Joint Committee on Jobs, Enterprise and Innovation debate -
Tuesday, 13 May 2014

Access to Finance for SMEs: (Resumed) ISME, IBEC and SFA

Vice Chairman

The next item on the agenda is our resumed discussion of access to finance for SMEs. I welcome Mr. Mark Fielding from the Irish Small and Medium Enterprises to discuss the matter.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I am pleased to welcome Mr. Fielding and ask him to make his presentation.

Mr. Mark Fielding

I thank the joint committee for inviting me to attend. ISME is the independent body that represents small and medium enterprises throughout Ireland. As members know, it is not funded by banks either through membership or sponsorship, which is an important fact when one talks to representative bodies Compared with larger companies which have options, small and medium businesses have always faced great difficulties in accessing credit on a non-punitive basis. Even the Governor of the Central Bank has made the same point a number of times recently. It is clear that banks are primarily interested in lending to safe SMEs, whereas the real difficulties in the current environment are faced by SMEs that are not what we would call safe in the eyes of banks. There is strong evidence that the number of refusals is higher in Ireland than in other eurozone countries. I would like to address in the short time allotted to me a number of issues relating to refusal rates on the part of banks, late payments in commercial transactions which create a need to go to banks to raise funding, the training of small and medium business owners, personal guarantees and the conditionality of loans, alternative sources of finance, peer to peer lending, asset bank lending, private investment and a third banking force.

I will commence by nailing down the fact that access to finance has been difficult, despite what members will have heard from different people. The most up-to-date Central Bank statistics for money and banking, dated March 2014, indicate that lending to Irish non-financial corporations showed a year to year decline of 6.1% in March, following an annual decrease of 5.8% in February. All categories of loans recorded a decline over the year. This represents the 16th consecutive monthly decline in lending. Also, the headline from the CSO's access to finance survey that compared the 2007 figures with those for 2010 reads, "Successful loan applications dropped from 90% in 2007 to 50% in 2010".

The ISME Bank Watch survey figures confirm higher refusal rates than the banks admit to. The figures are at variance in a number of areas. ISME has been carrying out periodic Bank Watch surveys since 1993. Never, even in the heady and crazy days of 2004 to 2008, did we see a success rate of more than 82%. The average refusal rate throughout the 1990s and up to May 2008 was 20%, a figure never disputed by the banks in those days. In November 2008, the refusal rate jumped to 57% and has fluctuated around the 50% since then. Currently, the refusal rate is at 54%. Much is made of the banks' assertions of 90% of credit applications being granted - by definition, a refusal rate of 10%. We need to know what constitutes a credit refusal. To an owner-manager, a refusal is very plain in that they do not get the credit requested. From the bank’s perspective, they talk about sanctions and agreement to give credit, whether it is accepted or not. Initially, the banks count fully completed formal applications. Being discouraged over the phone or at a meeting is not counted by the bank but is counted by the SME. A collateral request or any other requirement that the SME cannot fulfil, such as deposits to be placed with the bank, is not counted, but the SME sees it as a refusal. Where a customer requests €50,000 and the bank offers €20,000, which is useless and which the customer does not take, the bank counts it as a success but the SME sees it as a refusal.

We hear the banks talking about success rate figures of 85% for Bank of Ireland, 92% for AIB and 94% for Ulster Bank. I quote from a response from AIB to the Securities and Exchange Commission on 31 October 2012. The Securities and Exchange Commission asked AIB about the 90% credit sanctions, and the response stated:

AIB sanctioned 90% of formal credit applications (note: only formal applications captured). This measurement does not take into account any informal discussions between AIB and SME customers that did not result in formal applications.

By its own admission to the Securities and Exchange Commission, it is not counting informal applications. The first Mazars report on SME lending finds that the banks failed to adequately record the level of SME lending and that they also failed to adequately record all business inquiries for finance. They could not differentiate between new and existing customer loan applications and between requests for overdrafts and requests for term loans. When those representing the bailed-out banks talk about figures of 84%, 93% and 92%, they are counting fully completed formal applications. They are not counting all applications. They are guilty of what Churchill called terminological inexactitude.

ISME carries out the Bank Watch survey every quarter; the latest was carried out at the end of February. I will not go through all the figures. The response rate was 9.5%, with 924 owner-managers responding. Fifty-four percent of SMEs that had applied for funding from banks in the three months to the end of February were refused credit by the banks, a deterioration from the 50% refusal rate in the previous quarter. We hear from the banks that demand for credit has decreased, but in that quarter, 39% of respondents had requested additional or new bank funding, an increase from 37% in the previous quarter. The requests have increased rather than decreased. A reduction in overdraft was demanded of 35% of SMEs. This is an increase from 28% in the previous quarter. Not only are the banks refusing requests, they are demanding reductions in existing overdraft facilities. Seventy-eight percent of owner-managers were in favour of an alternative strategic investment bank. Of course they would be if they are being refused at a rate of 54%.

Late payments in commercial transactions is a major issue for small businesses. Some small businesses act as banks by extending trade credit to companies turned down by banks. That leads me to the issue of late payments, which has a bearing on access to finance. If businesses were paid on time, their need for finance would reduce dramatically. I will not dwell on the topic but I ask the committee, which is very busy, to examine the situation in which small and medium-sized enterprises are waiting an average of 60 days to be paid, despite prompt payment legislation introduced in 2002. The legislation has not worked. I will leave that matter to the committee. If we are waiting an average of 60 days beyond the credit period, it means we must go to our banks to get funding.

With regard to training, I listen to the banks and some of their cheerleaders in other organisations talking about the lack of expertise of SMEs when it comes to the presentation of a case for credit. Time and again, the lack of expertise in putting a plan together is used as an excuse by the banks. I am the first to promote and advocate for management training for SME owners, which is important, but it is much too easy to blame the shortcomings of an SME because it lets the banks off the hook. I have been working with SMEs since the 1970s and have been assisting them with loan and credit applications for 40 years. In the 70s, 80s and 90s, small business owners were successfully getting credit from banks at a rate of eight loan applications out of ten. How is it that, in the six years since 2008, the calibre and abilities of these same SME owners have deteriorated so drastically? Have we suddenly come across a generation of people who cannot count? The truth is that it is not so much the ability of the SME that has deteriorated but the calibre of yellow-pack relationship managers in banks who, between them, cannot read a set of figures, are frightened by the word "risk" and are scared to make a lending decision for fear of career reprisal. In addition, their ability to act as advocates for SMEs when decisions are pushed upstairs is abysmal due to a combination of ignorance, fear and career protection. In 2009 we pointed out the lack of expertise in the banking sector, to be met with the usual denials from the banks. Now we hear they are training their staff - better late than never. The Skillnets ManagementWorks initiative is currently advertising a training programme entitled "Building Financial Capabilities of SMEs" to upskill owner managers in basic finance. ISME recommends this initiative as part of the Government’s efforts to get credit moving. While it is not the be-all and end-all, it is an important initiative and we commend it.

The conditionality surrounding the securing of loans is a cause for concern. Since 2003, the incidence of demands for personal guarantees against loans has increased from 51% to 72%. Many of these personal guarantees and conditions are worth twice the amount of the loan. This negates the banks’ argument that high rates are derived from the risk involved. Another major issue is the discussion about the family home being used as collateral. Recent surveys show the family home was brought into discussions in 15% of cases, while banks asked for the family home as collateral in 11% of cases. That is another worrying trend, and there also a growth in the retention of personal guarantees and collateral deeds by banks after the loans have been finally paid.

Alternative sources of finance to traditional bank lending for SMEs have increased in importance in Ireland and across Europe since the economic crisis began.

This increase in importance was not a natural progression; rather, it has arisen out of necessity, as bank loans became more difficult to acquire due to the unwillingness of banks to lend. Start-ups are finding it especially difficult to obtain traditional bank lending as they lack the essential criteria such as cashflow, history and collateral.

In the alternative area I see the Government playing a part. It has introduced a range of measures which are intended to correct market shortcomings. The microenterprise loan fund and the credit guarantee scheme have yet to prove themselves, while the Credit Review Office, after a shaky start, is having some effect, but needs more promotion. The tax incentives of employment incentive and investment scheme and the seed capital scheme are not working sufficiently due to red tape and major constraints. In fact, the seed capital scheme has been availed of by fewer than 66 businesses in the past year, which is disastrous. The development capital scheme, Innovation Fund Ireland and the National Pension Reserve Fund all are aimed at the medium and large business sector and are having an effect but, again, at the higher end.

Alternative financing activities such as crowd-funding, peer-to-peer lending and invoice trading have emerged as a significant funding mechanism and source of capital, especially in the UK in recent years. Meeting the capital needs of both individuals and businesses and facilitating fundraising activities for civic projects and social causes, alternative finance intermediaries have become online marketplaces where individuals, rather than institutions, work collaboratively to form capital. It is having an effect. However, little information is available regarding the overall size of the finance market. While there has been some industry reporting by for-profit organisations on crowd-funding, there is very little independent, reliable, academic research. We see that as a way of getting funding into SMEs and we would certainly promote it. The initial success of linked finance bodes well for peer-to-peer lending initiatives in Ireland. The boost that the UK Government gave to the sector by investing directly into it is encouraging. We would recommend similar investment in the Irish sector.

The arrival and revival of some finance houses in the asset-backed arena is encouraging. Old fashioned leasing and hire-purchase finance together with invoice discounting and factoring have begun to gain a foothold in the finance space. Again, this is badly needed, and we have a long way to go.

The success of the SSIA scheme shows how Irish people can be incentivised to save or invest their money in certain ways. Currently there is more than €90 billion in personal savings lying in deposit accounts earning negligible returns. If just a small proportion of this total were invested into Irish SMEs, the results could be transformative in terms of jobs and wealth creation as well as in the overall economy. If savers were allowed to invest in an account which would be lent to or invested in SMEs and get tax relief for it in the way that EIIS investors do, this could divert billions of euro in funding into the sector at effectively no direct cost to the State. Alternatively, tax relief could be allowed on the interest earned up to a maximum of, say, €10,000. This is open for discussion and everybody would win under such a scheme. Savers would potentially get a far better return, SMEs would benefit through a new line of funding, the need for bank lending would be reduced at a time when they are deleveraging and the country would benefit through job creation and an overall boost to the economy. Obviously, savers would have to understand that there would always be a risk associated with this, but they would at least have the cushion of the tax relief to mitigate that. With certain constraints similar to those already in play in peer-to-peer lending, such as maximum loans and maximum individual lending, it should be a quick due diligence procedure to establish that the proposal is reasonably sound and that the facts contained in the documentation are correct. This could be administered through a third banking force or a banking fund. On that issue, we propose the establishment of a State-sponsored SME development fund or third bank to support the recovery of the economy by providing the funding and finance services needed by businesses, particularly Irish-owned SMEs. Specifically, the fund could focus on providing loans and trade finances to Irish businesses to meet the gaps in the banking market, support the development of SMEs, support exports, support the many IBRC and Danske Bank customers in refinancing their loans, and support growth sectors using a system of funding based more on future cashflow than the quality of the promoter. This is preferable to being over-reliant on property and collateral.

Irish small and medium-sized businesses are significantly more reliant on bank overdrafts and short-term debt - in the region of 60% - than their counterparts in the 28 EU states, where the rate is approximately 39%. This reliance has led to financial fragility, especially when the banking system has let us down and the length of debtor days is extended. It is, therefore, important that alternative sources of finance and alternative methods of financing are encouraged. In essence, as well as right-sizing their businesses, small and medium-size businesses have to begin to right-size their finances. In the short to medium term, Irish small and medium-sized businesses are stuck with a small number of banks, and the responsibility falls on Government, through the Central Bank, to oversee and regulate the bailed out banks that remain.

I thank the Chairman and the committee for the opportunity to make this presentation. Our association will co-operate with the committee in whatever way it decides to advance the solutions.

Vice Chairman

I thank Mr. Fielding for his open and frank statement.

Deputy Peadar Tóibín

Gabhaim buíochas leis an gCathaoirleach agus gabhaim buíochas le Mr. Fielding as an gcur i láthair a chuir sé os ár gcomhair. I thank Mr. Fielding for all his work in this area. In recent years there have been quite divergent messages from various groups regarding the experience on the ground among SMEs as they try to access credit. As elected representatives, we hear a message very similar to that heard by the witness, but obviously a large array of organisations are trying to give us a far different message. Access to credit and loans is an important issue at this juncture. What is the witness's experience of debt distress among his members? How much of a dampening effect is it having on the economy in general? What is the personal experience of those people who experience that debt distress? The representatives of some of the banks that appeared before the committee said they were trying to nurse some of those in debt distress back to health by separating out their toxic loans from their functioning businesses. What is the experience of the witness in that area?

I commend the Government on its efforts to create other strands of credit. In the main, these have not been functioning successfully. Mr. Fielding mentioned the Credit Review Office and its dodgy start and the fact that the numbers seeking credit through the microfinance credit guarantee are low. Why are these not being used? He also referred to the red tape around seed capital. Perhaps he would say a little more about that issue. Is the cost of credit having an effect on his membership? Perhaps I can pose a few other questions later.

Vice Chairman

That is fine.

Mr. Mark Fielding

I thank Deputy Peadar Tóibín for his questions. In regard to small and medium-sized businesses being in distress, speaking in Tralee last year, Ms Malone from the Central Bank mentioned SME lending of €57 billion, while the word "distress" was used in the same sentence. Of the €57 billion loaned to SMEs, about €32 billion is construction and development related and about €25 billion is normal SME lending, for want of a better expression.

We all know the difficulties in the construction and development sector, but let us consider the €25 billion figure associated with it. I imagine the norm for distressed figures is somewhere in the region of 30%. I am referring to what the banks would regard as in being distress, in other words, beyond 90 days due.

Reference was made to the banks working with SMEs. There was a major issue when this problem arose initially in late 2008 in the case of small businesses which were keen to be sorted out, having overextended during the heady days of 2004, when credit was being thrown at them like snuff at a wake. They could not find people within the banks to talk to them because the expertise was not available. We took numerous calls on the Irish Small and Medium Enterprises Association's helpline from people involved in SMEs who expressed frustration and asked where they could get someone to talk to them at that level. That persisted for a long time. Certainly the banks have now started to do far more and there is less of the pretend-and-extend than in the past. In fact, it was mainly pretending, rather than extending. We have found that, in the main, the banks are grappling well with the debt overhang. The difficulty was in trying to separate the non-core assets on the balance sheet of a business from the others. They were non-core, but they were non-performing. The difficulty was in finding a way to deal with the core business that was, perhaps, employing 15 or 20 people and that was feasible, albeit vulnerable for several reasons. One of the reasons was the over-extension on borrowings, but such businesses were also vulnerable because of the economic situation in which we ended up. It was something of a struggle to get the banks to get their heads around the fact that the lending was not part of the core business, as such, and that a given portion would have to be warehoused or have something else done with it. That is happening, although I cannot honestly tell the Deputy how fast it is going. I must accept what the banks state about the number of people they have put into that area. Initially it was slow, but they are certainly working on it.

Reference was made to Government initiatives and the Credit Review Office, in particular, but the figures are rather small. The Deputy is correct to suggest it is difficult to get businesses to bring their cases to the CRO. There is a certain fatigue also in that a person running a firm may go to a bank and eventually receive a refusal. I say "eventually" because I have seen the list of excuses used by the banks about which we have heard from our members. One of the major excuses is constructive refusal in the sense that the banks simply drag out the decision until the need for the funding is nearly gone. That is taking place with the internal appeals procedures in the banks and then firms come back and start again and have to go through another appeals procedure. All of this is rather difficult for small and medium businesses.

The credit guarantee scheme was simply not being mentioned by the banks in many cases. The idea was that the bank would bring a firm to the credit guarantee scheme; it was not for the SME to ask for this. If a business was refused on the grounds of collateral, the bank was supposed to follow that route. We found that many of the banks did not do so because it involved increasing their exposure to the SME in question. That was another difficulty.

Recently, we made a submission to the Department of Finance on the employment investment incentive and seed capital schemes in an attempt to make them far more user-friendly, especially for small and medium-sized businesses. A large business can use the seed capital scheme easily, but smaller businesses have been finding it rather difficult to do so.

Reference was made to the cost of credit. I will be shot for saying this, but it is not a big issue. The reason it is not a big issue is that many SMEs remember a time when the cost of credit was 19% or 20% and they were still able to get by because that is what a business does. It is simply another cost. Having said that, let us compare the cost of credit in Ireland for SMEs as against that for large businesses. The gap is expanding year on year. Each year we see the gap in the cost of credit to a large business as against a small business extending. Let us consider the cost of credit in Ireland for SMEs as against the cost of credit for SMEs throughout Europe. Again, the gap is increasing all the time. That remains an issue for us. Another problem is that there are so few banks which meant that there is not as much competition as we would like because of the exit of many banks.

Deputy Peadar Tóibín

The strategic investment bank and the strategic investment fund were part of the programme for Government. Has ISME had negotiations or discussions with the Government or the Department on how the strategic investment fund could be used for SMEs?

Mr. Mark Fielding

We had some discussions in 2011 and 2012 and a discussion document on the matter in March 2013. However, we have not heard anything back in the recent past.

Senator Feargal Quinn

Mr. Fielding is most welcome and I thank him for a clear, concise and detailed explanation of the position. I am keen for him to tell us something about the State-sponsored development fund or SME bank. How does he see it coming about? What will happen to it and how will it work?

I have a certain amount of sympathy for banks which turn people down. Because we own the banks we must ensure they stay in business and do not end up losing it. I have a certain amount of sympathy for someone who wishes to ensure the banks pay for themselves, especially since we own them; therefore, we should ensure they stay in business. My experience has been that many of the applications made by smaller businesses were less than professional. I am pleased to hear from Mr. Fielding that ISME is now holding their hands, teaching them and showing them how to handle the matter. I was jolted by the figure provided by him. He said the refusal rate used to be between 18% and 20% but that it had jumped to 54%. What is the reason for this? Can the banks give ISME any reason for it?

Has there been any success with crowd funding? The committee was visited by Linked Finance, an organisation with which I am involved to a small extent. I have been impressed by the whole concept of crowd funding elsewhere. Do ISME members use it or have they used it? Is there a possibility that more could done to help ease the financial position?

Mr. Mark Fielding

Reference was made to the proposal to establish an SME development fund or bank, for want of a better expression. We know that one of the main objectives of the Government is to secure a financial system for deposits and the flow of credit to consumers and businesses. The Irish banking system, as it stands in early 2014, is not fit for purpose. There is a need for a new and active relevant actor in the business credit area. We have a proposal on the establishment of a State-sponsored SME development fund to support the recovery of the economy. This would work by providing the funding firms are not obtaining in the quantities they require from the existing actors, that is, the two pillar banks and Ulster Bank. At issue are proposals for future development rather than rescue funds or bailing out firms. These are proposals for future-proofing many small businesses. We hope the fund will focus on providing loans and trade finance for Irish businesses.

This would serve to meet the gaps in the market, support the development of SMEs, support export growth and look after the many business owners, including IBRC and Danske customers, who are obliged to refinance their loans.

The main objective of such a fund would be to create Irish wealth which would ultimately create jobs. To that end, it would restrict its activities to the SME wealth creating sector. Subject to the approval of the Department of Finance, we estimate that the fund would initially require in the region of €500 million. As I mentioned, we are finding that many SMEs depend too much on short-term funding. The development fund, on the other hand, would concentrate on repayment periods of up to 20 years, with the possibility of securing fixed interest rates. It would be an instrument of economic policy, majority-owned by the Government and controlled by it. It would offer something similar to what ICC Bank did in the past. Unfortunately, that level of expertise is not as prevalent in the existing banks as it should be, as we keep hearing from entrepreneurs who are talking to their lenders.

In terms of having sympathy for the banks, I, too, have sympathy for them. However, in the surveys we conducted people whose loan applications had been refused gave examples of lenders making the conditions for lending unjustifiably hard such as seeking guarantees of €800,000 for a €60,000 loan or not accepting a €550,000 security against a €100,000 loan. There were instances of repayment capacity being calculated on previous years' cash flow, even though the loan was being sought to purchase stock to fill new orders which would double previous years' turnover. I have more than 100 examples of where the banks did not have the ability to read the proposals put to them.

I accept the point that some SME owners - I would not say the majority - have not done themselves any favour by going in with half-baked proposals. However, I have been dealing with people involved in the sector since the early 1970s and they have not suddenly become numerically illiterate. That argument is being used as an excuse for not giving loans to small businesses. The vast majority of SME owners will have asked their accountant to go over the figures before approaching the bank. There has been no dramatic increase in the numbers going in unprepared and I refuse to accept the banks banging on all the time about SME owners needing to be trained, offering a day-long course to bring them up to the level of an accountant and so on. That is not required. A small business owner running a retail outlet does not need to be an accountant. He or she needs to understand figures, of course, and, in reality, the vast majority of SME owner-managers understand their business and from their till roll and cheque book how the business is doing.

The difficulty at this time is that there is not the same capacity for engagement when small business owners approach their bank manager. There was a time when the bank manager put one through one's paces. He or she was able to read the figures, tell the business owner how good or bad the proposal was and, if necessary, send the applicant off with a flea in the ear and an instruction to return when the proposal was drawn up properly. Now owners go in and meet a blank face, a person who would not know a balance sheet or a profit and loss account from a kick up the transom. The business person is simply told the proposal will be sent upstairs and examined. In the past, by contrast, SME owners, even those who were not using financial advisers and accountants, were still able to get some leverage with the banks because the expertise was available. The expertise is not available as much as it should be.

On crowd funding, we certainly are more than supportive of peer-to-peer lending and Linked Finance. We understand another organisation is just about to come on board, to which we say the more the merrier. In the United Kingdom in 2011 £26.7 million was made available through alternative finance and peer-to-peer lending. Last year that figure had risen to £332 million, an increase of 254%. Just over 5,000 SMEs have raised funding through peer-to-peer lending in the United Kingdom in the past three years, with the total jumping from 550 in 2011 to 3,706 last year. That large jump between 2011 and 2013 was facilitated by the decision by the UK Government to encourage and support peer-to-peer lending. It gave an immediate boost in confidence to people lending into the market.

Deputy Seán Kyne

I welcome Mr. Fielding. Representatives of the various banks have appeared before the joint committee in recent weeks to discuss this topic. In moving back and forth between the banks and the ISME on the figures for lending rates and refusals, I asked the bank representatives whether there was a need for independent verification of the data. What is Mr. Fielding's view in this regard? Is there a standard methodology that could be put in place? I am not in any way casting doubt on his data, but a figure of 924 responses from SME owner-managers equates to a response rate of 9.5%. Is he concerned about the low response rate in reference to the accuracy of the statistics? Is there a need to take account of the possibility that those who are annoyed with their bank because their loan application was refused are more likely to respond to such surveys than they would be if everything was wonderful?

Is Mr. Fielding satisfied with the resources available to the Credit Review Office in the context of the work it has to do? He has mentioned that 65% of SME owners have heard of the office. When this issue was raised with the delegates from the banks, they observed that a significant proportion of the businesses in respect of which loan refusals had been overturned by the CRO failed within a period of time. Their view was that they were doing everything right and proper in this regard.

Mr. Fielding referred to increased competition and his experience of the banking sector from the 1970s through the 1990s. Is it his view that there was a more intimate relationship between bank managers and their clients in the past and that such engagements have become more impersonal as the country grows? He referred to the importance of managers having a feel for the likely success or otherwise of a new business. Is he saying a decline in that type of expertise might account for some of the increase in the number of refusals?

Vice Chairman

On the credit refusal rate and the discrepancy between what the banks are stating and what Mr. Fielding's survey suggests, would it be helpful to encourage more SME owners to submit a formal application in order to put the banks to the test? It would be easier for us to stand over what Mr. Fielding is saying versus what the banks are stating if there were more data available in this regard. I am conscious that if an SME owner is not hopeful of securing a credit line, he or she will probably not bother to apply for it. However, it would help us to get a better picture of what is happening if the numbers submitting a formal application were higher. That would assist us in putting all of the figures presented, whether by banks or any other business group, to the test.

Mr. Mark Fielding

I will deal, first, with the issue of getting some consensus on the data.

We asked SMEs whether they were in the market for funding in the past three months. They either were or they were not - it was a "Yes" or "No" answer. We also inquired of those who were in the market, whether they applied. Again, the answer was a "Yes" or "No" answer. The final question we asked of those who applied related to whether they were successful. I cannot make it any clearer than that.

The response rate of 9.5% or whatever is actually very good when one considers it. We agree that there is a bias in our statistics. That bias has been present since 1993. The banks never queried the refusal rate right up to 2008, when it stood at something in the region of 20%. There was a bias in that regard as well because someone who had been refused was more likely to complete a questionnaire. The same bias exists at present. However, the fact that the refusal rate increased from 20% to 57% was not suddenly down to there being more SMEs. From that point of view, I would be extremely careful but, while admitting that there is a certain amount of bias, we will certainly stand over our figures. When the CSO compared the position for 2007 to that for 2011, it discovered that the figure dropped from 90% to 50%. In the context of the refusal rate, therefore, the answer the banks give depends on who is asking the question. I think the SEC frightened the living daylights out of them when it requested a breakdown in respect of the 90% figure. In that context, I quote from my submission, which states "AIB sanctioned 90% of formal credit applications (note: only formal applications captured)." AIB is actually stating here that it has not been counting.

For the past three or four years we have encouraged ISME members to make formal applications. Before I came here today, I received a phone call from one of our members who informed me - again, this would be fairly common - that his bank had refused to accept a formal application. He was told that he should put something down on paper and then informed not to do so. That is happening time and again. The person to whom I spoke represents a good number of businesses. The banks are increasingly refusing to accept formal applications because if they do, their figures will be shown up.

The Credit Review Office, CRO, overturns just over 50% of decisions in favour of SMEs. We would expect that to happen. One of the banks has been banging on about 30% of the businesses in respect of which decisions were overturned subsequently failing. I go with Mr. John Trethowan on this one, namely, that 70% of businesses were successful. There is always going to be some sort of attrition. This is not the playground; we are talking here about the business arena and there will be failures and successes. If the CRO had not stepped in, the failure rate would have been much higher because the businesses involved would not have obtained the money they required.

I agree with the Deputy that competition is required. However, I cannot see many foreign-owned banks arriving in Ireland in the near future. There may be some room in this regard for the establishment of a development fund or something of that nature.

The Deputy inquired as to whether there were more intimate relationships between business owner-managers and bank managers in the 1970s and 1980s. The answer in that regard is "Yes" but such relationships do not exist now. There was a flight of expertise out of the banks and the relevant staff were replaced with those I term "yellow packs", that is, people who just do not know either their business or their customers. I will not bore the committee by recounting a long story but I will provide an example. Those involved in precision engineering use lathes to cut metal. One of our members was brought before a branch manager and informed that the bank in question - I will not say where it is located - would "not be providing funding for the company's latte this year". That is a measure of the type of expertise that is currently available. The staff in question do not go beyond examining the figures. I am aware of instances where banks will not actually discuss matters with SMEs and are refusing - left, right and centre - to visit their premises in order to gain some knowledge of what their proposals involve. Perhaps there is a need to accept that the relationships which existed in the past were reminiscent of something from Pollyanna and that there is no way they could obtain in the current climate. However, one would expect a little more expertise to be available and more face to face engagement to occur. In one of the local bank branches in Carrick-on-Shannon, two of the tellers have been replaced by plants. There are difficulties and these have been caused by the fact that the banks have been deleveraging and cutting back on staff numbers.

Deputy Seán Kyne

Is there a need for independent verification in respect of lending statistics?

Mr. Mark Fielding

We are quite happy to go with the CSO and the Central Bank. The Central Bank is ideally placed and I am of the view that it should have responsibility in this regard. It is, however, difficult to count the number of informal applications made. If I approach my branch manager at the local GAA club or contact him or her by phone in order to seek a loan and if he or she says "No, don't come near me for the moment", in my view that is a refusal. This reflects the reality for SMEs at present. I will be shot for saying so but I have sympathy for the banks because they find it difficult to count instances such as those to which I refer as refusals. However, they are refusals and they reflect the reality that exists.

Vice Chairman

I thank Mr. Fielding for attending. He was very frank in the views he expressed and I welcome what he had to say. His comments will definitely feed in to our overall report into access to finance for SMEs. I appreciate the fact that Mr. Fielding was both honest and blunt in his observations and I thank him for giving of his time.

Mr. Mark Fielding

I thank the Chairman.

Vice Chairman

I welcome Ms Sharon Higgins, head of sectors at IBEC, Mr. John O’Dea, CEO of Crospon and immediate past chairperson of the Irish Medical Devices Association, IMDA, Mr. John Chamney, director of Walsh Whiskey and founding member of the Irish Whiskey Association, Mr. Karl Flannery, CEO of Storm Technology, and Mr. Frank Gleeson, managing director at Aramark Food Services and chair of Retail Ireland. The purpose of this session is to discuss access to finance for SMEs with the representatives from IBEC.

In accordance with procedure I am required to inform those present that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If witnesses are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they will be entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or any official by name or in such a way as to make him or her identifiable.

It is fantastic to see the large entourage from IBEC. Before I invite Ms Higgins to make her presentation, I remind all those present that we have a reasonably tight schedule and another presentation at 3.15 p.m. I acknowledge that we are already five to ten minutes late, but to be fair to everybody, I will press Ms Higgins to finish not too far off 3.15 p.m.

Ms Sharon Higgins

I thank the Chairman and committee members on behalf of the representatives of the business associations in IBEC in attendance and the broad membership of IBEC for giving us the opportunity to engage with them.

IBEC represents Irish business - home grown, multinationals, big and small, spanning every sector of the economy. The vast majority of our members are SMEs. To reflect the distinct interests of all our members, we have 60 business associations in IBEC. Our overall ambition is to work with the Government to help put more people back to work and make Ireland the best country in the world in which to do business. The IBEC 2014 policy priorities document, Ireland that Works, states our belief that the economy, underpinned and driven by a strong SME community, can grow by an average of 3% to 4% annually during the next 20 years or so. Access to finance for SMEs in a timely manner is a critical component of achieving that goal. At the broadest level, SMEs require finance for investment and-or working capital. The needs of SMEs are far from homogenous and depend on their size, market, product portfolio and, most importantly, stage of development. It goes without saying the recent economic climate has had a negative impact on many of them.

Evidence suggests lending to enterprise has dropped, in part due to Irish banks engaging in the repair of their balance sheets but also due in part to a lack of demand from enterprises as consumer demand fell. As the economy recovers, so will consumer demand; consequently, the demand from business for working capital to finance expansion of their operations will increase. A functioning competitive banking model is, therefore, crucial. However, our reliance on traditional banking is too high by international standards. We need to provide more options and improve credit flow to business by enhancing tax-based investment schemes, State-backed capital funds and the venture capital environment. We also need to communicate coherently the finance options open to companies and, very importantly, SMEs need to develop their management and finance skills.

I will outline our findings and proposals in more detail before I pass over briefly to my colleagues in the four sectors who will describe their members' first-hand experiences.

Irish companies continue to pay relatively high interest rates on bank loans. In January 2014 non-financial corporations in Ireland had to pay an interest rate on loans up to and including €1 million of 4.8%, one percentage point higher than the eurozone average. We expect that as the banking sector continues to recover and an improvement in economic conditions reduces the risk associated with business lending, these rates will converge to the eurozone average.

Credit conditions for financial enterprises and businesses remain tight. The Central Bank's lending survey conducted in quarter one of 2014 suggests respondent banks did not lower their credit standards for loans to SMEs. This means that while some or all of the credit sought by firms may have been obtained, the conditions attached to that credit remain strict.

Bank sector knowledge is improving and we welcome the advances made by banks in upskilling their teams to understand the different sector business models. This needs to continue and intensify. We believe the banks also have opportunities to develop services to deal with sectoral needs, for example, there is an opportunity for domestic banks to provide much needed funding for their technology clients, secured against the future receipts of research and development tax credits, while access to funding and grants, as is the case in Scotland, would help distilleries in their early years.

IBEC has previously identified that a State-backed enterprise or investment bank could usefully fill the gap in the market in financing growth-oriented smaller enterprises and start-up companies. An enterprise investment bank would provide the certainty of source needed to fund growing and high potential businesses and act as a catalyst to leverage funding from other equity and debt sources. Investments should be made efficiently without major friction costs by using information already available from existing State agencies and the banking network. The model of a State-backed enterprise or investment bank is established and used in Canada, the United States and Germany, to mention a few examples.

IBEC believes an improved employment, investment and incentive scheme, EIIS, could play a key role in encouraging the development of an alternative funding or investment culture among SMEs and the public. Budget Statement 2014 began addressing the issue, as the EIIS was removed from the high earner's restriction for a period of three years. IBEC recommends the following number of additional measures: the EIIS, as currently branded, does not seem to have a clear purpose. It is IBEC's continuing position that the scheme should be rebranded to make its purpose clear, that is, investing in Irish SMEs. We need to drop the employment or research and development restrictions under the EIIS. The purpose of the scheme has been confused by the inclusion of the employment growth and research and development spend restriction. IBEC recommends that the restriction be lifted, with a 30% upfront payment and an 11% payment over a three year period, regardless of how the funding is allocated. We also need to target non-traditional investors. The rebranded scheme would benefit from greater marketing and promotion to help smaller investors to become aware of the opportunities involved and allow them to easily find enterprises in which to invest. We need to reduce overall risk. Non-traditional investors have a different risk profile from the typical cohort or seasoned BES-EIIS investors and are currently not sufficiently encouraged to make investments in SMEs owing to relatively low value returns and a relatively high investment risk. In other European countries a number of methods, including guarantees against a proportion of losses, have been successfully used to promote investment schemes similar to the EIIS.

The take-up of the seed capital scheme has fallen in value terms in recent years. The scheme is likely to expand in size as the economy recovers, but growth will be limited unless a number of issues are addressed. Information on entitlements under the scheme is not reaching individuals starting a new company and should be prioritised through the new LEO system. The shareholding period for which the shares must be held, currently three years, is excessively long, given the high risk of company failure in the early years. A number of key venture and seed capital funds are running out of funds, with no new supply in place, leading to serious interregnums in funding flow. In order to reinforce Ireland's economic recovery, the Government decided to reorient the National Pensions Reserve Fund from a long-term pension fund to an investment fund focused on domestic investment on commercial terms that would support economic activity and employment. The new fund, the Irish Strategic Investment Fund, ISIF, to be established under legislation, must be prioritised and passed before the summer recess, as otherwise there are unlikely to be ISIF investments until the end of the year which, at best, will cause problems.

The capital gains taxation system in Ireland is no longer supportive of productive investment by domestic, indigenous entrepreneurs and should be reformed. We need meaningful incentives in the capital gains tax regime for reinvestment in order that entrepreneurs will invest in Ireland. It is much more attractive from a capital taxes perspective for someone to invest in Newry rather than in Dublin. The UK experience in providing targeted capital gains tax relief for trading enterprises should guide a fundamental reform.

Early stage companies require support to improve their commercial skills to make them investor ready and in preparing and presenting for follow-on funding. Supports from the Government via the local enterprise offices, LEOs, and online portals are very important.

It goes without saying the leadership and management of SMEs place a strong onus on themselves to upskill and source appropriate skills needed as they develop. Representative bodies such as IBEC have an important role to play to support that flow. I will ask each of our sector representatives to speak about the needs of their specific industry and access to finance and give context to our submission. The points they will make individually are, in many cases, relevant across sectors. Mr. Chamney, director of Walsh Whiskey and a founding member of the Irish Whiskey Association, will make the next presentation.

Mr. John Chamney

Employing 5,000, the Irish whiskey sector is the world's fastest growing, with figures for premium spirit up 200% since 2003, driven by four multinationals. In response, 13 small Irish SMEs are planning new distillery projects in Carlow, Mayo, Galway, Cork and Dublin, with a total industry planned capital investment of €1 billion. The working capital required for distilling and maturing ranges from €15 million to €30 million per project, making it a significant barrier to entry and survival. Companies must wait at least four years for a financial return.

The current Government assistance makes no allowance for the special funding needs of the whiskey industry, as standard grant assistance of €20,000 per job generated or approximately 6% of capital requirements is provided. This compares very unfavourably with the assistance available to our Scottish rivals, for whom in 2013 capital grants per job were more than €160,000 and represented between 16% and 40% of capital needs, depending on location. In Scotland SME distilleries are eligible for ex gratia funding of €300,000 which is allowed every three years under EU state aid rules, plus up to 40% of capital investment, 50% of a graduate's salary, a figure of 40% in building a website and 50% in the case of new product development.

While the UK Government is retrenching aid generally, financial support to its all-important Scottish whisky industry - amounting to 25% of Scottish exports - is being given a high priority. If we want to grow successful indigenous Irish companies, we must follow this lead by establishing meaningful whiskey-specific funding programmes that will help drive the industry to a second golden age.

Mr. John O'Dea

The medical technology industry is built on small and medium-sized enterprises. Ireland’s medical technology industry is now a recognised global medtech cluster comprising approximately 250 medtech companies. Of these, some 80% are SMEs. In fact, the majority of these companies are small and micro-sized, employing fewer than 50 people.

Global offerings across competing jurisdictions are threatening Ireland’s hard-gained leadership position and strong reputation, not only in Europe but also globally. It is important for the Government to support the pivotal role SMEs and entrepreneurs play in the medtech ecosystem and Irish economy.

One reason SMEs are so important to medical technology is the particular nature of research and development within the industry. Innovation often emerges from intimate collaborations between health professionals, academia and manufacturers - an approach to which small businesses are particularly suited. Developments often arise in direct response to particular needs, and result in the rapid innovation that characterises the industry.

Securing early-stage investment in these medium to high risk SMEs is critical to their very survival and to bring the technology to exit or to market. The introduction of a State-backed enterprise or investment bank could usefully fill the gap in the market that exists in financing growth-oriented smaller enterprises and start-up companies, the lifeblood of the medical technology ecosystem.

The medical technology sector is characterised by serial entrepreneurs. We need to take advantage of the potential a reformed capital gains tax regime for reinvestment will bring to the Irish economy and ensure we do not lose out to international competition as a location for investment. Capital gains taxation in Ireland is no longer supportive of productive investments by domestic indigenous entrepreneurs. For example, the levels of capital gains tax for entrepreneurs engaged in high-technology start-ups in Ireland are over three times higher than those in Northern Ireland.

Further measures to support investment need to be addressed, for example, simplification of the rules related to the EII and SCR schemes, and founder pension-funded investments.

Mr. Karl Flannery

There are close to 1,000 technology companies located in Ireland, ranging from start-ups and SMEs to the multinational corporations, and they are employing more than 90,000 people. The number of Irish-owned technology companies continues to grow and now stands at over 700, accounting for a total revenue of approximately €1.8 billion. According to a recent survey, nearly 75% of these companies plan to increase their workforce.

While the ICT sector as a whole has weathered the storm or even prospered relative to other sectors in the Irish economy, the indigenous digital technology and software sector has not achieved its full potential, with very few companies scaling beyond 100 employees and €10 million in turnover. Two main factors are at play here: talent and finance.

With regard to finance, Enterprise Ireland has played a key role in nurturing and developing start-ups and early-stage enterprises with a variety of grants and acting as a catalyst for a range of private equity seed and venture capital funds. Two new development capital funds are now in place for expansion-stage companies. However, the availability of finance, particularly debt finance, is proving challenging for growth-stage companies that have achieved sustainable revenues and profits. Factors at play include the fact that traditional forms of security for debt are not typically available from technology companies. Second, there is limited understanding of the technology sector among the banking sector, although I note AIB has this year produced a report specific to the technology sector, which we welcome. This is but the first stage. Third, we experienced demand for personal guarantees from the banks. The fourth factor is the long "No". Ongoing demand for information and long delays in processing the applications, followed by onerous terms and a reduced offer, can mean that the requested debt facility is frequently not pursued or taken up. The final factor is poor awareness among technology companies of the range of financing options and the particular options that are appropriate given the stage of development of the company and risk involved.

We can see from the Central Bank quarterly numbers that the level of credit outstanding to the technology sector has remained largely unchanged for the past two years despite the growth in the sector. Therefore, innovative and targeted products are needed for the growing number of companies which have achieved critical mass and have the potential to scale up. We need ways to provide security to the banks such as leveraging the research and development tax credits, extending State guarantees and other mechanisms.

Venture debt products appropriate to the Irish market conditions need to be developed where pure debt products are not appropriate to the level of risk involved. These products can provide a more acceptable risk-reward model to the financial institutions. The reward for Ireland, where we can address the shortcomings in the financing system for growth and expansion-stage companies, far exceeds the perceived costs or burden that may be placed on the State.

Mr. Frank Gleeson

It would be remiss of me not to paint the true picture of retail in this country since the recession began. Sales have fallen by a quarter, tens of thousands of jobs have been lost and vacancy rates are up. Margins have been cut to the bone, if they exist at all. Flat is the new growth and those retailers who have survived the recession are on the edge. This is particularly true of SME retailers, who make up 77% of retail enterprises in this country. However, we are not without hope. Retail Ireland forecasts that sales will rise this year for the first time since the crash. Even more important, we believe the sector has the potential to create 40,000 new jobs by 2020 if we can record a sales rise of 3% to 4% from the middle of this decade. However, this can only be achieved if retailers can grow. To grow, they need finance. While large retailers can often use their size to avail of credit, and very small retail businesses can use micro-finance schemes to get funding, there is a huge problem for those retail businesses that may have two or three small stores, or forecourt fuel stations. They are caught in the middle and are unable to grow with high rents that they are struggling to pay. These are usually independent retailers, even if they are part of a symbol group or a franchisee with a recognisable national or international brand name over their shop door. These small retailers have significant potential, and a huge footprint. Retail is one of very few industries that can boast a presence in every town and village in Ireland. Some 75% of retail businesses are located outside Dublin. Retail is a vital link in the supply chain for indigenous manufacturers and suppliers, especially in the food and drink sector. Unlocking finance for retailers therefore means job creation everywhere and for everyone in the country.

Ms Sharon Higgins

I thank the committee for inviting us and for taking the time to listen to us. We will be happy to take questions.

Vice Chairman

I thank the presenters. So as not to encroach on the time allocated for the next set of presentations, I ask that only those who are most qualified to answer questions do so. We have been hearing a lot about what the delegates said. It is good to hear the points reinforced. However, some nuances pertaining to the IT sector have not yet been made known to us so it was good to hear them today.

Deputy Peadar Tóibín

Táim buíoch as an chur i láthair. I agree on the technology and whiskey sectors, which present great opportunities. It sometimes seems that the banking industry is behind the curve with regard to emerging opportunities. Sometimes the banks say those looking for loans are not skilled enough with finance to be able to apply correctly. What have the delegates been doing to pass those skills on to individuals so they can apply correctly? Has the organisation been involved in trying to upskill the banks’ staff with regard to the emerging trends in the economy? Have the delegates seen the Government doing anything to upskill the bankers themselves in regard to how they should respond to the whiskey and technology sectors?

With regard to capital gains tax, I agree it is ridiculous having different rates in Newry and Navan. I would like to see the same rates in those locations.

The delegates referred to a lack of demand and quoted reports in doing so. We have been hearing that there are many cash flow problems in businesses at present. Will the delegates talk us through them?

I agree that retailers seem to be the poor relation in terms of Government policy in the past. One of the questions I have been putting to all the organisations is the dampening effect debt distress is having on the economy in general. Are the banks making an effort to nurse business out of debt distress, by separating toxic assets from the rest of the business? Will they comment on the cost of loans? What is the price elasticity of loans? Have the organisations engaged with Government recently on the Ireland Strategic Investment Fund? I know this is an issue that has been at play for a long time but has not reached implementation in practice.

Have the member organisations experience of sourcing finance abroad?

Ms Sharon Higgins

May I deal with these questions now?

Vice Chairman

Yes, and the person who is most appropriate can answer the questions that Ms Higgins wishes them to field.

Ms Sharon Higgins

Yes, I will make some general comments and some of the delegates will respond to other areas.

We support members to improve their skillsets and work through our different trade associations to look at the funding options and try to make our members aware of the available options. Obviously more can be done. I think the local enterprise office, LEO system, will have our wholehearted support in trying to ensure that our members really understand the role of LEOs.

In response to the Deputy's question on engaging with the banks, we have had quite significant engagement with the banks in terms of upskilling by individual sectoral levels. Individual sectors will meet the bank and talk about the particular situations that the industry is up against and look at products that might be helpful for them. This is a great opportunity to put that together on one submission, which we do at all times.

Deputy Peadar Tóibín

Is that translating to increased knowledge by the bank staff who engage with the different industry sectors?

Ms Sharon Higgins

The banks have certainly made a commitment - and we have seen a great many changes in the banks quite recently - to put staff with the right skillsets in place. That has not reached ground level in all cases at this point. Different things are happening. Obviously the historic lending was asset based but the banks are moving to different models of lending and that requires a new expertise in the banks. We have seen progress but much remains to be done. Let me give an example. I will call on Mr. Chamney to elaborate on the whiskey industry.

Mr. John Chamney

Our company, Walsh Whiskey, has been operating since 2009. We decided that we wanted to progress to the next phase, which is to produce whiskey. We had a long-term contract with an Irish supplier. In the first instance, we set up a joint venture with an Italian company which has routes to market throughout the world. In the first phase we needed to lay down the stills and the still house, which is about one third if not more of the total investment. The second tranche is laying down the whiskey. We went to Irish banks and they did not know the language we were talking; they had no notion of the industry. Luckily we were skilled enough to find a British bank which was quite happy to commit to funding our development of laying down the whiskey.

Ms Sharon Higgins

That is a good example of a sector where more can be done. I invite Mr. Karl Flannery to speak on his experience.

Mr. Karl Flannery

I have been chairperson of the Irish Software Association. We have worked recently with AIB on its outlook report. We helped them to understand the structure of the sector itself, the scale and the type of products needed. That information will be used by AIB to create products tailored for the market at branch level, so that they themselves are trying to gear themselves up to work with the technology sector, which is a major sector in Ireland. There are specific things going on, but I do not see that it is systematic across all the banks.

Mr. Frank Gleeson

I agree with Deputy Tóibín that the retail sector is the poor relation in banking at present. When I deal with independent retailers in the market, the exiting banks are willing to do deals but they cannot fund it through the Irish indigenous banks. That is the fundamental problem. There may well be some toxic loans or restructuring needed but they cannot get the restructuring done because the Irish banks have not got down to dealing with the small and medium sized enterprises yet. The banks are dealing with the larger companies. We need to have the issues addressed. There are many viable businesses, retailers have reset the bar in terms of running the business but the refinancing is critical. That is the fundamental point. When I talk to all independent retailers they spell out the difficulty in refinancing their business for medium to long term, given that the Irish banks are not interested in their business at this time.

Vice Chairman

Did Deputy Tóibín have some other questions that were not answered?

Deputy Peadar Tóibín

I asked about the price of loans and the effect that was having on their understanding of demand and the impact of demand on cash flows.

Ms Sharon Higgins

At present the price of loans in Ireland is one percentage point higher than the average in the UK and Europe. This is having an impact. There must be a demand and a competitive market environment but it would be our assumption that we will begin to see a reduction in the bank rate as the economic environment begins to start moving back into play. It has a major impact on companies that the rate is higher.

Senator Feargal Quinn

The delegates are very welcome and I thank them for opening our eyes to a great deal of information.

Two delegates mentioned capital gains tax. What do they propose should happen? What is happening elsewhere? How different are we from what is happening elsewhere?

My eyes were opened by the reference to the level of State help in capital grants for Scottish whisky. I did not know that. Are there opportunities for us in Ireland to do something similar?

Mr. John O'Dea

I will respond to the question on capital gains tax, CGT. We have a blanket capital gains tax which is at a very high rate. One only has to look at the situation across the Border to see how entrepreneurs are achieving a much more attractive capital gains rate. It is not just about the opportunity cost and losing tax revenue from CGT, this could be a selling feature to entrepreneurs. We attract a great many multinationals because of our attractive corporate taxation rate. There is no reason that we could not do the same in terms of attracting entrepreneurs to come to Ireland, if it was a low CGT location. When looking at CGT, we have to delineate between selling a piece of land and a house versus entering a high risk business that one will be in for seven or eight years. Perhaps there is a way we could carve out certain types of technology industries that are very high risk ventures and we should be looking at a very keen capital gains tax rate versus what might be considered a more passive type of investment, such as to salt away money for 20 years or whatever. Members might look at an approach to give technology entrepreneurs an incentive to take a punt.

Mr. John Chamney

The Irish Whiskey Association has made the Minister for Agriculture, Food and the Marine aware of the difference between the grant aid situation in Ireland versus Scotland. I am happy to say the Department is looking into the question and some other items which we do not have time now to discuss. There is genuine engagement taking place.

Certainly the Scottish First Minister Alex Salmond taken up the banner for Scottish whisky, and well done. We would be saying that there is a very good opportunity to do the same in Ireland.

Senator Feargal Quinn

Is Mr. Chamney being listened to?

Mr. John Chamney

Yes.

Mr. Karl Flannery

Let me add to the question of CGT. There is a problem developing in that companies that are looking to be bought out or are trying to sell up are actively relocating their enterprises into the United Kingdom. They may have made an acquisition in the UK and then they relocate the company to avail of the preferential CGT treatment in the United Kingdom. This is an issue for Ireland. I have seen it in a couple of companies in the technology sector.

On the issue of CGT, an effort was made in the last budget to introduce roll-over relief. Something needs to be done to clean that up and make it simpler. If people roll over their gains from a company they have sold, it should be just a straight roll-over, instead of having to claim it back. The chance of having two successful tech start-ups in a row are reasonably low, so why not just offer the relief there and then instead of having to claim it back five or six years later?

Deputy Anthony Lawlor

I just wish to make a few observations. Despite the number of witnesses who have addressed this committee, this is the first time we have got a definite figure regarding the cost of borrowings being 1.4% higher than across the rest of Europe. It was important we heard that today. It was also important for us to hear a number of witnesses speak about the need for a State-backed bank. Some of us were in Europe after Christmas and the European concept seems to be to look at what is going on in America and at funding being sourced elsewhere.

I suppose we have a State-backed bank in AIB, but I assume the witnesses are looking for something else. Obviously, we need to be looking at alternative sources of finance, rather than at the normal banking sector. Mention was made of microfinance loans, which are for small loans, but we need some source of funding for medium-sized companies that want to expand, particularly those in the retail sector which we hope will develop and grow over the next couple of years.

Mr. John O'Dea

Mr. Flannery put it well when he spoke about the need for a debt product that recognises the higher risk - high coupon debt. The venture debt products that exist generally require an equity injection of two-thirds, but if one is looking for debt, one is not looking for two-thirds equity at the same time. Otherwise, a business would just do an equity raise.

We must recognise that it is riskier to lend into some of these technology companies that do not necessarily have assets, other than intellectual property. However, there is a clear need for something above pure debt and below the kind of swing for the fences type investment that venture capital firms will make. Many companies are not going for billion dollar markets. If we could build a bunch of companies employing 40 or 50 people with a revenue of €10 million or €15 million, this would be fantastic for the economy, but this is not the type of company a venture capital firm is set up to invest in. Equally, venture capital firms generally have seven-year funding cycles, but it takes a lot longer than seven years to build a company of substance. Therefore, I feel strongly there is need for something like the old ACC Bank or a bank that is a little more investment oriented where the coupon is correspondingly high. Many companies would be willing to take on that debt.

Vice Chairman

I have a quick question for Mr. Chamney that is directly related to whiskey. I was in Taiwan approximately 18 months ago and was very surprised to see the low penetration of any Irish whiskey to Taiwan, given it is a country half the size of Ireland, but with six times the population. It has a growing middle class, but we were not on the shelves at all. Scotland was winning out there. We could point fingers as to whose fault this is, but I was surprised that while we like to champion our products, Irish whiskies were not on the shelves. Has Mr. Chamney any comment to make on that?

Mr. John Chamney

To be positive, Irish whiskey sells well in five countries or perhaps ten. The rest of the world is open to us.

Vice Chairman

Our interpretation of the one-China policy means that at State level we do not do business directly with Taiwan, but this does not mean that companies cannot. The Government works through China by way of the one-China policy. However, I felt there was a market in Taiwan that Irish companies, particularly in the whiskey sector, should consider. Perhaps this has been considered, but I was surprised by the lack of penetration.

Mr. John Chamney

There are large tranches of the world where Irish whiskey is not huge. If the Deputy went to Rio de Janeiro he would find the same issue. To be positive about this, we need to train young Irish graduates to learn languages that will help them market our products. It is relatively easy to deal with Portuguese and Spanish markets, but more difficult when we go to the East, which is where the market is and will be in the next 30 years. We need a graduate programme to prepare for this. We had such a programme in the past, sponsored by IBEC for Europe. I remember employing a young man and telling him to go and learn Polish. We need to do the same in regard to Korea and elsewhere.

Vice Chairman

I have one further question on the issue of communication. Not enough businesses know about all the schemes or which scheme would suit them. The lack of communication on schemes always seems to be a problem whether we are talking about business or anything else. The Government needs to get a one-stop shop online so that businesses can access information on all of the services they can avail of. I believe this is coming soon. How do business representative groups like those here fare in regard to getting information out to the various businesses, particularly information on crowd funding or linked finance? These non-traditional types of funding are taking off in other countries and are beginning to sow seeds here.

Ms Sharon Higgins

We are involved in providing information in a number of different ways. We engage with the Government in terms of the portals being developed and have access to these to make them appropriate for industry. Where we can, we engage on these. We must also ensure the schemes are appropriate and where we need change, we engage in a communications process to achieve that. We do this through the various trade associations. I think we can do more of this to get the message across as coherently as we can.

Vice Chairman

Are there any final wrap-up comments before we finish?

Mr. Karl Flannery

In regard to communication, much activity happens at a sectoral level because the products tend to be sector specific. In the technology sector for example, we run a lot of events where we bring in specialists from the US or UK on private equity funds. We recognise the issue that the founders of the tech companies tend to come from an engineering or science background, not from a finance or accounting background. Therefore, we look at how we can use that funding to put together courses that are tailored for the tech sector founders.

Mr. John Chamney

I should tell the committee that the Irish Whiskey Association has a mentoring programme with the four multinationals. I am long enough in the industry to be pleasantly surprised that these four businesses mentor the smaller businesses. Therefore, the kind of thing that the Deputy would like to see happen is happening within the industry.

Mr. Frank Gleeson

The Government has done a great job of promoting jobs in the export area, but we need to concentrate on the domestic sector now. We have outlined how we can create 40,000 jobs by 2020, but we require a functioning banking system for that, along with confidence and growth. Without a functioning system, we will not get there. There are 40,000 jobs on the table so I urge the committee and Members to remember that when making policy.

Vice Chairman

Are there any further comments?

Ms Sharon Higgins

I would like to thank the committee and look forward to working with it and with anyone else who will help us access finance.

Vice Chairman

I thank Ms Higgins and the other witnesses. The points they have made today will not go unnoticed.

I welcome the delegates from the Small Firms Association: Mr. A. J. Noonan, chairman; Ms Patricia Callan, director; and Ms Avine McNally, assistant director. They are present to discuss access to finance for SMEs.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I invite Mr. A. J. Noonan to make his presentation.

Mr. A. J. Noonan

I thank the committee. I am chairman of the Small Firms Association, SFA, and I run my own business, Rhonellen Developments. I am joined by Patricia Callan, director, and Avine McNally, assistant director. It is a great honour as a leader of the small business community to address you today on the important topic of access to finance for SMEs.

The SFA represents 8,000 small businesses throughout the country, all of which are customers in some way of the banking sector. The SFA is the voice of small business in Ireland and internationally, with members and affiliated organisations in all sectors and parts of the country. We specialise in the provision of valuable business-focused advice, developing connections for our members and effective public representation to the Government on small business issues.

Ireland is most definitely a nation of small businesses. Ireland has 200,000 businesses, of which 98% are small. Some 93% are micro-business with ten employees or fewer. They provide 50% of private employment, employing 655,000 people. Each year, in the region of 12,000 new businesses start up. We are a nation of entrepreneurs.

I have never known a business, big or small, to be successful without a bank supporting it. The business community is wide and varied. Its constituent businesses have one thing in common: they need an active banking market. Companies vary in size in the SME sector from tiny to large. Their banking needs vary from their being self-sufficient, in which case they can self-finance projects, to requiring an overdraft simply to exist from week to week, as in the case of some small businesses. Obviously, managing that cross-section of needs brings its own set of challenges for banks.

The SFA’s most recent business sentiment survey shows that small business sentiment continues to improve, with four out of ten companies predicting their business to be good or very good over the next three months. The survey indicates that the economy has stabilised, business performance is encouraging and companies are looking to the future with an increasing sense of optimism. However, the latest SAFE survey on access to finance for small and medium-sized enterprises in the euro area shows that credit advanced to SMEs remains on a low level. This is both a supply issue and a demand issue. For Irish SMEs, supply of finance is second only to finding more customers as the most pressing issue. Irish interest rates are well above those in competitor economies, such as Germany, and this dampens our members’ international competitiveness.

The SFA itself has recently conducted a business banking survey among a number of member companies, to which 855 member companies responded out of a sample of 3,000. Fifty-five percent of respondents use commercial banks for their working capital requirements, while 40% rely on them for their investment capital needs. Retained profit is the second greatest source of funds in a business, with 49% using that for working capital and 43% for investment capital. This is followed by shareholder investment and loans from family and friends. Just 1% of respondents use venture capital and business angels.

On the availability of finance from commercial banks, 38% of respondents stated they do not need investment capital at present, and 28% do not need working capital. Some 12% of companies stated that the availability of investment capital had decreased over the past year, with 19% reporting a decrease in the availability of working capital. Just 8% reported an increase in the availability of investment capital while 7% reported an increase in availability of working capital.

The cost of finance is increasing, with 29% reporting an increased cost for working capital over the past year and 25% for investment capital, compared with 4% experiencing a decrease. Thirty-one percent of respondents stated that their relationship with their business bank had disimproved over the past year, with 41% stating it had stayed the same and 10% stating it had improved. Eighteen percent did not respond.

The great majority feel that the idea of “relationship” is missing from “relationship manager”. They want a dedicated person to contact who understands their business, communicates effectively and responds quickly. The biggest issues identified are increased collateral required to secure finance and delays in securing credit and investment finance.

On the small business side, we recognise the imperative to upskill business owners in management capabilities, particularly on the financial information they need to supply to the bank. We run training courses to promote programmes, such as ManagementWorks’s Building Financial Capability in SMEs, for all our members on a frequent basis. However, for those already in difficulty who cannot afford professional financial advice, we believe the MABS remit should be expanded to help. This would help business owners to resolve their business issues, including by means of advice and advocacy on dealing with legal, accounting and financial issues concerning business restructuring, including negotiating with creditors and banks. This can be justified as it would save more businesses and the jobs of the people they employ.

The SAFE also shows that nearly 40% of all Irish SMEs do not feel confident in talking to banks and obtaining a bank loan. In other European countries, such as Germany and Belgium, confidence is much higher, at approximately 80% and 70%, respectively. Trust has been broken in dealing with commercial banks, hence the difficulties with small businesses gaining access to EU financial instruments, as these must be channelled through intermediaries, which are the commercial banks in Ireland. We have called time and again for the introduction of a State investment bank that would have as its remit job creation and infrastructure provision. We would welcome new overseas banks in the market to give businesses a choice and enhance competitiveness.

Banking in Ireland has changed dramatically over the past six years. Since the crash, the banking sector has moved from being proactive to being reactive. The next step has to be for banking to move to being active. The challenge as the economy begins to grow in a meaningful way will involve the banking sector being ready and willing to support potential growth.

The banking sector has lost an enormous amount of human resources - bankers who possessed enormous knowledge built up over many years. This is by no means easy to replace. Banks’ credit departments operate in an environment where risk is feared. Bank branch managers and employees need to become active members of their communities once more, attending local business functions and offering their support in rebuilding our towns and rural areas. Traditionally, they have been leading lights of the business community around the country, and we believe they should start again.

SFA members have increasingly been raising the issue of the lack of competition in the banking sector, and increased charges and extra conditions are becoming greater barriers even for growth-oriented small businesses. Why are banking approvals so high, yet draw-downs are running at 60%? Some of the main reasons are confidence and the terms and conditions attached to loan offers. A period of three months is not enough to adhere to a deal. Other factors are the prohibitive cost of funds, the offering of life assurance for astronomical sums, personal guarantees, and general legal operations being onerous and slow. The level of equity in some cases can be impossible to achieve.

What can the banks do to address this? First, a decision must be taken by a bank to lend. Then, when it decides to take on a business or a project, it must be priced at a level at which the promoter is seen to be wealthier at the end of the project than at the beginning. The terms and conditions are really where problems are arising. How can decisions be made based on a three-month offer letter? Are personal guarantees for the entire sum of a project absolutely necessary? The same applies to life assurance for the entire sum. That is before we move on to the legal aspects. Are the hoops being put in front of the business community on the basis that approval figures can be shown to be high and in the belief that there is really never any danger that the funding will be drawn down? This is completely unsatisfactory. There is a need for increased transparency on banking products and greater competition in the marketplace. The SFA has called on the National Consumer Agency to undertake and publish a price survey on the range of business banking products to improve price transparency for small businesses on an ongoing basis, and this should now be done.

Irish SMEs rely heavily on banks as a source of external finance, which makes them vulnerable to developments in the banking sector. Greater diversity in funding is necessary, including Government funding, peer to peer lending platforms, business angels and venture capital.

The Government has a role to play in the relationship between banks and business. Only a small percentage of SMEs make use of Government-related funding sources. One of the reasons for this is a lack of knowledge of existing finance schemes. For example, just 23% of respondents to the most recent Department of Finance-commissioned Red C survey stated they had good knowledge of State-funded supports, with only 25% aware of the microfinance loan fund scheme and 51% aware of the credit guarantee scheme. Let us look at the latter two schemes which were launched with great fanfare but which have been singularly unsuccessful. In relation to Microfinance Ireland, it is essential that it adapt its strategy to communicate directly with potential start-ups through social welfare offices and community enterprise centres, as well as LEOs. Applications should be allowed to be made directly to Microfinance Ireland, rather than having to go through banks and be turned down, and LEOs. The process should be as straightforward and speedy as possible. The levels of risk taken should reflect the additional price being paid for access to this form of finance and, consequently, the risk of higher failure rates should be tolerated.

The credit loan guarantee scheme has been designed in such a way that it cannot be used effectively. Our understanding from the recent meeting of the SFA national council with the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, is that it will take primary legislative change to make it work properly. We ask committee members to use their influence to ensure this is fast-tracked into the Oireachtas legislative programme. This is the key scheme for our members as, if we can get it right, it will allow business to grow and flourish. It will give the banks the necessary comfort to lend to worthwhile projects that lack equity or have had their balance sheets wiped in the past six years, or that are in innovative sectors in which banks do not have the necessary expertise to understand. For the Government, it will allow new companies access to finance which they are being denied. They will generate revenue from it and it will allow companies under pressure to survive. These are the ideals that were espoused on its inception but which have not managed to come to the fore. For the record, there will be failures, but the success rate will more than make up for this. Fanfare is one thing; real action is another.

The SFA continues to press the Government on the EIIS and has made a submission in the Department of Finance’s consultation process. It was formerly known as the BES and provided much needed equity. In 2007 €120 million was provided, which figure last year was down to €12 million.

Our recommendations include the following: a return to the BES as the scheme name, as it would be more recognisable. No one understands what the EIIS is - one always has to say it was formerly the BES. There is a need for enhanced publicity around the availability of the scheme. The only media reporting on the scheme tends to have a negative tilt from the perspective of tax write-offs versus recognising the importance of facilitating equity investment in what are viewed as relatively high risk schemes. In particular, there is a need to promote the family and friends and private placement options, as well as funds option, and to make it easy for companies to use the scheme without having to pay for expensive professional advice.

The scheme's rules should be changed, as follows: there should be a return to a five year, rather than a three year, investment term in order that businesses would have the necessary time to grow sufficiently to be capable of repaying investors. There is a need to remove employment and research and development criteria which complicate the scheme unnecessarily. By definition, if a business grows, these will occur, but it poses unnecessary risk up-front to the investor. There is a need to evaluate the cost-benefits of extending the scheme to other sectors and to examine UK and international models with a view to implementing government risk-sharing models with private investors in similar schemes. This is important to attract non-traditional BES-type investors and, specifically, other small business owners who might be interested in investing in other businesses. An enhanced EIIS is essential to allow business balance sheets to recover and give the equity piece that banks need to make a project work on their side of the equation.

The regulatory environment underpinning peer to peer lending platforms needs to be clarified and developed by the Financial Regulator. Also, the marketplace for crowd funding, business angels and venture capital needs to be improved, with enhanced Government funding acting as a catalyst for private sector investment.

The SFA welcomes the committee’s review of this important topic for small businesses. We hope the outcome will be recommendations for the Government, the banks and the SME sector to deliver an enhanced finance system that will work for all small businesses and the economy in general.

We welcome questions members of the committee may have.

Vice Chairman

I thank Mr. Noonan for his presentation. I call Senator Feargal Quinn who will be followed by Deputy Seán Kyne.

Senator Feargal Quinn

I thank Mr. Noonan and his colleagues for coming and giving us some understanding of the problems encountered in the area. I do not think the Small Firms Association will find a solution by asking the Government to put its hands in its pocket to do anything. I was delighted to hear some of the things Mr. Noonan said, but when he refers to enhanced Government funding, I do not think it will happen. If we have entrepreneurs in Ireland, all we need to do is to find some way or other to give them their head and remove boundaries that may restrict them. One proposal - the Government has taken the first small step towards it - is that people should be able to release their cash from their pensions which they could spend on improvements to their houses or shops. Asking the Government to do something is not going to solve the problem, apart from asking it to remove restrictive barriers. If these are the words Mr. Noonan has been using, it seems that it is likely to happen on that basis.

Why have relationships with the banks deteriorated? Can anything be done to encourage the banks to change and do something about this? Mr. Noonan spoke about optimism and confidence on the horizon, which sounds as if they should give the banks the ability to change. I can understand why they have cut back on their costs, but we practically own some of them. We want to ensure they succeed but not by asking them to release all control. The SFA has the necessary ability if more money was available in the economy.

Mr. A. J. Noonan

Absolutely. The relationship issue with banks is down to the human resource factor. A lot of bankers - relatively young men and women - have taken packages. They could not afford to stay for many reasons. A new generation is now coming through in the domestic banks and I have met a number of them both in my business and in my SFA role. That position will improve in the coming years. The banks are finding their feet, although I am not an apologist for them; therefore, members should not get me wrong. I am just suggesting they have been through a very tough time also. The fear that persists is felt in credit departments. A lot of front-line managers and others dealing with businesses are much more proactive and want to do deals. However, issues start to arise when matters go back to the banks' credit departments.

I agree completely with Senator Feargal Quinn in the sense that if the Government can give us a chance, we will certainly deliver jobs. As the Senator rightly said, we have done this before. However, there is an equity piece of roughly 30% missing. Some companies the balance sheets of which have been destroyed in recent years have to rebuild them. The Government should allow the tax system to work through the EIIS, reduced capital gains tax or rollover relief. It should give people a break to allow them to invest in relations or businesses. We do not want any money from it and do not think we are going to get any because it does not have any. However, we want the tax system to be facilitated to allow people to grow.

Ms Patricia Callan

I want to add one point on the enhanced Government funding angle. It goes back to the issue of competitiveness between companies here and those in the North and Britain. The UK Government has demonstrated that where it becomes a partner to an investment decision, it is much more successful. On crowd funding, for example, the Crowdcube model has been phenomenally successful, with the government underwriting 20% of an investment. It instils an air of confidence to generate a lot of private sector money. That is how the traditional venture capital, VC, model works, with the government putting in X amount and attracting matching funding. Hundreds of millions has been allocated to schemes such as credit guarantee and microfinance, but we cannot spend the money because these schemes are not working. We need to find a scheme that will deliver. In particular, the equity piece has to come into play because banks keep telling us they cannot go beyond the figure of 70%.

Our members tell us that in the 1980s that was done through grants because State aid rules were not there. We come up against State aid rules all the time now so we must be more creative. We can learn much from the UK model in respect of that.

Deputy Seán Kyne

I welcome the panel from the SFA and thank it for its presentation. I note the very high response rate. A total of 855 member companies out of a sample of 3,000 responded, which is excellent. In its presentation, the SFA mentioned that 40% of businesses do not feel confident talking to their banks. What is the reason for that? Has the SFA monitored change over the past number of years? Mr. Noonan made an interesting point about approval rates. We have had this debate previously in that the banks are saying they are lending to all and sundry and others, including ISME, are obviously disputing that. Mr. Noonan made an interesting point that banks are making people jump through hoops to the extent that they will just not draw down the loan even though there is approval. This is a very interesting point that I would not have noticed before.

What is the uptake in respect of training and upskilling? Mr. Noonan mentioned relationship managers. I will repeat the question I put to representatives from ISME. Does Mr. Noonan think there was a better relationship between bank managers and customers back in the 1980s and 1990s and that they knew, regardless of whether they were in small towns, their customers, their history, their families and the risk involved better than they do now?

Senator Feargal Quinn

I see that there is a vote in the Seanad so I must leave.

Deputy Seán Kyne

Mr. Noonan spoke about the regulatory environment underpinning peer-to-peer lending. What are the SFA's concerns in this area? It is a new area.

Mr. A. J. Noonan

I will deal with relationship managers and approval rates. The issue of approval rates is a subtle one because banks can say they have approved so many billions but the Deputy is right in that the terms and conditions attached to those approval rates are structured in such a way that banks can justify the rates but there is no danger of those loans ever being drawn down. Personal guarantees are one of the biggest factors because people are fearful of them. Overcoming that is very difficult because banks are fearful. I go back to the point I made to Senator Quinn, which relates to the fear within credit departments, how to get over that fear and what security and equity one can give. The more equity one can put into a deal, the less fear they have, which goes back to what Ms Callan was saying. It is a difficult one to manage.

The relationship manager issue is improving. In the 1970s and 1980s the branch manager had enormous power, which brought with it enormous responsibility. The banks decided, in their wisdom - we would not agree with it - to centralise lending, so one has bureaucrats sitting in some lending unit saying they do not like a particular project, knowing nothing about the people or promoters. This can lead to projects that are really weak getting funded because they look so good on paper, whereas the manager in the branch in Galway or Mayo could turn around and say "Your man's not hectic. It doesn't matter how good the figures are," and vice versa. I might let Ms Callan deal with upskilling and peer-to-peer lending.

Ms Patricia Callan

With regard to the trust figures raised by the Deputy, the survey in question is not our survey. Rather, it is an EU survey that showed benchmarks across all of the eurozone figures. That is why it is so interesting. It is saying that 40% of people here do not have confidence going in to make bank applications. That is really where we come back to the concept of the State investment bank. The Deputy is right when he says we own AIB and that we only have two banks, but those brands have a lot of work to do to rebuild themselves in terms of confidence. There are many companies which simply do not want to go through the doors of the three main banks because they have had a bad experience and they would love something new. When the European Commission rolls into town and runs its access to finance seminars, loads of people ring me up asking about how to get hold of this money, but in Ireland, that comes through the three mainstream banks, so one just goes in and makes a normal application. One might get some of the money, but there is no clarity there. They are fully aware that they are trying to rebuild it over time, but that is why many people would welcome something fresh and new to which they can go. It might just be cosmetic, but that is what is needed to give the lift in terms of improving demand rates. Again, one of Microfinance Ireland's biggest downfalls was the fact that one had to go to one of the banks and get rejected. I know that has been amended, but someone should just be able to make an application directly. That is what people want to do.

In respect of training and upskilling, we have worked with Skillnets in Avena in respect of the programme called ManagementWorks. The Building Financial Capability in SMEs programme is excellent and we strongly advertise and endorse it. In respect of management upskilling for small companies - there are many reports on this - it is really hard to get companies to take time out and pay money to train and upskill themselves. That is a communications and messaging issue. One just needs to keep coming at people from all avenues. I would not accept unilaterally that most small businesses are not professional. They are professional. Certainly we have no fears around this in respect of our members. We are really just trying to hone and improve their skills. However, there is a class of small businesspeople outside of organisations such as those represented today who are struggling. This is why we suggested the MABS route for people who are essentially desperate and cannot afford to come to professional organisations or even accountants for help because they will ask to be paid up-front. If we want to save those companies and jobs, we need to look at a different proposition.

There is a phenomenal opportunity in respect of peer-to-peer lending. The biggest thing we need to decide is whether we need to have a regulated structure. Linked Finance certainly worked. It probably took it about three or four years to ultimately get up and running without going through a Central Bank regime, which is fine. I know this is becoming a discussion across the EU, but if one looks at the US one can see that they have been doing it for years. They are already there, are competing and have a competitive advantage. A similar situation pertains in the UK. It takes us so long to catch up and get any of these things across the board. There are four models of peer-to-peer lending. Two of them are specific to business. One is the lending product through Linked Finance, but the other is just allowing people to buy products, similar to Kickstarter in the US. Some companies here have used that very successfully. If we could get there quicker, it would be hugely desirable and would really kick-start companies and give a good bounce in general. However, we need to decide quite quickly whether we are going to go for a regulated type of platform. If not, they need to say "No" and advise people how we can implement these schemes. The most successful one in the UK involves the government underwriting the actual funds, which are then invested in businesses. That has been hugely successful.

Vice Chairman

I agree with what Ms Callan is saying in respect of peer-to-peer lending, crowd-funding and the umbrella of names that do similar things. When Linked Finance appeared before us, I am almost sure that the message I received, although I stand to be corrected, was that it was very much open for business and had a lot to give but that the amount of applications could be even better because there was money to give. One of the big issues is communication around it and that fear of going to the non-traditional lender. There is something we are missing out on - and by "we", I mean the royal we, everybody here. Not enough people even apply for that. I am a big fan of that type of funding.

Ms Patricia Callan

It is a communication issue. If it had a big marketing budget, one would be more aware of it.

Vice Chairman

Everybody tells us that about everything - namely, that it is a communication issue. As much as I am hearing everything else that is coming in here today, when something is not working, everybody says it is not being communicated properly. I am horrified that according to the RedC research carried out for the Department of Finance, only 25%-----

Mr. A. J. Noonan

The guarantee scheme is flawed. The EIIS scheme is flawed. It is not because of communications that they are not working.

Vice Chairman

We all seem to say this when something is not being taken up as much as it should be. We all need to play a part in making sure it is communicated better, including that kind of one-stop shop online portal for access to supports for businesses.

Ms Patricia Callan

That has already been created. It was developed by the State agency across all Departments. Essentially, one answers eight questions, depending on one's sector and the business one is in, and it then lists all the supports that are available. That has already been done. Again, nobody knows about it, which is the problem.

Vice Chairman

Money needs to be spent on advertising that. That is one of the problems.

Ms Patricia Callan

It is a question of where one is communicating. Microfinance Ireland tends to attend shows attended by existing businesses. One could go into social welfare offices, persuade more people to take the self-employment route and tell them about funding.

In circumstances where a bank issues a rejection letter, it is stated that the applicant can go to the Credit Review Office. Why is it not possible for the office to be made aware of the fact that the application has been rejected in order that it might contact that applicant directly and have him or her send on the application to it? If these matters are pursued on a proactive basis through the proper channels, then it is possible to achieve greater success.

Vice Chairman

Good point.

Deputy Anthony Lawlor

I welcome our guests. This has been a fascinating discussion. I have in front of me the papers submitted by the banks and it has been extremely interesting to listen to what employers have to say on the various matters to which they relate.

The cost of loans is a major issue. Said cost is probably scaring people off in the context of drawing down loans. The difference between the cost of loans here and that which obtains in the UK is striking. The representatives from InterTradeIreland made a valid point with regard to loans when they came before us. Loans are being approved and drawn down but the issue which arises relates to the type of companies by which they are being drawn down. I am of the view that, in the context of the financial crisis, the pendulum has swung all the way to the opposite side and that there is a need for it to come back to the centre. The key issue in that regard relates to the quality of the staff available to analyse loan applications. However, applicants also have a responsibility in the context of outlining their position accurately. InterTradeIreland clearly stated that up to 90% of people who made proper applications received loan approval.

Mr. A. J. Noonan

That comes back to the issue of approval.

Deputy Anthony Lawlor

I know. It also comes back to the issue of diverging viewpoints. It is interesting that SMEs are repaying loans and that the level of lending is being outstripped as a result. The focus of SMEs is to consolidate their businesses before they begin to expand. This is reflected in the overall economy at present. The banking sector is also shrinking. There must be some encouragement from Government and it must inform businesses that they have paid back enough and that if they expand their operations, they will repay their outstanding balances more quickly.

Mr. A. J. Noonan

We have provided the committee with a few ideas in that regard.

Deputy Anthony Lawlor

Yes. Mr. Noonan and Ms Callan both referred to State banks as a source of finance. It takes a while to establish a State bank.

Mr. A. J. Noonan

We have only been calling for it to happen for two or three years.

Deputy Anthony Lawlor

I am aware of that. We may have moved beyond the need to establish such a bank at this stage.

The BES was a good initiative and it should have been brought to a close when expansion began. In addition, the section 23 reliefs should have been stopped when the property market took off. Those reliefs were only put in place to kick-start activity. Similarly, the BES was designed to kick-start activity in the business arena. It should have been brought to a close when activity commenced in earnest because its continued operation led to subsequent inflation.

I have taken on board the real and valid points made by our guests. MABS is struggling to deal with the sheer volume of people seeking its services. Perhaps the SFA and IBEC could come together to establish an organisation similar to MABS to assist those in business who are in difficulty.

Mr. A. J. Noonan

MABS for business.

Deputy Anthony Lawlor

Yes, particularly as MABS itself is overrun at present.

Our discussions today have been enlightening, particularly in the context of the conflicting arguments that have been put forward. I can see some light at the end of the tunnel but I reiterate that there is a need to get the pendulum to swing back in the opposite direction. There must not be a return to the stupidity which obtained in the past.

Vice Chairman

Do our guests wish to make any closing comments?

Ms Patricia Callan

No thanks.

Mr. A. J. Noonan

We are very grateful for the opportunity to be here.

Vice Chairman

We are delighted that our guests attended. We have gathered a degree of momentum in respect of this issue, particularly as the three presentations focused on the relationship between applications for loans and the drawing down of such loans. It was extremely interesting to be informed of what happens to people after loans have been officially granted. I again thank Mr. Noonan and his colleagues for attending and for raising a number of distinct issues.

The joint committee adjourned at 3.55 p.m. until 1.30 p.m. on Tuesday, 20 May 2014.