Lorraine Higgins (Labour)
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I thank the Minister of State for taking this matter, which is of importance to the recovery of this country. It is the need for a bank to actively lend to the small and medium enterprise sector. This week we were informed by reports in the Irish Independent that lending to small and medium enterprises has declined for each of the past three quarters when lending to farms and property companies is excluded from the figures proffered. This is on top of news from last year, when the Department of Finance told us 24% of small and medium enterprises, SMEs, refused finance were not given any reason and nearly half of applications are taking longer than the Government-recommended 15 days to turn around. These kinds of statistics make me genuinely fear for a lost decade in Irish society, as we have not adequately addressed the deep-seated problems with competition in the banking sector. We need to tackle it head on.

Small and medium enterprises make up 99% of all businesses in this country yet we have a loan rejection rate second only to Greece in the eurozone at 24%. We have the second-highest level of discouraged borrowers and we also have the worst terms and conditions applying to new credit in the EU. If people want a commercial loan or mortgage, they must come up with a 33% deposit in order to get the loan and be approved by the bank, and they also need to pay conveyancing fees not only for their own solicitor but that of the bank as well. Such issues must be addressed very quickly.

We can compare small and medium enterprise lending against best practice in the western world. In most First World countries, lending is proffered on a cash flow basis and not on bricks and mortar security, as continues to be the case in Ireland. As a result of the property crash we must have a major shift in thinking or else we will miss out on the next Facebook or Steve Jobs kind of entrepreneur. Despite AIB and Bank of Ireland giving the Government an undertaking to lend €3.6 billion to small and medium enterprises for 2013, it seems that to a certain degree we are being duped. What may not be obvious to some is that banks include in their calculations restructuring of debt, renewal of season loans and overdraft facilities, changing overdraft facilities into term loans, as well as all agriculture, retail and service loans. The portion relating to the likes of manufacturing is minute in terms of the existing small and medium enterprise book and new finance.

It is clear we need proper banking competition in this country and if we cannot succeed in making those banks bailed out by the Irish people lend to the small and medium enterprise sector in the way they should, we must set up or encourage a new institution to set up here. We need a properly focused business bank that would target more than half of lending on the SME sector and commercial enterprises so we can ensure cash flow businesses are being adequately financed. To give an example, a licence was given to an enterprise called Metro Bank, with over half of its lending targeted at the SME sector only. The Department of Finance and the Central Bank must bear that in mind when they devise policy in the area.

We are letting go opportunities to finance Irish businesses and entrepreneurs, and we are not offering money to people based on the strength of business plans but rather bricks and mortar security, with which I have difficulty. If we do not correct the trend and take remedial action, we will face an issue of paralysis for small and medium enterprises in the country. Without a working banking system, we will not be able to rebuild Ireland. SMEs cater for 99% of all businesses, and they have a real role in revitalising local towns and villages. We must recognise how critical they are for economic development, and we must do everything we can to address what has been inflicted upon them. For that reason I ask the Minister for Finance, in conjunction with the Central Bank, to consider granting a new licence to a business-based bank.

Fergus O'Dowd (Louth, Fine Gael)
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The Government acknowledges that SMEs are the lifeblood of the Irish economy and play a crucial role in employment growth in our country. Since March 2011 Government policy has concentrated on ensuring that viable micro, small and medium sized enterprises have access to capital, equity and debt funding from a more diverse range of sources. Experience has shown us that not only do SMEs need credit from banks but some SMEs have an appetite to take equity and other investments from market-based funders. The NPRF has committed to using its funds to help the flow of credit to the SME sector through the SME equity fund, the SME credit fund, the SME turnabout fund and the innovation fund, all of which are up and running.

In budget 2014, the Minister for Finance introduced a number of measures for funding growth in the SME sector including enhancing the Credit Review Office, devising a comprehensive communication strategy on Government supports for SMEs, improving the financial education of SMEs and measures to help SMEs to export. The Government supports seed and venture capital directly through Enterprise Ireland and has established a credit guarantee scheme. Microfinance Ireland can also help smaller SMEs and Senators and Deputies can help us to spread that message in their constituency clinics. The launch of the development capital scheme will help firms with high growth and job creation potential. The actions outlined above show that the Government is fully committed to maximising the potential of the SME sector in any way it possibly can so that the people will benefit from a thriving domestic economy.

The Senator should note that it is unlikely that the Central Bank would refuse a license to an SME-focused bank provided such an application complied with all relevant laws and procedures. As this House will no doubt be aware, the Taoiseach mentioned in the Dáil at the time of the exit from the troika programme that he had held discussions with Chancellor Merkel on ways in which Germany could actively support our efforts to foster economic recovery. The discussions included a specific focus on finding ways to reinforce Ireland's economic recovery by improving funding mechanisms for the real economy, including access to finance for Irish SMEs. In that context the German Government has asked KfW, the German development bank, to work with the German and Irish authorities in order to deliver on this initiative at the earliest possible date. Officials of the Department of Finance have already exchanged working papers on this subject with KfW and the German Ministry of Finance. There have been meetings on this matter in Berlin, Frankfurt and Dublin as well as numerous teleconferences, including two last week.

The NTMA and the Department of Finance are currently working on the details of the debt products to be offered to the SME sector with a view to making them attractive in terms of both cash flow and accessibility. As we are trying to ensure that any initiative that comes out of this process is as effective as it can be, we will be discussing approaches that meet the strategic objectives of all stakeholders and ultimately facilitate lending to the real economy, in particular to SMEs in Ireland. In addition, the medium-term economic strategy and in turn, the action plan for jobs, commits the Government to working with multilateral development and national development banks to develop new sources of finance for SMEs. In this context we will also be exploring how the European Investment Bank's assistance can continue to be leveraged to the maximum benefit of the Irish economy.

Experience in other countries suggests that any lending facilitated by a national development bank like KfW or a strategic investment bank is generally complementary to lending already taking place in an economy and can assist commercial banks with access to cheaper credit lines such as from the European Investment Bank. Additionally, the Government has decided to establish the Ireland Strategic Investment Fund, ISIF which will absorb the National Pensions Reserve Fund, NPRF. Using the ISIF, we will further maximise our resources to enhance growth in the Irish economy and improve key infrastructure to maintain Ireland's attractiveness as a place to do business and to create employment. As announced, the legislation for ISIF will be introduced in the Oireachtas shortly.

Lorraine Higgins (Labour)
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I thank the Minister of State for his answer and acknowledge all of the efforts being made by this Government. The creation of 61,000 new jobs last year, so soon after taking office, is indicative of the success of its policies. However, we all know of small businesses in towns and villages all over Ireland that have closed down as a consequence of the recession. I am trying to draw a parallel with what happened in the 1980s. At that time, ICC bank and ACC bank were operating here and had targeted lending structures for the agricultural community and the SME sector. I am opposed to the funds that are potentially coming from Germany through KfW going into our pillar banks which have legacy issues vis-à-vis their customers. We need a third force in banking in this country and the Government needs to create that. That would really assist all of the ancillary work that has been done by the Government, as outlined by the Minister of State. We need fresher thinking in the context of granting loans to business people. We need to move away from bricks and mortar security and ensure that the viability of any business is assessed on the basis of its business plan and not on whether it has 30% or 33% of a deposit to invest in a building. We need properly focused business banks and that is the nub of the issue.

Fergus O'Dowd (Louth, Fine Gael)
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I thank Senator Higgins for her comments and assure her that the statistics she presented earlier, which are very useful, as well as her views and comments will be brought to the attention of the Minister for Finance.