The Australian government's banking reform package failed to address lack of competition in the banking sector, the lobby group for non-bank lenders says.

Mr Phil Naylor, CEO of the Mortgage and Finance Association of Australia (MFAA), today appeared at the Senate Economics References Committee at a public hearing on competition within the Australian banking sector.

"The focus of MFAA's submission and subsequent appearance at the Senate Economics References Committee is to ensure that Australia maintains a competitive lending industry with the objective of all the players operating to better facilitate consumer choice," he said.

In the mortgage market, banks are now writing around 90 per cent of all business, up from 78 per cent before the global financial crisis. Non-banks are writing about 3 per cent, compared to 13 per cent precrisis, while credit unions and building societies have held their own at around 7 per cent.

"The reason market share of the non-bank lenders has diminished is the collapse of the securitisation market," Mr Naylor said.

Government injection fails to revive securitisation market

"To its credit, the Federal Government has injected $16 billion of funds via Australian Office of Financial Management (AOFM) and promises another $4 billion in the Banking Reform package. Whilst this injection has been welcomed it has not been sufficient to revive the securitisation market," said Mr Naylor.

"The Banking Reform package announced by Federal Government is really a package of peripheral changes which do not attack the real problem of lack of competition in the industry. And one of its planks, the banning of exit fees will have the reverse effect by causing non bank lenders to lose their most effective weapon in competing with banks, the Deferred Establishment Fee," added Mr Naylor.

The MFAA believes the measures announced by Federal Government will not have a significant impact on enhancing competition in the lending sector.

"Fundamentally there will be no meaningful changes to competition in this industry unless there is a strong and viable non-bank sector," added Mr Naylor.

A missed opportunity for Australia

According to the MFAA, the Federal Government has missed a golden opportunity to develop an Australian version of the Canadian Mortgage Bonds systems which enables a thriving and competitive non bank lender sector to operate in Canada.

"The Federal Government's investments pale to this made by the Canadian Mortgage and Housing Corporation which during the past three years has invested $300 billion in the National Housing Act Mortgage-backed Securities and Canadian Mortgage Bonds programs."

In recognising the Federal Government cannot simply take a 'cookie cutter' approach, Mr Naylor added, "The MFAA accepts that it is not as simple as just importing an overseas model into Australia but there are many similarities between the Australian and Canadian economies and banking systems that would suggest the model could easily work.

"These include similar population sizes, the number of major banks operating, similarities in the prudent banking systems, state of economy and an ability to avoid the worst impacts of the GFC," he said.