€7,600 v €15,600).”
The relatively low level of investment in machinery and new technologies by the construction sector has contributed to the challenges in building the housing and infrastructure Ireland needs.
Many of our services sectors have been de-leveraging for years
The low level of investment by domestic businesses and households also means they have become a net lender of funds to the rest of the world, Mr O’Brien points out.
Robert Kelly, director of economics at the Central Bank, said Irish firms have signalled repeatedly their lack of interest in lending and preference for using their own funds in investments. “This is something we’d like to see shift,” he said.
“What we have seen happen over almost a decade at this stage, but definitely in certain sectors where it’s becoming more specialised, is non-traditional or non-bank lenders moving in to provide credit.”
Neil McDonnell, chief executive of ISME, said the latest figures are consistent with what he is seeing among members.
“Many of our services sectors have been de-leveraging for years, including sectors that should be doing well post-pandemic,” he said, pointing out that research has found a lowered appetite among businesses to scale and a preference for bootstrapping rather than debt finance.
“This was raised in detail at the Cost of Business Advisory Forum yesterday, and it does appear another factor is absence of competition in lending, resulting in a significant premium to the cost of debt over our EU peers.”
A new policy paper from ISME notes that Irish banking institutions typically confined themselves to asset-backed lending, underwritten by personal guarantees, but the current business environment requires affordable lending for working capital.
“Now that the Irish State has exited the banking system, opportunities to examine local public banking (Sparkassen), or the WIR banking system from Switzerland, should be examined again,” it says.
Launched in 1934, the WIR bank allowed SMEs to operate a private currency system, the WIR franc, within an asset-backed system. ISME’s argument is that this allows for efficient use of capital, and reduces the need to get bank funding.
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