A lack of competition in the Republic's banking industry is costing small business an estimated €200 million a year, it has been claimed.

The Irish Small and Medium-sized Enterprise Association (ISME) yesterday released details of a study showing what it called a "serious lack of competition in the banking market".

The study found that Irish SMEs are being charged an average of 8.9 per cent interest on credit. The association said figures compiled by the EU Commission's statistics body, Eurostat, showed the European average was 4-6 per cent. At the same time, almost three-quarters of ISME members are paying more than €500 a year in charges.

ISME said Irish banks were the most profitable in Europe. Their average return on equity was 22.2 per cent, compared with 16.4 per cent in the rest of the EU.

The association's chief executive, Mr Mark Fielding, said the average amount of money borrowed by the State's 170,000 SMEs was €25,000. He said that on this basis, higher than EU average interest charges and excessive fees were adding €200 million to the sector's costs.

"SMEs are the banks' whipping boys," he declared.

Mr Fielding said that, while large industries got favourable terms from banks, the institutions handed the bill to small business.

However, the Irish Bankers' Federation (IBF) last night questioned the accuracy of the Eurostat figures. The IBF said that Europe's central banks had already said the statistics were not suitable for making cross-border comparisons.

ISME also said that, over the past 10 years, Irish banks had steadily increased the profits they have been making from loans to small and medium-sized businesses.

"The average spread \ currently is 6 per cent, in comparison to 4.3 per cent in the period 1993 to 1998, an increase of 40 per cent," it said.

The survey of its members found that 37 per cent of them were concerned about high interest rates. More than two in three businesses had queried bank charges and, significantly, 42 per cent of these had subsequently received refunds from their banks. At the same time, 57 per cent said their banks did not fully explain their charges.

The study was carried out by Compecon, the consultancy run by former Competition Authority chairman Mr Pat Massey. It found that AIB and Bank of Ireland enjoyed a near duopoly of the SME market, with a combined 77 per cent share.

The report states that barriers to new entrants appeared to be particularly high in the SME banking market. These include the perceived high cost of changing banks. The report calls for the examination of arrangements between banks for operating direct debit payments, as these could contribute to the cost of changing banks.

Similarly, it states that a "reported requirement" that banks wishing to join the money transmission system contribute to past costs of its development, should also be scrutinised, as this may also be a barrier to entry.

Mr Massey said the SME banking market displayed a number of traits that facilitated co-ordinated behaviour. These included high barriers to entry, a past history of price regulation, inelastic demand for some products and identical products.

He said these traits required further examination by the Competition Authority, but stressed that ISME was not accusing the banks of deliberately operating a cartel. "We are not in a position to say that," Mr Massey said.

The Competition Authority will today publish an interim report on an investigation that it has been carrying out into the State's banking sector.