HBOS is to offer interest payments on small business current accounts in a bid to attract more SME customers.

The move by HBOS, formed by a merger of Bank of Scotland and Halifax, is designed to break the four biggest UK banks' stranglehold over small business banking.

"The majority of small businesses have substantial cash balances and yet receive no interest from their bank," said George Mitchell, head of Bank of Scotland's activities within HBOS.

"In contrast, our account will always pay a competitive rate of interest."

SME groups cheer

Small business groups welcomed HBOS' move.

"This is a bit of a breakthrough. The hope now is that the other banks will do something similar," said a spokesman for the Forum of Private Business.

The new interest-bearing accounts are expected to boost HBOS' share of the SME market when they are launched in January 2002.

Account holders will receive payments set at 2% under the Bank of England's base rate, provided they are �1 or more in credit.

It will cost HBOS around �20m a year to pay interest on its existing SME current accounts, the bank said.

In London, HBOS shares closed up 38p at 845p.

Big Four

Lloyds TSB, Royal Bank of Scotland, Barclays and HSBC between them control 90% of small business banking, compared to HBOS' 3% market share.

Small business groups complain that each of the Big Four offer broadly the same terms to their SME customers, effectively stifling competition.

Last year, the government commissioned former London Stock Exchange chief Don Cruikshank to investigate anti-competitive practices in the SME banking market.

Mr Cruikshank's report, highly critical of the four biggest banks, triggered a full investigation by the Competition Commission.

The commission wound up its investigation in October this year, but the government has not yet published its findings.

Earlier this year, Trade and Industry Secretary Patricia Hewitt blocked a proposed merger between Lloyds TSB and Abbey National on the grounds that it would further reduce competition in the SME banking market.

Abbey National is the only major UK bank apart from HBOS which aims to increase its share of the small business market.