Dáil Éireann Debate, Thursday - 18 October 2018
193. Deputy Bernard J. Durkan asked the Minister for Business, Enterprise and Innovation the extent to which borrowing costs here are affecting growth and development of small and medium enterprises; and if she will make a statement on the matter. [43047/18]
View answerWithout investment enterprise growth is slower and the productive capacity of the economy is lower than optimal. While recent studies report that Irish businesses are investing less than their EU counterparts several possible barriers to this investment have been highlighted, including the cost of borrowing.
The ESRI study Measuring the Investment Gap and its financing requirement for Irish SMEs found that businesses are investing about a third less than would be expected based on fundamental factors. This study is consistent with the findings of several domestic and European surveys that point to underinvestment by Irish businesses. The EIB Group Survey on Investment and Investment Finance 2017 highlighted that Irish businesses reported a higher investment gap than their EU counterparts - 19% versus the EU average of 15%. The SME Brexit Impacts Study conducted in September 2017 found that 48% of businesses are not investing currently and that 55% did not plan on investing in the following 18 months.
The ESRI/Department of Finance Study, Exploring SME Investment Patterns in Ireland: New Survey Evidence, published in September 2018 reported that more than two thirds of SMES in the sample reported that they were satisfied with their investment levels or with their current capacity. The main stated reasons for not having sought credit in the past six months are dominated by a simple lack of credit requirements, a reason cited by 89% of businesses not seeking credit.
Irish firms fund a high share of investment using internal funds. The EIBIS Survey 2017 indicates that 75% of investment by Irish companies is financed using own funds, substantially above the EU average of 60%. This reliance on own funds for investment limits the size and timeliness of investment. It also means that a business is not establishing a credit track record which would support future access to finance.
Consequently, the level of demand for credit among Irish SMEs is lower than the EU average. The European Central Bank SAFE study shows that the loan and overdraft application rates in Ireland are considerably lower than euro area averages and that lending expressed as a proportion of domestic demand is also significantly below European norms. However, the Department of Finance SME Credit Demand Survey in July this year shows that credit demand is increasing with 26% having applied for bank finance in the first 6 months of 2018 compared to 20% in 2017.
The cost of borrowing for Irish SMEs is higher than the European average and this is a barrier to investment for some SMEs. The ECB SAFE study reports that interest rates on new NFC loans below €0.25 million (proxy for SME lending) in Ireland are substantially above euro area averages. One explanation for the interest rate differential is that the SME lending market in Ireland continues to be highly concentrated. According to the latest Central Bank SME Market Report the combined market share of new lending of the three main banks was 82%.
It is in this context that my Department has developed some important SME-specific initiatives to improve availability of affordable finance for SMEs. A revised Credit Guarantee Scheme was launched in July 2018 and is providing new financial products and loans other than traditional bank loans and involving other financial providers (beyond the three main banks) for Irish SMEs. The Brexit Working Capital Loan Scheme was launched in March this year. It provides affordable financing (maximum interest rate of 4%) to Irish businesses that are either currently impacted by Brexit or will be in the future. The Microenterprise Loan Fund Scheme was introduced in 2012 and is administered by MicroFinance Ireland. The purpose of the Fund is to provide loans of €2,000 up to €25,000 to Micro-enterprises who cannot obtain funding through traditional sources.
As part of Budget 2019 I announced a new longer term Brexit loan scheme, the Future Growth Loan Scheme, which is being developed by my Department and the Department of Agriculture, Food and the Marine (DAFM) in partnership with the Department of Finance, the Strategic Banking Corporation of Ireland (SBCI) and the European Investment Fund (EIF). Through a counter-guarantee from the EIF, the Future Growth Loan Scheme will leverage €62 million of Exchequer funding, of which 60% will be provided by my Department and the remaining 40% will be provided by the Department of Agriculture, Food & the Marine over a five-year period to make a fund of up to €300 million available to eligible Irish businesses for terms of 8-10 years.
