Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I thank Senators for their thoughtful contributions and general support for the Bill. The establishment of the strategic banking corporation of Ireland by increasing the availability of longer-term flexible debt finance which is appropriately priced will provide SMEs with access to the type of patient intelligent capital that will increase productive investment, encourage growth and generate additional employment opportunities. In this context, the company will be supportive of domestically-focused and export-oriented SMEs. It is intended that the company will have a role in tackling supply-side issues facing SMEs' access to finance and attempt to tackle demand-side issues. SMEs will now be reassured that their needs are being catered for and that the SBCI will be in place to cover their needs into the future. This should have the effect of releasing pent-up demand. The provision of loans that are designed to meet the customised needs of SMEs should also incentivise demand and build confidence in the SME sector, thereby encouraging investment in growth and employment.

Commentators have pointed out that liquidity in the Irish SME credit market is in general not a particular issue. However, this assertion extends only as far as the credit product types that incumbents are willing to offer. Longer-term debt finance is relatively hard to come by in the Irish SME credit market and the SBCI will be addressing this shortfall in liquidity or absence of particular product types.

The strategic banking corporation of Ireland is being established as a private company but will operate with a strong public policy mandate in terms of providing additional finance to the SME sector, stimulating economic activity and contributing to the economic well-being of the State. As a wholesale lender, providing funds to on-lending institutions, the SBCI will enhance the supply of funding by using existing channels and encouraging new entrants into the market. New entrants are not restricted to foreign banks coming in to compete with the existing banks but could be other traditional providers of credit who would expand their operations or find entirely new ways of delivering credit in the Irish market.

The strategic banking corporation of Ireland will seek to distribute its funding across multiple on-lenders in an effort to both diversify its portfolio of front-line lenders and also to enhance competition in the market place. Its relationship with on-lenders will be vital to its effectiveness. Consequently, a number of requirements will be imposed upon the on-lenders to ensure that they use funding for SME financing and to fulfil the purposes of the legislation. These conditions will ensure that the actual benefits of the funding arrangements provided by the SBCI are clearly passed on to the ultimate end user, namely, the SMEs. The strategic banking corporation will demand from existing lenders and other new entrants that all funding drawn down is either used as intended or returned to the SBCI. The reporting requirements set by funders of the SBCI in conjunction with the nature of the lending agreements with on-lenders will also provide the SBCI and the Department of Finance with sufficient data and information to enable them to analyse and explore the effectiveness of the SBCI in terms of financing SMEs. This information will be utilised to inform and shape ongoing product development to ensure that customised financing needs of SMEs continue to be met by the SBCI.

A key function of the SBCI is to finance projects which promote economic development. It is also possible for the SBCI to provide, via on-lending institutions, financing to social and environmental projects that enhance economic development, provided they present the on-lender with reasonable repayment prospects. At the same time, it is important to recognise that the SBCI, in conjunction with NewERA, and the soon to be established ISIF, will collectively provide a more robust infrastructure for financing productive investment in the real economy, thereby contributing to more sustainable long-term economic and employment growth. Achieving this type of economic and employment growth will provide not only economic but also social and environmental benefits to the country and its citizens.

To establish a company which can enter into agreements with the international providers of finance and the on-lenders in the Irish SME market, we first need enabling legislation. Waiting until the autumn semester to commence or complete that legislation would effectively mean that the work that needs to be done in establishing the company could not proceed until September at the earliest and the sequential actions which follow that, such as establishment of a board, hiring of staff, signing of agreements with the international lenders, establishing internal operations, signing agreements with the on-lenders and awareness raising initiatives, could not commence until October or thereabouts. It was decided, therefore, to expedite this enabling legislation so that additional and enhanced lending to SMEs would be facilitated in this year and without delay.

The SBCI will be audited by the Comptroller and Auditor General and will also be accountable to the Committee of Public Accounts on the effectiveness of its operations. It will later be included as a new body to be covered by the new freedom of information regime. I am working with my colleague, the Minister for Public Expenditure and Reform, on this. I consider that these provisions are sufficiently broad to ensure effective public oversight of its ongoing operations.

Under the legislation, the Minister of Finance is to be the sole shareholder in the SBCI. It is not our intention that the shares will be sold or disposed of any time. The SBCI will be a key element in the future financing of the real economy and contributes to our stated ambition of creating a more diversified, competitive and responsive financial infrastructure that can finance growth in the SME sector as we move into a new phase of economic recovery and growth.

State-sponsored development or promotional institutions are an integral part of the financial architecture in other countries such as Germany, Canada, France and Spain and it is recognised that they will continue to play a key role in the financing of many economies in years to come. My Department has contacted a number of similar institutions throughout Europe and exchanged information with an OECD research team on the subject of development institution models. Using this information on the models used in other jurisdictions and the products available elsewhere, the SBCI will be customised and tailored to the Irish market.

It is important that SMEs in Ireland have access to similar financial products that are available to comparative enterprises in competitor states otherwise they will be operating at a serious competitive disadvantage. With its concentrated focus on improving the supply and availability of financing to the SME sector, the SBCI ensures that Ireland will have in place a stable State-sponsored financial institution capable of supporting long-term investment in that sector.

An interdepartmental policy group known as the State Bodies Group chaired by my Department will play a role in ensuring that the SBCI can be linked into other Government initiatives aimed at improving access to finance in the economy. Many of the State bodies involved have been examining the effectiveness of their individual schemes. It is intended that where a link between the SBCI and such schemes is possible and would be beneficial or create synergies, the Departments and agencies involved would work with the SBCI. Microfinance Ireland has met with the SBCI project already with this in mind and will liaise further on possible link ups.

I do not intend for the SBCI to receive blanket exemptions from Central Bank regulation. The company will not conduct banking business at the start of its operations. It can bring about benefits to the economy by being established as outlined and can expand its operations to other areas in the months and years to come. The legislation is flexible and facilitates this anticipated growth. Should the company commence or seek to commence any activities which are ordinarily regulated by the Central Bank of Ireland, we intend for the SBCI to be treated no differently from any other company and it would, therefore, need to engage fully with the relevant authorities before commencing such operations.

A robust, dynamic and innovative indigenous SME sector is key to ensuring sustained economic recovery and employment growth. The establishment of the SBCI builds on the measures and initiatives that have already been put in place by this Government to enhance SME access to finance and can be considered to be a major milestone in our continued economic recovery. As a State-sponsored private company, the SBCI is mandated to provide additional credit that is tailored to the business needs of SMEs. In carrying out its core functions, the SBCI will make an important contribution to stimulating economic activity, enhancing competitiveness and generating employment opportunities for people across the State.

Some specific queries were raised by Senators. Senator Quinn asked whether it would help start ups and the answer is "Yes". It may help start ups or credit lines may be used to expand existing companies. An online tool has been launched and collects in one location all Government supports for SMEs. It can be accessed on the Department of Finance website. It is also being sponsored by the local enterprise offices. One can go to a local enterprise office, access this online and all the assistance available to SMEs will be there on a very user-friendly way. It has already had several thousand hits and has been of benefit to SMEs.

Crowd funding may also be supported. The SBCI will examine that when it is up and running. The Credit Review Office and the lessons from KfW will inform the setting of deadlines for decisions regarding SMEs. Credit unions are not excluded and can be considered for funding at a later time. If the SBCI is happy, it can work with them and the Registrar of Credit Unions concurs. That will be kept under review but it is not envisaged at the initial start-up phase.

In response to Senator Barrett, the Department will try to flexible in addressing amendments submitted to the Bills Office even if they come in after the deadline. We will stop the clock or do some of those initiatives that develop from Brussels. We will get the Senator's amendments in if we can. KfW and the European Investment Bank do not want their funding being used for property development so it is not envisaged that it will be used for this purpose.

In response to Senator Michael D'Arcy, rates between the SBCI and the on-lenders will be passed on to the SMEs. Under DG Competition rules and the SBCI's intention, banks or on-lenders will contractually be obliged to pass on all of the benefits of funding from the SBCI to the end customer. An SME is defined in the legislation. We will aim for small and medium-sized companies but the SBCI will help all SMEs. A total of 90% of loans in Ireland are for less than €10,000.

In response to Senator Gilroy, €5 billion from the State is a cap, not a target. It is made up of €1 billion maximum from equity and €4 billion maximum from lending. It is not intended that the State would fund all of that but, again, flexibility is built in. We looked at comparable investment funds across Europe and strategic investment banks. In proportion to the GDP of certain countries, €4 billion to €5 billion would be the appropriate comparable balance sheet cap on a strategic investment bank here.

In respect of the actual mechanisms, the money will come from KfW and the European Investment Bank in the first instance but also from our strategic investment fund. Obviously, interest rates fluctuate but at present, it would be coming at a margin of about 25 basis points so the interest rate is very low, which is one of the major advantages of getting money from KfW. The second advantage is that the typical SME going into Bank of Ireland or AIB will apply for working capital which is probably renewed annually. Alternatively, the SME may have to reapply at the end of the year. Again, it can get term loan arrangements but it might be two or three years. It is very hard for an SME in Ireland to get money from anywhere between five and ten years yet if one is carrying out a strategic expansion of a company, that is what one needs. One of the big flaws in Ireland is that when SMEs reach a certain size, they either get stuck there or if they are in the modern economy involving any of the modern technologies, they tend to be sold on. Quite frequently, one finds that a very successful SME in Ireland reaches a certain point of development and a US multinational buys it. Sometimes, it transfers its intellectual assets offshore and we lose it to the economy. We will be very conscious of that. The advantages are not just the availability of cheap money but also the fact that there would be a range of products tailored for the start up and expansion of the SME sector and that in the Irish context, it would have novel lending terms of between five and ten years.

As well as that, KfW, upon whose experience and advice we rely quite a lot, has interest rate holidays. If one decides that one will expand one's company, quite clearly, one's business plan would not say that the company would be profitable until perhaps year three or four. If one can gear the credit product so that one can be carried for the first two and a half or three years at which point the interest rate repayments come in at a slightly higher level when the company is profitable, one can see the advantage of that and the encouragement that gives to a company to expand.

Of course, we all have the interest that companies would expand so there is more growth in the economy and, consequently, more jobs created. That is the range of advantages.

The legislation provides that the fund may lend directly and it does not exclude this. Whereas the initial model will be on lending through the commercial banks or through new lenders, the idea of lending directly is not excluded, and I would see it growing into that.

I believe this is a very significant initiative and I am delighted it has received such support here today. I believe people will look back on this in 20 years time and see it as a landmark decision. This will be like the founding of the IDA or one of the successful State agencies and it will be seen as one of the big initiatives that grew the economy. We are very grateful to our colleagues in the European Investment Bank, to the German authorities through KfW and to our own Ireland Strategic Investment Fund for getting involved in this. I know there are many other questions of detail that Senators would like to get into but we can do that on Committee Stage and Report Stage. Generally, I recommend the Bill very strongly and I hope it will be as successful as I believe it will be.