Dr. Conor O'Toole:

The issue of SME access to finance came to the fore after the financial crisis. We have done a huge amount of research, along with the ESRI, in recent years, which has tried to measure and quantify the access to finance constraints that are affecting many small firms. Coming out of that research the following matters were clear. First, Irish firms disproportionately used debt financing when they funded any of their external financing commitments, up until the financial crisis period. That evaporated pretty much overnight and the banking system structure changed. We had retrenchment in the financial sector and we have had market exits of some of the banks that lent to SMEs since then. There has been a huge amount of change in the Irish financial sector, therefore. We have had a historical challenge in this area as we were reliant on external financing from banks.

We have moved to a position where our firms are financing a huge amount of investment from their internal funds so we spent quite a bit of time trying to understand if that is because of supply side challenges like access to credit, if they have become more risk-averse or if the demand for that investment is not there. We publish an annual SME investment report on this and we have published various papers on it and the conclusion is that it is a bit of both. Financing constraints are an issue and debt financing is a problem within that mix but there is also a reluctance on the part of SMEs to invest. That is part of the reason SMEs, in particular, invest in things like intangible assets or research and development, where there are things that are good for the economy in terms of productivity growth in the long term. We have to think about what role the tax system plays in that and how we can try to help to get more different types of financing, because our banking system has changed.

When you look at other countries, you see that more equity financing is used in many other markets. It is harder in smaller countries like Ireland because often equity markets come from wealthy individuals and in large countries there are just more wealthy individuals. Trying to encourage an investment culture to draw equity into small businesses in Ireland is a good step forward to try to diversify the financing mix. We have not had options historically and we want to give small businesses options. Equity financing through the EISS or any revamped equivalent or some sort of relief or angel financing are only one part of the story but we want to try to develop a range of options so that SMEs can choose the financing mix that suits their business ventures at that particular time.

If we are thinking about the recommendations from the commission, in particular, I would be supportive of the entrepreneurs relief. Extending that to third-party investors is a good idea because that would allow the angel investors to derisk a little bit and get involved a little bit more. When you read the detail of the EISS, you see that the commission suggests that a lot more research needs to be done to find out exactly what the financing challenges and barriers are and to examine how we set up that scheme to address the issues around SME access to finance. Having a more diversified structure in which SMEs have access to many different things is the way to have a well-functioning financial system.