Canadian small and medium-sized enterprises continue to face a persistent gap in access to credit and capital, according to a new Senate committee report that calls on Ottawa to pursue sweeping reforms to a financial system it describes as structurally tilted toward large, low-risk borrowers.
The Standing Senate Committee on Banking, Commerce and the Economy spent nearly a year examining the issue, holding 15 meetings and hearing roughly 24 hours of testimony from more than 35 witnesses, including SME owners and representatives across Canada’s credit and capital markets. The resulting report, released in October, found that SMEs account for 99.7% of employer businesses in Canada as of December 2024 and generated nearly half of private-sector GDP in 2022, yet remain underserved by a financial sector the committee says is dominated by a small number of large institutions.
Why Smaller Borrowers Struggle to Get Financing
The committee’s central finding is that Canada’s financial system, built primarily around stability and scale, naturally favours larger, asset-backed transactions over the riskier, smaller loans SMEs often need for expansion, innovation or succession planning. Witnesses described a widening disconnect between businesses seeking capital and the institutions controlling its allocation — namely Canada’s six largest retail banks and their affiliated insurance, wealth management and investment banking arms.
The report also raised concern that large institutional investors, including pension funds and insurers, appear reluctant to finance SME growth, a dynamic the committee argues limits Canada’s ability to retain homegrown companies, research and intellectual property. It noted that growing reliance on foreign capital has, in some cases, led to the premature sale of promising Canadian firms and the transfer of innovation and economic value abroad.
To address these gaps, the committee recommended the federal government create a dedicated SME Office accountable to a single minister, pursue tax changes to improve competitiveness for SMEs and their investors, and introduce regulatory reforms aimed at expanding the number of lenders competing for SME business. It also urged provinces to reform public and exempt investment markets to give growing companies more viable ways to raise capital domestically, and called for SMEs to have more reliable access to federal procurement opportunities.
Bank Lending Margins and the Rate Environment
While the Senate report focuses on structural financing gaps, broader lending conditions are also being shaped by interest rate dynamics playing out at major banks. Gerard Cassidy, managing director and co-head of global financials research at RBC Capital Markets, told BNN Bloomberg that commercial loans tied to policy interest rates reprice immediately when rates move, while banks tend to raise deposit rates more slowly — a dynamic that affects net interest margins and, by extension, the profitability of commercial lending.
Cassidy said a steeper yield curve was expected to provide a modest boost to third-quarter net interest margins for U.S. banks, with a larger benefit anticipated in the fourth quarter. He noted that despite underlying business conditions remaining strong, bank share prices have been weighed down partly by lingering memories of the 2023 failures of three large U.S. banks, even though he characterized current rate movements as smaller and said banks today are better managed.
Borrowing Costs and Renewal Pressure in Canada
On the consumer and mortgage side, Canadian borrowing costs illustrate the broader credit environment facing households and, indirectly, small businesses that rely on personal credit or home equity. The Bank of Canada’s policy rate has held at 2.25% since October 2025, but fixed mortgage rates — which follow Government of Canada bond yields rather than the central bank’s rate — have been rising. The five-year bond yield closed at 3.54% on October 16, below its 52-week high of roughly 3.73% in late September, and every Big Six bank has raised select fixed rates since early September.
Canadian Rate and Bond Benchmarks, October 2026
Forecasters are divided on where rates head next: RBC, TD and BMO expect the policy rate to end 2026 at 2.25%, while Scotiabank and National Bank expect 2.50%. September inflation rose to 3.1% on higher gasoline prices, though core measures tracked by the Bank of Canada eased, with inflation excluding gasoline slowing to 2.2%. The central bank’s next rate decision, alongside a Monetary Policy Report, is scheduled for October 28.
Signals of financial strain are also showing up in household credit data, which can offer a proxy for broader lending stress. Equifax Canada’s second-quarter 2026 Market Pulse report found severe mortgage delinquency — payments 90 or more days past due — at 0.30% of balances, up 33.8% from a year earlier, with Ontario and British Columbia identified as outliers. Equifax also reported insolvencies at their highest rate since 2009, with a sharp increase among homeowners.
Taken together, the Senate committee’s findings and the current rate and credit backdrop point to a lending environment in which large borrowers and the banks serving them are positioned to benefit from a steepening yield curve, even as smaller businesses continue to report difficulty securing the financing needed to grow, according to the committee’s testimony and recommendations.
This article is for informational purposes only and does not constitute financial, investment, or legal advice. Consult a licensed financial advisor before making investment decisions.
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