No discussion about developments in Irish banking can take place while ignoring the backdrop of the seminal event that took place on 28 August, 1999. That was the day that Bank of Scotland's entry exposed the rip-off gross profit margins in the Irish home-loan market. Margins (reflecting the gap between the cost of funds to retail banks, and the rates they charge), were to fall a staggering 80%. Incredible as it may sound that was the reduction in the gross profit margin required by banks to bring their home-loan rates in direct competition with the Bank of Scotland proposition. And yet that proposition was merely in line with competitive gross profit margins on mortgages in the UK, and elsewhere in Europe.

What had happened was – despite much noise to the contrary – domestic mortgage lenders, led strongly by the main banks, ratcheted up gross profit margins to exorbitant levels as we adopted European interest rates in 1999, clearly convinced that the leap in profiteering could be concealed by the EMU confusion. That was, until Bank of Scotland arrived, and exposed the cant and nonsense that the Irish market was competitive.

The average standard variable mortgage before Bank of Scotland arrived was 0.7% above the EU average. After the phoney competition in Irish mortgages was exposed by Bank of Scotland, rates fell to 1.6% below the EU average.

A staggering shift of 2.3% was the initial measure of the skimming taking place in the Irish mortgage market. Remember this was a market we were told was competitive.

What a pity the same sea-change did not occur in the business lending arena but we know why. The physical infrastructure of Irish banking is lorded over by the five clearing banks, which account for 90% of branches and sub-offices. But the two largest banks account for 86% of this pie, and largely dominate retail banking, aided by their role in the money transmission system. BoSI found it more than difficult to break this cosy cartel-like club and eventually adopted the "if you can't beat them, join them" policy on business banking.

Now the withdrawal of BoSI from the retail banking sector is an ominous warning that other foreign-owned banks may follow suit, reducing both retail and commercial lending, impacting negatively on the already meagre competition in the marketplace. This will exacerbate the situation for hard-pressed SMEs who are already finding it impossible to access badly needed finance, and will have a disastrous impact on the individual companies and the overall economy.

Basic economics would indicate that where there is more competition in banking, margins and profits tend to be lower, providing better value for customers. This has been borne out by many international reports. However, based on 'return on assets', historically Irish banks were nearly three times more profitable than German banks, and a massive 11 times more profitable than French banks. Is there an economic reason why we should be fleeced across the board? Why is this happening?

Has it anything to do with market dominance and an over-concentration of power?

It's not as if the government isn't aware of the cartel-like situation. In its own report, 'Banking Sector; Some Strategic Issues, Report of Finance/Central Bank', it is noted that "a high degree of concentration does increase the danger of uncompetitive practices and possible over-charging of customers with less bargaining power and fewer alternative options". Unhappily the report concluded that there was little light on the horizon: "Because of legal, taxation and language barriers to overseas entry into the Irish market, added to customer inertia and information asymmetries, local institutions are likely to retain some degree of market power with respect to these customers." So that's all right then, nothing can be done!

This conclusion, once again, aptly demonstrates the lack of innovative thinking at government level.

So we can roll over and accept that we are destined to have just the two main banks or we can ensure a more competitive banking future by creating a 'third banking force', which could include a combination of BoSI, EBS, Permanent TSB and, dare I say it, Anglo, to effectively compete with the 'big two'. Failure to do so will only result in continuing cartel-like pricing of credit and reduced lending, to the detriment of all bank customers, particularly the SME sector. The prize of increased competition is more lending capacity, reduced bank fees and improved service for all, with a renewed emphasis on SME lending.

ISME is extremely concerned at the government's lack of real effort to address the credit fiasco, especially for smaller firms. We have always held the view (now reaffirmed by the IMF) that Nama will make little difference to credit for SMEs, with the beneficiary banks more interested in consolidating their balance sheets than servicing industry. We must guard against a situation where a small number of business banks can introduce monopoly pricing and neglect their smaller customers, including small business.

We cannot revert to a banking situation where super profits are gained through abuse of a dominant position by a few banks who, for generations, have abused small and medium enterprises through excessive overcharging. If we want to see a vibrant SME sector, then a 'third banking force' is urgently required.

Mark Fielding is the chief executive of ISME, The Irish Small & Medium Enterprises Association