I move: "That the Bill be now read a Second Time."
I welcome this opportunity to present the Microenterprise Loan Fund Bill 2012 to the House. The Bill is one of the key targeted initiatives in the Government's action plan for jobs 2012 to address access to credit and support lending to microenterprises, which are the most vulnerable cohort of our SME sector. I believe it will prove to be a practical way of facilitating additional lending to microenterprises across all industry sectors in the locally traded and the exporting sectors. A large number of our microenterprises are locally owned businesses that give their owners enough income to support their families and contribute to their localities. No glamour or particular riches are attached but they are the true heart and soul of Irish business and the Government firmly intends to support them. The microenterprise sector encompasses everyone from the corner shop newsagents, the mechanic, the solicitor, the accountant and the window cleaner to the coffee shop owner, the hairdresser and the small scale ICT player. The aim of this Bill is to facilitate lending to microenterprises and thereby help sustainable small businesses to generate jobs and return the economy to the long term growth path which was destroyed by the poor economic policies of the recent past.
Microfinance Ireland is being established to provide loans to sustainable microenterprises in these difficult times. It is targeted at newly established or growing enterprises across all industry sectors with commercially viable proposals that do not meet the conventional risk criteria applied by commercial banks. It is part of the suite of initiatives being implemented by the Government to get the economy moving again and transform the country to meet the Taoiseach's objective of making Ireland the best small country in the world to do business in by 2016. It is through initiatives like microenterprise loan fund that we will achieve our goal and provide sustainable employment for our citizens.
I will now explain the rationale for introducing a microenterprise loan fund. In February the Government launched a range of measures under the action plan for jobs aimed at improving the competitiveness of the economy, improving supports for job creating businesses and removing barriers to employment creation across the economy. Every Department and over 35 agencies and offices of the State are engaged in developing actions to support jobs which will delivered in this calendar year. The plan is an active engine for change which be reviewed and revitalised every year. The introduction of the microenterprise loan fund is one of the key commitments that my Department made in order to deliver positive and speedy results for this sector. The objective of the fund is to facilitate additional lending into the economy and create jobs in the microenterprise sector.
The formation and growth of microenterprises are critically dependent on access to credit. In the current risk averse lending environment access to credit is restricted for all businesses and this is particularly acute in the microenterprise sector. Even in good economic circumstances, banks decline applications from the sector if they do not meet their criteria even though the applicants may have proven creditworthy had the loan been granted. Factors that have discouraged banks from lending to microenterprises include: poorly compiled records and accounts, especially audited accounts; low levels of technical and management skills; high bad debt levels; lack of collateral; the administrative overheads and time investments required in terms of loan assessment, often with high refusal rates; and the relatively small size of lending proposition, with loans averaging €16,000.
To support the recovery we need to find ways to ensure that creditworthy borrowers have access to lending. It is important, however, that I make it patently clear that the microenterprise loan fund is not intended to replace current bank lending. The banks constitute the first port of call and lender of first choice for loan applicants. Indeed, applicants will be required to confirm that they have been refused finance by a bank before their applications to this fund are considered. Microenterprises applying for loans under the fund can be in the form of a sole trader, partnership or private limited company with up to ten employees. Loans will be less than €25,000 and can be used for any business purpose. Loan applications will be made on the standard loan application form as agreed with the Irish Banking Federation and must be supported by a viable business plan indicating repayment capacity. Support in developing business plans will be made available through the county enterprise boards and local enterprise offices, which will also assist small companies to professionalise their engagement with institutions and access much needed finance.
The fund is targeted at start-up, newly established and growing microenterprises across all industry sectors which employ no more than ten people. It will provide loans of up to €25,000 for commercially viable proposals that do not meet the conventional risk criteria applied by commercial banks. This will afford entrepreneurs a real opportunity to get started and support the creation of new jobs linked to new fledgling businesses and expansion of established businesses. It is intended that the fund will provide loans to some 5,500 microenterprises and generate close to 8,000 jobs over ten years at a cost of approximately €2,500 per job. This is extremely good value in any man’s language, particularly when one factors in the gains to the Exchequer.
I have chosen the Social Finance Foundation to manage and control the fund on my behalf. For transparency purposes it shall establish a dedicated subsidiary, microfinance Ireland, MFI, and run the loan book attached to the fund. This will minimise overall management costs, which have traditionally been high for microfinance. It will also ensure clear financial and accounting structures, enhance the possibility of European Investment Fund guarantee assistance and allow for clear accountability on the costs of running the scheme. MFI will work with other key stakeholders, including county enterprise boards and local enterprise offices, to deliver a comprehensive microenterprise service to potential clients. The Social Finance Foundation has a track record in the area of microfinance and will leverage this to deliver optimal outcomes for the State in this important area.
To underline the importance that I attach to an initiative for this sector, an allocation of €10 million will be made available as seed capital for the fund. In the current climate this is a clear indication of the importance that the Government attaches to this dynamic sector. When viewed in a macroeconomic context, microfinance is a very cost effective job creation and protection mechanism which generates a high rate of return. In many cases the would be entrepreneurs come from the ranks of the unemployed and draw State benefits. Existing employees who choose the entrepreneurial route and set up their own business are also likely to create a residual employment opportunity in their previous organisation. The vast majority of microfinance applicants are engaged in locally traded services. While many may not have the potential for growth in terms of internationally traded businesses, there are significant benefits in the development of a successful microenterprise sector because it provides a solid enterprise base from which the SMEs and high potential start-ups of the future can develop. There are clear societal and community benefits in addition to the economic and job creation objectives as individuals grow in confidence, generate positive internalities throughout the community and provide much needed competition in the locally traded sector.
In addition to contributing to the economic and social agenda, this initiative will also yield Exchequer gains in terms of employment creation, savings on welfare payments and increased direct and indirect tax payments, which are calculated at €23,000 per job per annum. The €10 million allocation, supplemented by €15 million borrowed from other sources in tranches of €5 million over years two, three and four of the lifetime of the fund, will generate €40 million in loan expenditure and create 3,800 jobs over a five year period. This is based on €8.8 million in loan demand and 20% in bad debts. The return to the Exchequer over five years is estimated at €46.2 million.
I will now address the specific provisions of the Bill.
Section 1 provides for the Short Title, the Microenterprise Loan Fund Act 2012, and commencement. Section 2 defines certain commonly used terms in the Bill. Section 3 provides that costs associated with administering the Act will be subject to sanction from the Minister for Finance, with the consent of the Minister for Public Expenditure and Reform, and will be met from moneys provided by the Oireachtas. Section 4 provides for the establishment of the microenterprise loan fund. The fund shall consist of all grants made to the subsidiary under section 5 and all gifts and other income.
Section 5 confers on the Minister the power to pay to the subsidiary €10 million, and provides scope for additional Exchequer funding if deemed necessary subject to an absolute cap of €25 million before further Oireachtas approval is required. Section 6 provides for the subsidiary to invest money from the fund and to vary or sell investments made. Section 7 enables the subsidiary to lend money to microenterprises using existing moneys and money borrowed from the Social Finance Foundation. Section 8 provides for the Social Finance Foundation to be able to borrow money for the purposes of this Act. The aggregate of borrowings under this section at any one time shall not exceed €25 million. Section 9 allows for the Minister, the Social Finance Foundation or the subsidiary, with the consent of the Minister for Finance and the Minister for Public Expenditure and Reform, to accept a gift of moneys - the purpose of the making of which is to benefit the fund - upon such trusts or conditions, if any, as may be specified by the donor.
Section 10 provides for the Minister to make a scheme. The scheme may make provision for various terms and conditions such as purposes for which the loan may be given, terms of the loan agreements, reports and information by the subsidiary to the Minister, audit and examination of accounts of the subsidiary, and other matters. Section 11 enables the Social Finance Foundation to form a subsidiary, to be registered under the Companies Acts. Section 12 provides for the name and share capital of the subsidiary, of €1, and that share shall be issued by the subsidiary to the Social Finance Foundation. Section 13 provides for the memorandum and articles of association to be consistent with the Act and to be approved by the Minister with the consent of the Minister for Public Expenditure and Reform.
Section 14 provides for a director of the subsidiary to be disqualified for various issues such as bankruptcy, conviction of an offence, and other matters. Section 15 provides for directors to cease to be a director if they are nominated as a Member of Seanad Éireann or elected as a Member of either House of the Oireachtas, or the European Parliament. Section 16 provides for the disclosure of interests by directors of the subsidiary. Section 17 provides for the disclosure of interests by members of staff of the subsidiary. Section 18 provides for the non-disclosure of confidential information by any person serving as a director or staff member, adviser or consultant to the subsidiary.
Section 19 provides for the funding of the subsidiary out of moneys in the fund and allows the Minister to make an arrangement related to the expenditure generally incurred by the subsidiary in the performance of its functions under this Act. Section 20 sets out requirements for accounts to be kept by the subsidiary and provides for auditing by the Comptroller and Auditor General. Section 21 provides for an annual report to be prepared by the subsidiary and to lay the report before both Houses of the Oireachtas. Section 22 provides for the Minister to conduct a review of the operation of the Act not later than two years after the date of its passing. This is designed to ensure that we have introduced a programme of relevance to this business sector that achieves results and delivers on our key outcome area of jobs.
Backing microenterprise by providing finance to those who struggle to get credit from mainstream lenders is deigned to meet a vital need. The development of the sector is not something that we can leave to chance. As can be seen from this and other initiatives, it is not being left to chance. We want to reach out to more people who have the ambition and drive to set up their own small business. This initiative has a significant entrepreneurship focus. Entrepreneurship and self-employment is an important opportunity for individuals. It is important for rewards such as self-worth, self-sufficiency, independence, job satisfaction and increased income. Entrepreneurship is also important for the economy as a whole as it leads to new jobs, and is a catalyst for new innovations for wealth creation. Entrepreneurship keeps the economy fresh and moving forward. The fund will help turn good ideas into great jobs. Across the country we have ideas and fantastically talented people. We must encourage entrepreneurs, particularly young people, to develop ideas into business opportunities. Entrepreneurs are attracted by the prospect of success and need to be encouraged and supported to make their mark and build a better future for themselves and this country. Entrepreneurs who utilise this fund will also have to make the best possible use of professional advice provided through bodies such as county enterprise boards, which are soon to become local enterprise offices. They will have to build on their skills and this can only heighten the professionalism of the sector. This, in turn, will lead to greater demand for professional services, further increasing the benefits to the economy of the fund.
Ultimately, profitable and competitive businesses will underpin job creation, prosperity and the broader success of the economy. This fund is an example of how we are taking action to ensure the business environment supports this agenda. The initiative is another step towards a more sophisticated and accessible financing environment for small business in Ireland, and is just one component in the suite of initiatives aimed at ensuring the flow of credit. It will add value to the measures already taken to address the SME credit supply issue such as the temporary partial loan guarantee scheme and represents real value for money to the State.
Despite the difficulties in the economy, we continue to have a high-level of business start-ups. We are among the highest in Europe for business start-ups but the constraint is access to credit. Even if the banks were in the whole of their health, this would be a problem. Deputy Peadar Tóibín is not in the Chamber at present but he has often raised the question of why we are not availing of the European Investment Fund and its capacity to guarantee independent credit providing institutions. The reason we have not drawn down that funding sufficiently in the past is that we have not had a nationwide fund of this nature filling the gap.
I pay tribute to the officials who have worked tirelessly to develop this, and the co-operation received from other Departments. I also pay tribute to the co-operation received from the Social Finance Foundation and First Step, which has pioneering experience in this area. The initiative will be really worthwhile but it is not the solution to our jobs challenges. It recognises an important niche in job creation that is underserved by the facilities currently in place. It will provide a new weapon in the armoury of our county enterprise boards and local enterprise offices as they seek to create a stronger business environment in local communities. I commend the Bill to the House.