Over €500million in additional credit will be made available to Irish SMEs through the establishment of the Strategic Banking Corporation of Ireland (SBCI), the Government announced today.
The SBCI is a new company and it is intended that it will be initially financed by the German Promotional Bank KfW, the European Investment Bank (EIB) and the directed portfolio of the Ireland Strategic Investment Fund (ISIF). The involvement of KfW follows directly from discussion between the Taoiseach and Chancellor Merkel following Ireland’s successful exit from the EU/IMF Programme on finding ways to reinforce Ireland’s economic recovery.
Speaking at the announcement of the new funding for SMEs Minister Noonan stated: “The establishment of the SBCI will provide over €500m of additional credit for SME’s and will be a great addition to the SME credit landscape in Ireland. Credit is the lifeblood of all businesses and SMEs will now be able to access loans of greater duration, with enhanced terms and potentially at a lower cost facilitated by the SBCI and its on-lending partners. This will promote greater competition in the SME lending sector, will drive economic growth and job creation in this key sector of our economy. The Government will be prioritising the passage of the required legislation through the Houses of the Oireachtas and I expect the SBCI to be facilitating lending before the end of the year”.
NOTE FOR EDITORS 1. STRATEGIC BANKING CORPORATION OF IRELAND
NPRF/ISIF
The Irish Strategic Investment Fund (ISIF) aims to invest in growth enhancing projects within the Irish economy rather than investing funds outside of Ireland. It is envisaged that the directed portfolio of the ISIF will contribute around 30% to the SBCI’s funds. It will also provide €10m of equity capital.
European Investment Bank
European Investment Bank The European Investment Bank (EIB) is the European Union’s bank. A key priority of the European Investment Bank is to provide financing to small businesses. It generally finances between 30% and 50% of a project.
KfW
Kreditanstalt für Wiederaufbau (KfW) is Germany’s state-owned promotional bank. Due to the direct guarantee from the German State KfW is able to fund itself at favourable conditions on the international capital markets. It then lends the funds onto banks in Germany who in turn lend to SMEs. KfW’s involvement with the SBCI stems from An Taoiseach’s interaction with Chancellor Merkel.
Other Potential Funders
Preliminary contact has been made with other European state development banks in line with the European Commission’s official policy of cross border co-operation in this area.
Strategic Banking Corporation of Ireland
Initially, the Strategic Banking Corporation of Ireland (SBCI) will source funds externally and lend them to SMEs through innovative loans via other institutions called on-lenders. On-lenders can be retail banks or other organisations that have the ability to assess SMEs’ loan proposals. The SBCI will provide loans that are currently not typically offered in Ireland. The SBCI will have a lower cost of funding and this cost benefit must be passed onto SMEs.
Current Retail Banks in Ireland
Existing banks will borrow from the SBCI and lend to SMEs. The Banks will assess the risk of SMEs’ borrowing proposals and the banks will hold that risk. They must demonstrate without a doubt, that the lower cost of sourcing funds from the SBCI is passed onto SMEs, in order to avoid a serious breach of European Union state aid regulations.
New Entrant into Irish SME Lending Market
The SBCI will lower barriers to entry for new entrants. Such new entrants into the Irish SME lending market will be potentially funded by the SBCI. This will drive competition and innovation. New entrants could be existing international banks, insurance companies and pension funds as well as new Irish lending institutions.
Potential Beneficiaries
SME 1
An established SME that wants to borrow to facilitate upfront expenditure on new machinery. It needs to match loan repayments on that capital investment with the future extra revenue or productivity savings from that investment. SME 1 could benefit from a SBCI funded loan whose key feature is an extended repayment holiday. This improves SME 1’s financial sustainability as its cash flow risk has been reduced.
SME 2
SME 2 is a new start up that would be financially more sustainable if it could pay back a loan to finance capital investment over a longer period than is available to SMEs at present. Its current bank wants the capital repayment to be paid back over three years but a loan funded through the SBCI could be paid back over 6 years.