And chief economist Andrew Goudie said an imminent recovery in the level of employment is unlikely.

Dr Goudie was giving evidence to Holyrood’s Economy Committee in its inquiry into the future of the financial sector after the banking crisis.

The Federation of Small Businesses in Scotland said this week that firms are suffering because a lack of competition in a banking sector dominated by RBS and Lloyds.

The state-rescued banks have about three-quarters of this lending market - RBS controls 40% of it.

Labour’s Lewis Macdonald said RBS and Lloyds have a “duopoly and almost a monopoly” and asked if small business are right to be worried.

Dr Goudie said: “In principal we would obviously prefer a situation where there was greater levels of competition generated by more actors in that particular area.”

But he claimed it is unclear the situation had created higher costs for borrowers.

“The view of the Scottish Government I know is that we wish to encourage competition in the market in Scotland, introduce new banking and financial institutions to Scotland to increase the competition and to increase the supply.

“That would be very much the wish of the Government, so from that point of view I think we would be very supportive of the general point that the FSB is making.”

The state owns about 70% of RBS and 43.5% of the Lloyds group after multibillion-pound taxpayer bailouts.

A report submitted to the committee by Dr Goudie from July this year said the supply of money to smaller firms in Scotland had fallen.

The approval rate for such applications has fallen and the supply of money to high-growth companies has also seen a “fairly dramatic” drop.

Dr Goudie had told MSPs earlier that a “slow, protracted recovery” in the economy is expected from late this year through 2010.

But unemployment has risen by about 75,000 over the year and this trajectory will continue “well into 2010”.

He added: “We’re unlikely to see much strengthening in the labour market for while.”