Tuesday, 26 January 2016
Credit Guarantee (Amendment) Bill 2015: Second Stage
When we took office in 2011, the programme for Government prioritised action to achieve access to finance for every business, finance which was needed for working capital and to feed investment, expansion, growth and job creation. In spite of recent progress, good access to finance for business remains very high on the agenda of Irish SMEs in the context of national competitiveness, with a recent Central Bank report indicating that 39% of SMEs still consider access to finance a matter of high concern. The Bill revisits credit guarantees to ensure Irish firms will have the full suite of supports necessary to compete and succeed and that they can operate on a level playing field with international competitors. Solving the problem of access to finance for SMEs - the section of the economy which accounts for 99% of business and 68% of employment - was a major challenge. No significant action had previously been taken to address the major area of concern to business. Accordingly, the programme for Government committed to introducing a credit guarantee scheme for banks against losses and qualifying loans to job creating small firms. It was designed to get banks lending again to viable businesses in cases where there was either a lack of collateral or where banks lacked an understanding of the operation of novel SMEs, their business models or markets.
In November 2011 the Government approved the urgent drafting of a Bill to give effect to the work undertaken and the future appointment of an operator for the day-to-day operation and management of schemes made under the credit guarantee legislation. In July 2012 the Credit Guarantee Act 2012 was passed. With the Act in place, a scheme under its provisions was drafted and an order was subsequently made to give effect to it. Finally, after conducting a public tender under public procurement regulations, an operator, Capita Asset Services Limited, was appointed and the scheme went live on 17 October 2012. In short, the 2012 Act and 2012 scheme were designed in double quick time to facilitate additional lending to small business.
As regards the operation of the scheme today, the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton; the Department and I have at all times maintained very close contact with Capita Asset Services Limited, receiving detailed weekly, monthly, quarterly and annual reports. Some of these details have been published on my Department's website on a quarterly basis and I recently asked the operator for up-to-date figures, as of Friday, 22 January 2016, to present to the House today, which I will summarise.
Approximately €45 million in credit guarantee scheme loans were sanctioned, averaging €161,300 in over 279 cases.Live credit guarantee scheme facilities were approximately €32.6 million, averaging €159,700 over 204 cases. Credit guarantee scheme loans drawn down were approximately €16.2 million, averaging €123,400 over 131 cases. The employment impact is estimated to be 1,142 new jobs created and 907 existing jobs maintained.
The regional distribution vis-à-vissanctioned loans is as follows: the east, which is regarded to be Dublin, Kildare, Meath and Wicklow, stands at 56.52%; the mid-west area, comprising Limerick, Clare and north Tipperary, is at 11.84%; the south east, which includes Waterford, Wexford, Carlow, Kilkenny and south Tipperary, is at 10.88%; the south west, comprising Cork and Kerry, stands at 7.85%; the midlands, comprising Laois, Offaly, Longford, Roscommon and Westmeath, is at 6.67%; the west, which comprises Galway and Mayo, is at 4.61%; the north east, which comprises Cavan, Louth and Monaghan, is at 1.43%; and the north west, which comprises Donegal, Sligo and Leitrim, stands at 0.2%.
An integral part of the 2012 Act was the commitment in section 10 to review its operation, to ensure that we could learn from its operation and also to ensure it was fit for purpose in meeting the needs of business. In mid-2013 the Minister, Deputy Bruton, noting the fact that loan sanctions were running at less than expected, despite a relatively high estimated level of positive jobs impact and no loans defaulting at the time, commissioned a full external review of the operation of the Act and the scheme. This review was laid before both Houses of the Oireachtas in July 2014 and the contents were reported to the Committee on Jobs, Enterprise and Innovation in autumn 2013.
In short, the review concluded that while the scheme had real merit, its complexity, the narrow range of products covered and the apparent disproportionate skewing of risk distribution in favour of the State as guarantor, made it unattractive for the banks to operate. The review accordingly proposed changes in respect of the simplification of scheme procedures, the term of the guarantee, the spread of risk-sharing and the product range. On 3 February 2015, as an interim measure addressing urgent concerns brought to my attention at short notice and with the consent of both the Minister for Finance and the Minister for Public Expenditure and Reform, I made an order giving effect to a second scheme, namely, the credit guarantee scheme 2015. This made two revisions to the 2012 scheme by first, providing for the re-financing of some loans where an SME's bank was exiting the Irish SME credit market and, second, extending the maximum length of the guarantee from three to seven years. However, it was clear that more significant changes requiring primary legislation would be needed to ensure that the Irish credit guarantee system fitted the needs of business.
The review I referred to earlier was brought to the attention of Government on 17 June 2014 and approval was given to a draft Bill to amend the 2012 Act and associated schemes to enhance uptake, facilitate the growth of SMEs and support job creation. At that meeting, the Minister, Deputy Bruton, was also asked to work with colleagues to seek an appropriate role for the newly established Strategic Banking Corporation of Ireland in terms of the operation of the credit guarantee scheme. Work on this aspect was initiated immediately by officials at my Department and the Department of Finance. This Bill was published on 16 September 2015 and a detailed regulatory impact assessment, RIA, has been posted on my Department's website.
The Bill progressed through Second Stage in the other House on 25 and 26 November last. In advance of Committee Stage on 8 December 2015, a significant tranche of amendments, primarily a new Part 3 covering a role for the Minister and SBCI to work together in respect of counter-guarantees, was presented. In summary, this Part 3 was designed to leverage EU funding for Irish SMEs. A supplement to the September RIA, covering the new material, was also circulated to Deputies and posted on the Department's website. I will describe these amendments in more detail presently. In advance of the Report and Final Stages in the Dáil on 20 January 2016, I circulated a final tranche of amendments, this time adding a new Part 4 covering miscellaneous but necessary amendments to other pieces of legislation administered by my Department unrelated to credit guarantees. I have also arranged for additional briefing to be sent in advance to Senators and I understand this has been the case.
Part 1 is headed "Preliminary and General". Sections 1 and 2 are quite straightforward and deal with citation, definitions and so on, including at section 1(2) making it clear that Part 4, which amends other legislation, stands completely separate from Parts 1 to 3.
Part 2 is headed "Amendment of Principal Act", that is, the 2012 Credit Guarantee act. This Part covers sections 3 to 9 and is primarily concerned with expanding and improving credit guarantees from the form in which they have operated since 2011. Broadly speaking, the provisions are designed to amend the 2012 Act and the two schemes as follows: to broaden the definition of "lender" so as to cover additional financial products provided, such as lessors, factors, invoiced discounters and other non-bank financiers; to change the definition of loan agreements to include non-credit products such as invoice finance and leasing, and to include overdrafts; to re-balance the level of risk between the State and the finance providers, with the State taking a greater share; and to charge an appropriate premium for the guarantee.
Specifically, section 3 amends section 1 of the 2012 Act by providing definitions of new key concepts such as finance agreements, finance providers and related matters. Section 4 substitutes a new section 2 into the Act providing for certification and approval of finance providers. Section 5 substitutes a new section 4 into the Act allowing the Minister to take greater share of the risk vis-à-visparticipating finance providers, subject to constraints, in particular capital limits, to which I will return later. Section 6 amends section 5 of the Act to broaden the scope of future schemes to cover non-bank finance providers. Section 7 amends section 8 of the Act to allow the Minister to charge premiums on all of the products covered by the legislation and, in addition, sets out objective policies and principles that the Minister must observe when so charging, primarily to ensure that premiums charged in respect of credit guarantees should not exceed what is needed to defray the costs in whole or in part. Section 8 substitutes a new section 9 into the Act in regard to the withdrawal of the guarantee by the Minister in problem cases. Section 9 provides that existing schemes and guarantees are not affected by the change in this part when they come into effect.
Part 3 is new and deals with counter guarantees. As I mentioned earlier, when approving the Bill the Government also agreed that my Department and the Department of Finance would work together on additional amendments to the Bill in regard to a role for the SBCI in this area. In pursuit of this aim, Part 3 contains important new provisions. First, to enable State promotion of financial institutions - the SBCI currently, and perhaps also others in the future - to work with the Minister to enhance the provision of credit to SMEs and, second, to empower the Minister to give counter guarantees that will enable the SBCI to unlock matching guarantee facilities from EU sources, and thus better share the risk across the banks, the SBCI the Minister and the EU sources. It is envisaged that this counter guarantee will operate in conjunction with optimal leveraging of EU financial instruments in this area, such as the European programme for competitiveness of SMEs, known as COSME, the Horizon 2020 funding earmarked for SMEs and the European Fund for Strategic Investment administered by the European Investment Bank and the European Investment Fund, otherwise known as the Juncker plan.
Section 10 contains the definitions to enable counter guarantees to work. While it in some ways mirrors section 1 of the principal Act, as extended for section 3 of this Bill, on definitions for credit guarantees, it goes further in respect of counter guarantees, most notably in the defining the promotional financial institutions. While this is currently the SBCI, the way as left open for others in the future as that evolves. Section 11 empowers the Minister to give counter guarantees directly to the promotional financial institution, a move that is designed to enable the institution to in turn leverage funding from EU sources, as well as seeking funds from other finance providers. Section 12 is very important in that, in accordance with the relevant Government decisions, a monetary limit of €15.6 million is set on any risk liability of the Minister under not just counter guarantees but also credit guarantees. Section 13 provides for the making of a counter guarantee scheme by statutory instrument jointly signed by the three Ministers. Section 14 covers the payment of premiums to the Minister, with a like provision to that in Part 2 to the effect that, as with credit guarantees, any premium charged to the SME should not exceed what is needed to defray the costs in whole or in part. Section 15 provides for a review of the counter guarantee scheme, as in the case of the credit guarantees. Section 16 enables the Minister's expenses in running counter guarantees to be paid from public funds.
Part 4 comprises sections 17 to 20 and contains a number of unrelated amendments which were essential to the good working of other enactments. Section 17 amends the Employment Equality Act 1998 to insert a new section 101(4A) to ensure the complainant cannot seek redress under both the Unfair Dismissals Act and the Employment Equality Act in respect of the same dismissal within a new framework for the adjudication of disputes under employment and equality legislation which has been put in place following the establishment of the Workplace Relations Commission. Section 18 amends section 34 of the National Minimum Wage Act 2000 to correct a typographical error in regard to the numbering of the subsections. Section 19 makes two separate amendments to the Workplace Relations Act 2015. The first amends section 37 of that Act to make provision for transitional arrangements to apply in respect of the transfer of the power to prosecute for summary offences under employment related enactments from the Minister to the Workplace Relations Commission. The second amends Part 2 of Schedule 1 of that Act to correct an incorrect reference to the Employment Permits Act 2003.
Section 20 amends section 916 of the Companies Act 2014. That Act, as the House will be aware, consolidated the 17 previously existing Companies Acts into one Act and introduced a number of key reforms which designed to make it easier to operate a company in Ireland. The Companies Auditing and Accounting Act 2003, one of the 17 Acts that were repealed and replaced, established the Irish Auditing and Accounting Supervisory Authority. In section 14, it provided that the authority could levy accountancy bodies for the purposes of meeting its expenses. This section 14 was re-enacted in section 916 of the 2014 Act but in a way that inadvertently limited the purposes for which moneys from the levy on the accountancy bodies could be used. The amendment will enable the authority to use moneys from the levy to meet expenses properly incurred by it in performing its functions, as was originally intended.
An overarching challenge for this Government over the past five years has been to ensure Irish firms have the full suite of financial and other supports available to compete internationally and to grow sustainable jobs across the country for citizens in order to facilitate an economic turnaround. This legislation is part of the ongoing work of the Government to address these challenges. In October 2015, an OECD study of 37 countries found that most of them continue to support access to bank financing by SMEs through loan guarantees. In the amendments to our legislation which I am proposing today, we are not just beefing up credit guarantees as regards risk spread but also extending them to non-traditional, or non-bank, sources of finance. We are also introducing, for the first time, counter-guarantees by the Minister to the Strategic Banking Corporation of Ireland to both spread risk and leverage EU funding.
I am confident these amendments will ensure we have a range of products that they are fit for purpose in this area and that they will continue to help to drive the economic recovery across the country and secure a sound economic future for our citizens. For these reasons, and because it fits business requirements to successfully compete internationally, I commend the Bill to the Seanad.
This is an important Bill which we, on this side of the House, will support. It brings about reform following the review of the credit guarantee scheme. These reforms are overdue, significant, warranted and absolutely necessary. The lifeblood of the economy not just in Ireland but across Europe is the SME sector. More than 99% of all the corporations in the EU are SMEs. I think the figure is approximately 99.8%. They provide more than 66.7% of all employment and account for 58.6% of value added according to EUROSTAT figures. They are essential.
SMEs have a distinct disadvantage in terms of accessing credit because they do not have access to credits through the markets, venture capital or the possibility of raising equity through the stock exchange. Therefore, often the only alternative available to them is bank lending. They have come up against huge obstacles over the past number of years since the economic crash as a result of the difficulty in accessing credit. This has been compounded by the financial crisis. It is not unique to Ireland but Ireland is one of the stressed countries, according to the European Central Bank and the Irish Central Bank, along with Italy, Greece, Portugal and Spain. The stressed position of the Irish economy has made it more difficult for SMEs to access credit and, as a result, less economic activity was generated within the State. The Government, therefore, had to intervene and the guarantee was introduced but it was found not to be working.
The review carried out in 2013, to which the Minister of State has referred, was scathing of the credit guarantee scheme introduced in 2012 and the figures on uptake speak for themselves. Various forms of guarantees have been implemented across European countries. Some are public guarantees while others are public-private guarantees. However, the litmus test must always be the uptake, that is, the numbers availing of the scheme. The figures up until the end of June on the current scheme showed just more than €31 million had been made available through it. The figures referred to today by the Minister of State indicate approximately €45 million in lending has been made available, which is an improvement, and I acknowledge that fact. It was going nowhere fast otherwise given it had a target of €450 million but lending was at approximately €1 million per month. Something drastic was required.
The review was damning. It found the scheme to be over-complicated, offered a narrow range of lending products and was skewing the risk in favour of the State. It also found the range of financial products under the scheme was too restrictive, that the three year term was too short given most loans are for a minimum term of five years to seven years and that the current level of the scheme guarantee at 7.5%, being 75% of 10%, was seen to be too low and did not provide an equitable level of risk sharing. More competitive rates must be introduced. For example, the recent Lord Mayor's fund in Dublin City Council, offered in conjunction with Ulster Bank, has a rate of in or about 4%. It is 4.1%, if memory serves me right. We have to look at making the scheme more competitive.
According to the review, the 2% premium was seen as expensive. There was no cost sharing of the premium with the lending institutions. Furthermore, the requirement to issue a formal decline letter as a prerequisite to being considered for inclusion under the scheme was viewed negatively by borrowers and stakeholders alike. The cost of administration of the scheme, which was high relative to the level of underlying scheme activity, came in for criticism. The review found the scheme was not appropriate for low-level credit needs and should be adapted to facilitate the flow of some credit, in particular to smaller SMEs, sole traders and partnerships. The scheme is onerous in terms of smaller levels of funding and, if we are to drive economic improvement within the economy, every sector must be catered for. The 2% premium was imposed on the borrower. There should have been some level of burden sharing of it with the bank, perhaps a 1% split.
The review recommended the appointment of a dedicated owner or manager to the scheme who would have responsibility for its general management, including the driving of performance against the scheme's objectives. Ultimately the scheme will be successful if it meets its performance objectives. Those objectives have been set out quite clearly. Heretofore, the scheme has not been meeting those objectives and some one is required to drive this forward. Public policy makers, including the Minister of State, cannot micro-manage a scheme such as this one but responsibility to drive the scheme has to be given at an appropriate level.
One alarming statistic was touched on by the Minister of State. I cannot understand why the scheme does not like the north west and other regions in the country. Why is so much of the activity generated in the direction of the commuter belt and the greater Dublin region? I will use the Minister of State's figures when looking at the uptake. I had alternative ones but the Minister of State's figures are worse than those which I was going to present this evening in respect of my area. Take, for example, the west. One of the big arguments coming from rural Ireland at the moment concerns the lack of economic activity there. The issues being raised include emigration, no opportunities, lack of investment, no jobs, no access to finance and banks not being available. Given the figures, I am not sure an economic appraisal was carried out in the review or if the Minister of State's Department has carried out a subsequent appraisal on why the uptake is so low. What are the reasons? I swill not speculate. Let us take the region of the west of Ireland, Galway, Mayo, Cavan, Louth, Monaghan, Donegal, Sligo and Leitrim. All of that region is the old BMW region which was recognised by the European Union as an area that required special economic incentive from the State and the European project. The region only received about 6% of funding so the remaining 94% goes to the rest of the country. There is something seriously wrong with such an allocation of funding. Has that been investigated? Why did it happen? Surely if we are bringing legislation forward and trying to drive this agenda then these are some of the questions that must be asked. Surely a manager driving performance targets would have to look at the situation as well. If the Government's programme is really about balanced regional development, creating regions and developing regions then a balanced approach must be at its core.
I am almost out of time. We will have an opportunity to tease out some of these issues on Committee and Report Stages. I am not sure how much time will be allowed but my party will table a number of amendments on Committee Stage. I would appreciate if the Minister of State would comment on some of the points that I have made.
I welcome the Minister of State to the House. This is timely legislation because the Central Bank has just produced its latest SME market report which was compiled by economists in its financial stability section. The report aims to give an updated picture of the developments in the SME credit market. It is important for us to note the main conclusions of the most recent report. Gross new lending to non-financial, non-real estate SMEs shows positive growth since the start of 2014. For the first three quarters of 2015, year-on-year growth rates in quarterly new lending were 26%, 33% and 4.9%, respectively. Despite this growth, the overall stock of outstanding SME credit continues to decline, implying that the volume of repayments is outstripping new lending in each quarter. Since the last report, outstanding credit has declined by 8%. Compared with other euro area countries, new lending, including renegotiations, relative to domestic demand is currently low.
While SME perceptions of bank willingness to provide credit have improved, 39% of Irish SMEs still consider access to finance a major concern. This share is similar to what is known as the EU2 countries of Spain, Portugal, Italy and Greece but above what is known as the EU1 countries of Austria, Belgium, Germany, Finland, the Netherlands and France.
Interest rates on Irish SME loans are high relative to the euro area. Furthermore, SME rates did not decline in line with the euro area from 2014, particularly relative to the EU2 countries. The difference between SME and large firm interest rates is also relatively high in Ireland. The latest data show a slight reduction in interest rates for smaller SME loans. In addition, the share of SMEs reporting interest rate increases is declining.
Bank finance application rates have been declining since 2012, driven by declines in applications for renewed and restructured products. Loan application rates, which have been steady since 2013, are low by European levels. The majority of finance applications are for working capital purposes, although this rate is declining. Bank rejection rates have declined slightly since the last report, currently 15%, down from 16%, but this rate is above euro area averages of between 8% and 9%. Firm-level data show that the share of SMEs with no outstanding debt is rising while debt-to-turnover ratios are declining. Furthermore, it is evident that the majority of fixed asset investments are currently financed through internal funds-retained earnings rather than external bank finance. SME default rates are declining. Currently, 19% of loans and 31% of total outstanding balance are in default, which is down from 26% and 41%, respectively, in 2013. Default rates remain highest in the construction and hotel-restaurant sectors.
SME profitability and turnover have improved substantially since 2013. The recovery in activity has been strong by European standards. For example, the net increase in profits, which is the share of SMEs reporting increases minus share reporting decreases, is currently 28% in Ireland compared with 5% in EU1 and 10% in EU2 countries. Similar trends are observed for turnover changes. However, improvements in business performance are weaker for smaller SMEs, both in Ireland and the euro area.
Much of this is good news and shows the progress made by this Government since the crash. It also shows the importance of the passing of this legislation. As SMEs and others have noted, the legislation is intended to address the competitive disadvantage of SMEs that lack collateral and, as a result, find it difficult to access finance. It is fair to say, and the Minister of State will agree, that the original legislation was not as successful as was hoped. The Government recognised this and a review was commissioned. Action was taken in the form of this legislation. It is vital for SMEs, the backbone of the economy, that this legislation is enacted as soon as possible. I commend the Minister for his action in remedying the original legislation.
I welcome the Minister of State to the House. The Oireachtas Joint Committee on Jobs, Enterprise and Innovation has spoken on this issue a couple of times so I am familiar with a lot of the background work on the matter. In fact, my party raised some concerns about this scheme when it was first established. We warned that it was not going to achieve its targets and, unfortunately, it has not. One of the big failures of the Government has been its inability to create a functioning credit market.
The dysfunctional credit market has played a significant role in the problems affecting small businesses. Legacy debt is still in place. Businesses are frozen out of growth and development because they are unable to service their loans or grow beyond servicing their loans. We have this dysfunctional system because the Government decided to have a very concentrated and limited banking market. If we had a more diverse and less concentrated banking market there is no doubt in my mind that it would create more competition and many of the problems regarding credit and access to finance would start to dissipate.
As the Minister of State is aware, the economy is very lopsided in the sense that we have few decent sized indigenous businesses that are able to export. Of approximately 4,500 exporters in the State, 1,500 are foreign enterprises, which means only 3,000 indigenous enterprises are exporting their goods. These figures do not compare well with other countries of similar size, such as Austria and Denmark. This structural problem in the enterprise sector can be attributed in part to the structural problems in the banks.
The credit guarantee scheme was designed to provide much needed finance to job creating small and medium-sized enterprises that are struggling to obtain credit from banks. This was one of the legacy issues that arose from the previous Government and the problem was inherited by the current Government. One of the promises that this Government made to businesses and people, in terms of developing and diversifying the economy, was that it would deal with the lack of credit available to entrepreneurs, risk takers and people who want to establish new businesses. However, most of the schemes that were put in place by the Government have failed or been insufficient.
The purpose of this scheme was to provide credit to viable businesses in two specific circumstances, where a business has insufficient collateral or where it operates in a sector with which the banks are not familiar. In such circumstances, the State would provide a 75% guarantee against losses of qualifying loans. The scheme was intended to benefit 5,400 businesses and create 3,900 new jobs but neither objective has been realised. These were not our targets in Opposition. These were the targets that were set by the Government. Since 2012, approximately €20 million backed by the guarantee has been provided to only 156 businesses.
Since the introduction of the credit guarantee scheme, Sinn Féin has repeatedly highlighted other opportunities for resolving the crisis small businesses are experiencing in accessing bank credit. My party colleague, Deputy Tóibín, has developed a model for a public banking system which could be used to direct credit to small businesses. It was modelled on a network of local banks in Germany which are a major component of the German banking system. It would add a new dimension in terms of competitive behaviour among the banks and rebalance somewhat the relationship between the banking sector and those it is meant to serve.
Our proposal envisaged the establishment of ten new regional banks, managed independently and supported by a centralised specialised unit that would provide auditing, risk management and procurement services to the network. The costs of these elements of banking would be reduced because they would be carried out centrally. Each bank would operate in a defined region, ensuring a balanced distribution of deposits and lending across the State and providing a greater incentive to invest in the sustainable development of a local banking region. In other words, it would focus money back into the regions because it would be ring-fenced.It would also ensure that the management, staff and expertise of the bank was oriented to the needs of the region.
The Minister will know that I published an economic development strategy for the south east in 2012. One of the key issues that arose in many of the engagements I had with small businesses and entrepreneurs was access to credit. Another key issue was how to get finance into regions. We all know that unless the capital, tools, resources and infrastructure are there, regions are not in a position to build, grow and develop to the extent they should. That is where the State comes into its own. It can provide a positive robust environment in which we can create jobs, encourage job creation, sustain jobs and reward and enable risk takers, entrepreneurs and those who are creative to create the jobs we need. Access to credit is central to that.
The Government will present its own case on the economy, which is recovering. I acknowledge it inherited a real mess from the previous Government. However, we are concerned here with the supports that have or have not been put in place for small businesses. Unfortunately, the Government has not succeeded in supporting the SME sector and small businesses across the State.
Anybody who reads a newspaper or watches television here would imagine the Irish economy revolves around foreign direct investment and companies like Google and Apple. Many of the Senators who have already spoken have pointed out that the SME sector here is central to and is the backbone of our domestic economy. It accounts for approximately 54% of total employment and 70% of total private sector employment. SMEs also contribute approximately 48% of value added funds. In 2011, which probably represents the low point of the Irish economy, SMEs created 90,000 extra jobs in Ireland, despite the fact that 50% of SME businesses failed. Apart from employing a large number of people, SMEs also represent risk takers, innovators, entrepreneurs, the tourism and retail industries and the construction sector. Many of the companies that have led and are leading the economic recovery are in the SME sector.
As mentioned, SMEs face an environment where access to credit is hampering the recovery. This is partly due to systemic factors, such as lack of collateral or lack of a track record, but in general the lack of credit is a response to the economic downturn. For example, in the construction sector, the equity gap between what can be raised through bank finance and what is required by the builder is in the region of 40%. At the end of 2012, some 94% of all external finance to SMEs came from banks, but between March 2010 and March 2015, lending to SMEs by financial institutions fell by 23%. Senator Henry has provided good figures to show how Irish SME lending from banks and financial institutions compares with other European countries. Unfortunately, since the crisis, SMEs have also become more risk averse and are less likely to borrow, and are now increasingly more dependent on short-term finance, such as overdrafts and trade credit. Viable businesses are failing due to a lack of liquidity. It is important to emphasise the less than proud record of Irish financial institutions in terms of the interest rate they charge in comparison with other European countries. This is also reflected in the interest rate being charged on mortgages, both old and new. This raises an issue for the sector.
The credit guarantee was introduced in 2012 and while it has come in for some criticism, it can be argued that the scheme has been successful. It is estimated that 864 new jobs were created and 601 jobs maintained as a result of the €31 million loans. However, it is accepted that the scheme did not achieve the uptake expected. Ian Lucey, whose foundation helps entrepreneurs, has argued this was partly due to a lack of awareness. Not only did the banks not advertise the scheme, but there was a lack of knowledge within bank branches and a failure to actively encourage SMEs to take up the scheme. Some 90% of SMEs admit to having low awareness of Government schemes and 80% say more information should be made available. A review of the scheme found improvements could be made and this is what this Bill seeks to do.
The Bill proposes to increase the guarantee period from three to seven years, to increase the overall amount available from €31 million to €150 million and to allow the Minister to guarantee up to 80% of a loan. The types of loans covered have been extended significantly, to include other products such as invoice discounters, non-bank financiers and other financial products, such as invoice financing leasing and overdrafts. Overall, it is expected there will be 1,350 successful businesses assisted as a result of this scheme. I understand the Bill will enhance the capacity of Microfinance Ireland, a welcome initiative. Microfinance Ireland was established to deliver the microenterprise fund and to provide small unsecured loans of up to €25,000 for commercially viable proposals at favourable conditions.
There is no doubt that this Bill goes a considerable way towards improving the environment for SMEs. As mentioned, an important part of the amended Bill is that it contains new provisions to enable the State's promotional financial institution, the Strategic Banking Corporation of Ireland, to work with the Minister in enhancing the provision of credit to SMEs. It also empowers the Minister to give counter guarantees. This is important when we consider the level of funding, through quantitative easing, that is being made available at the European level. If we are to be able to access that type of funding, it is important the systems are in place to enable our businesses to compete on a level playing field with other European businesses.
There are one or two positive developments I would like to highlight that I believe will assist Irish SMEs. This Bill is an important part of the process of enabling our businesses to access credit. The capital markets union will create a single market for capital in Europe and will help unlock capital and liquidity for businesses. One of the disadvantages here is that our SME sector is highly dependent on bank funding. We are the most dependent on bank funding of any of the 28 EU countries. The idea behind the capital markets union is to enable businesses to access venture capital funding and to put in place the provisions that will enable that to happen. I welcome this, but at EU level it is important to ensure the relatively small size of Irish SMEs is borne in mind when agreeing on issues, such as the level of reporting that is required. Regulations that are overly onerous that do not take size into account would be very costly to Irish businesses.
I welcome the new Central Bank regulations on SME lending, which were released in December 2015. These regulations are aimed at strengthening protection for SMEs, at facilitating access to credit and at making the application system more transparent. I have come across a number of situations where SMEs have been refused finance. This has happened mainly in cases where the finance of the SME concerned has been tied up with borrowing for something such as a property investment. Where the borrowing is blended, there has been a major issue for Irish SMEs to access credit in certain circumstances. I believe an SME that has reached an agreement with its creditors is entitled to know why an application for credit is being refused by a lender. The new system being introduced will be a valuable mechanism for ensuring that viable SMEs are not unduly prejudiced by the hard times they have faced following the collapse of sectors of our economy.
If we want a knowledge economy and want to lead recovery through innovation, we need the requisite capital financial systems.If we do not improve our credit market, whether through the traditional banking sector, venture capital funds or other means, the people who want to set up the next Stripe, which enables websites to access credit and debit card payments easily, will go elsewhere. The website hassle.comis a Hailo-type business for cleaners and Fenergo provides software to investment banks. They will go somewhere else. This Bill represents an important step in encouraging job creation and opportunities for businesses and employees in the country. I commend it to the House.
I thank colleagues for their contributions. I am very pleased to sponsor the Bill and to have taken responsibility for the legislation when I took office approximately 18 months ago. This is a necessary Bill to assist our small and medium enterprises, SMEs, as best we can. We reviewed the operation of the scheme quite early in its existence and accepted what the independent review indicated regarding the changes that needed to be made to help us achieve the ambitions we had for the SME sector in the context of access to finance. Everybody agrees that the principles of the scheme and as set down in the original legislation were ambitious and were certainly targeted in the right direction in terms of supporting SMEs. Those original ambitions were not realised for a host of reasons, as outlined in the review. We have very much accepted what the review had to say.
Almost 70% of our employment and 90% of companies are in the SME sector. We need to strive each and every day to ensure we provide appropriate vehicles for access to finance for growth. In the first couple of years of the existence of this Government, the challenge was to ensure that there was access to finance at a very basic level for SMEs but the challenge now is to ensure we can finance for growth as SMEs are expanding and our economy is becoming more successful. We need to ensure we have vehicles of this nature, available through the legislation before the House, that are flexible and receptive to the needs of business. We must ensure that we get credit to the businesses that need it when and where they need it.
The emergence of the Strategic Banking Corporation of Ireland, SBCI, is an important addition to the landscape for SMEs in this country. It is not yet a year in existence but it is performing very well, providing a host of opportunities for businesses to expand. The opportunity to access SBCI finance comes through the pillar banks and we have made important changes in this legislation to broaden a range of products and vehicles covered in the scheme to ensure that risk-sharing is spread. There should be a host of products and vehicles available to our SMEs outside the traditional banking products.
The range of different initiatives we are taking through this legislation on foot of the review we initiated a couple of years ago really will make a difference and make the scheme much more attractive to SMEs. Critically, we have provided a role for SBCI in the legislation to help leverage funding from appropriate EU sources such as COSME, for example, and opportunities that will arise under the Juncker plan and a range of different EU financial instruments. That will help our SME community to create the good, decent and sustainable jobs that everybody in the House wants to see.
I take on board Senator Ó Domhnaill's point about the spread around the country and there is a job of work to be done to promote awareness of the opportunities that will emerge and which are available. The scheme has protected a significant number of jobs and helped to create a large amount of jobs that would not have existed or been maintained in the absence of a scheme such as this. There is always room for improvement, as we acknowledge. We will ensure that this enhanced scheme and the opportunities arising under this legislation will be promoted through the relevant avenues.
I thank my colleagues in the Seanad for the very positive contributions. I look forward to engaging with them again later this week on Committee Stage of the Bill.