Banks have accused military chiefs of obstructing loans and funding for defence companies in a move that threatens Sir Keir Starmer’s push to get Britain on a war footing.
A senior executive at a major UK bank is understood to have raised concerns with the Ministry of Defence (MoD) that the opaque procurement process is making it difficult to lend to defence manufacturers.
The current approach means that banks are not allowed to see the contracts companies have struck with the Government in many cases, making it difficult to verify basic information such as the payments they have been promised.
Labour faces growing criticism over its defence strategy after it emerged that Rachel Reeves, the Chancellor, is resisting pressure from military chiefs to invest billions more in the sector.
UK Finance, which represents 300 financial institutions across Britain, said banks were “fully committed” to supporting defence companies but said greater transparency and clarity around procurement was essential.
Banks say it can be difficult to understand the nature of contracts that defence companies have struck with the MoD because they are often not able to share them or only in heavily redacted form.
On top of this, the industry also tends to suffer from unpredictable cash flows, owing to the complexity of the equipment-buying process. This makes it harder for banks to judge the level of risk and extend loans or credit facilities to defence firms.
One senior defence industry source said that a possible “workaround” being explored with the MoD and banks was to separate the financial sections of contracts into different annexes.
This could potentially allow firms to share them with lenders without creating a risk of revealing details of what is being procured by the military.
A UK Finance spokesman said: “Providing finance to this sector [defence] can be complex due to the wider regulatory environment and the sensitive nature of defence procurement. As a result, banks must carry out enhanced due diligence and apply robust risk controls when lending to companies in this space.”
Defence companies have struggled to access traditional funding in recent decades because of a focus among investors on environmental, social and governance considerations – an approach whose proponents claimed it was unethical to back defence companies.
However, the growing threat from hostile states including Russia and China and tensions in the Middle East have emboldened the City to change its attitude.
Meanwhile, governments have committed to ramping up spending on defence following pressure from Donald Trump.
Sir Keir has set a target of spending 2.5pc of GDP on defence by April 2027 with an “ambition” to increase this again to 3pc after the next election.
Defence chiefs have urged the Government to bring forward the increase but The Telegraph revealed this week that Ms Reeves has blocked such a move amid concerns over wasteful spending.
TheCityUK, the Square Mile’s representative body, suggested in a report last year that the Government should offer a guarantee scheme, similar to existing programmes for export finance, to attract a wider range of lenders to support companies in the sector.
One senior banking source suggested the Government’s reluctance to introduce such a scheme for defence was because it did not want to appear to be “picking winners”.
Kevin Craven, of the industry group ADS, said: “ADS has long advocated for commercial processes and contracts that reconcile security with sufficient openness to support investment cases.
“Progress has been made in recognising this challenge within MoD and investment providers but more work is needed to develop practical solutions such as approved redacted versions of contracts and appropriately secure investor communities.”
Defence companies have criticised the City for obstructing access to lending.
Nick Ames, the boss of Supacat, which makes the armoured Jackal vehicle for the British Army, said last year that there was a widespread view that lenders “will bank you as long as you’re big enough but if you’re small and in defence, they’re not interested”.
He told The Telegraph: “The Government has got to be much firmer. The banks all sit there at these events and say, ‘Oh no, no, no, we’re investing in defence,’ but it’s deluded.
“I don’t think they really know what goes on when you actually go and talk to your high street bank.”
A spokesman for the MoD said: “This Government is backing British jobs, British industry and British innovators and since July 2024, we have signed 1,100 major contracts with 84% of our annual spend going to British companies.
“We are developing a dedicated defence finance and investment strategy, supported by a new defence investors’ advisory group, bringing together senior expertise from venture, growth, private capital and banking.”
