The government is obsessed that banks are not lending to the UK’s small and medium sized enterprises.

Banks claim it is not their fault: they say they are granting about two thirds of all facilities that are being requested. If, as they claim, many small businesses are not using the facilities they’ve been granted then that’s not the bank’s fault. Or so they say.

The reality is, of course, much more complex than the debate suggests.

The first and most important point to note is that when the government is seeking to cut costs with the quite reasonable expectation that up to 1.5 million jobs could be lost as a result — half each in the public and private sectors — it is wholly irrational for any small business to be taking risk. The last thing business will be wanting to do right now is invest, take on people, expand, use up lines of credit or in any way take action that might prejudice its potentially already slim chances of survival. So of course SMEs are not asking to borrow right now — and that is entirely George Osborne’s fault.

Second, of course that explains the reason why by no means all of the bank facilities that have been granted are being used.

Third, it would be particularly worrying if most of most facilities that had been granted were being used. If the term ‘facility’ here is being used to mean the part of an agreed overdraft limit that is being drawn down at any time then it is encouraging that many are not being drawn upon. Overdrafts are perfectly sensible things for small businesses to have, but they are meant to provide short term liquidity to cover the peaks and troughs of cash flow, and are not long term funding. If all small businesses were at their overdraft limits then we’d, in all likelihood, be facing a round of insolvencies very shortly. It is good news that we’re not, but this also means that the bank excuse for customers not using their funding is at the very least a little disingenuous.

So what is the problem? First of all, without a shadow of a doubt small business is feeling very vulnerable in the face of an impending double dip recession — from which there may be little chance of recovery for a long time.

Second, quite a lot of new small businesses may be decidedly marginal. By that I mean they are being registered simply because their owners cannot claim benefits and have no prospect of finding other work so they seek self employed income in whatever amount they can get it as the next best thing. There is no doubt that this is happening, but such ‘last resort’ activity is not something to encourage bank confidence, quite understandably, and does almost certainly distort lending ratios.

Third, and by far the most important, we’re simply looking for the wrong solution to the problem of small business funding. The sort of lending banks have offered UK small business has always been inappropriate, costly and largely ineffective in encouraging this sector. It is the surest indication of the business inexperience of those in government that they have no idea that this is the case and that they really believe the banks advertisements that say those organisations are a source of finance and advice to small business. They are not, and never have been.

This needs explanation. First of all let’s kick the advice thing into touch. Why on earth would anyone think a bank can help a small business? The people who work in banks are about as far removed from having the characteristics of a successful entrepreneur as it is possible to be. There is always going to be a chasm between them and the entrepreneur which will be virtually unbridgeable when it comes to offering advice. And it is this lack of comprehension on the part of bankers of the SME community — a world that is so far removed from their own safe security embraced most of all for the certainty (if once there was one) of a month end pay cheque that has meant that banks just don’t offer what small businesses need.

What banks offer is the type of lending that suits bankers personalities — so they offer lending against the security of assets repayable in nice equal amounts, when in the knowledge economy there won’t be many assets suitable for this task and cash flow is lumpy.

And banks want to lend for liquidity through overdrafts secured on assets when what small businesses really need is capital that can be subject to risk.

The mismatch this gives rise to is staggering. This is a failing of Anglo Saxon capitalism, not a mismatch of this moment. The government does not understand that. Banks do not understand that. Those who are meant to champion business in government don’t seem to get it either. And nor do I hear the accountancy bodies saying much on this — at all — to their own shame. They just talk tax avoidance and offer the rhetoric of being opposed to regulation, which has never solved the problem of a shortage of capital.

So the government is right — there is a problem of small business lending. But the solution is for them to reinvigorate the economy.

And the government is right — there is a problem of a lack of appropriate bank lending, but this is a systemic fault, not a temporary one, and only a change in culture will address this.

The required change of culture by banks is, however, as radical as that required of this government right now if it is to stop cutting and reinvigorate the economy instead so that business has a reason to invest.

If both can have these changes of culture what is needed, in essence, is that the government in partnership with the banks and others have to create the mechanism to invest capital in businesses that need it.

How does this happen? There are three mechanisms. First direct tax incentives — especially for new socially desirable businesses that can create jobs such as those linked to green energy — have to be offered.

Second, more flexible structure for apportioning reward in small businesses than the rigid forms of capital required by small limited companies have to be developed. The basis for this is available in the limited liability partnership but the understanding of its use is not present as yet. Real thinking on how to move the corporate entity into the twenty first century and out of the nineteenth to which it is still wedded is needed, now. Only then can the partnership relationships where banks can, for example, subscribe for variable and repayable equity in businesses without assuming liability for management as well be created.I’ve explored some of these issue here.

Third, banks, the government, local authorities and pension funds have to combine to create small enterprise funds that direct savers money into creative enterprise — which is not done at present.

And last any tax based incentive scheme — such as ISAs — have to be made conditional on the funds invested being used for real investment in real businesses in the economy — and not for leaving funds on deposit or to be saved in the second hand shares of large companies.

All of this is possible — and banks have a role to play in it. Indeed - this is the perfect role for a Green Investment Bank or the Royal Bank of Sustainability. But the real onus to achieve this is on the government. It is they who have to create the environment in which the demand for bank’s constructive role in society exists once more. And that can only happen if they change the infrastructure for providing capital to small business in the UK.

Will the government do it?

Will banks demand they do it?

And will the supposed representatives of small business stand up and demand the capital that is needed so those businesses can deliver the jobs we need?

It will require a miracle for all three to happen.

In which case start praying for one because that’s what we need.