Joint Committee on Enterprise, Trade and Employment díospóireacht -
Wednesday, 20 Sep 2023

General Scheme of the Microenterprise Loan Fund (Amendment) Bill 2023: Discussion

An Cathaoirleach

Apologies have been received so far from Senators Sherlock, Garvey, Ahearn and Gavan and Deputy Shanahan. We will look at the general scheme of the microenterprise loan fund (amendment) Bill 2023, which provides for an amendment to the Microenterprise Loan Fund Act 2012 to provide for the transfer of the ownership of Microfinance Ireland from the Social Finance Foundation to the Minister for Enterprise, Trade and Employment and to put in place related governing structures.

I am pleased we have the opportunity to consider this and related matters further with the following officials from the Department of Enterprise, Trade and Employment: Ms Jean Carberry, assistant secretary, European Union, digital and access to finance; Ms Fiona Kilcullen, principal officer, access to finance; Ms Pamela Malone, assistant principal, access to finance; and Ms Anne-Marie Finlay, principal officer. It is great to see four women in for the first time. I do not think we have ever had a delegation where there has not been a man involved. There is a bit of progress there somewhere, so well done.

I will explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to another person in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected, pursuant to both the Constitution and statute, by absolute privilege. Witnesses are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if witnesses' statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.

The opening statement has been circulated to members. To commence our consideration of this matter, I invite Ms Carberry to make opening remarks on behalf of the Department.

Ms Jean Carberry

I thank the Chair and members of the committee for the opportunity to discuss the general scheme of the microenterprise loan fund (amendment) Bill 2023. The purpose of the Bill is to provide a statutory basis for the transfer of Microfinance Ireland, MFI, into State ownership within the remit of my Department and to bring MFI fully within the State body governing structure of the Department.

Before commenting on the specifics of the proposed Bill, I will provide a general update on the work of MFI.

MFI was established in 2012 and lends to viable small businesses with fewer than ten employees and annual turnover of less than €2 million. That is the businesses' turnover, not Microfinance Ireland's. It provides vital support to start-ups and established microenterprises that do not meet the conventional risk criteria applied by commercial lenders. MFI provides loans ranging from €2,000 to €25,000 to businesses and applies interest rate charges for its lending which are far below what the market would charge for the level of credit risk involved. In addition to its lending services, MFI provides post-approval mentoring services free of charge to its borrowers. These are delivered through the local enterprise offices. There is a wide regional spread of loans across the country with 78% of loans approved for microenterprises outside Dublin. To date, MFI has approved a total of 4,922 loans to the value of €81.2 million, supporting more than 10,300 jobs.

MFI was established as part of an array of measures introduced to improve access to finance for SMEs in the wake of the global financial crisis. While there were a number of microfinance providers across Europe at the time, this was a novel concept for Ireland. MFI’s purpose was to generate and retain employment in businesses with fewer than ten employees. A sunset clause was built in by way of a limit of €25 million on the amount of funding so that, if the programme was not a success, it could be discontinued relatively easily. Although all of MFI’s operating costs, including losses on lending, are met by the Exchequer, MFI is not currently State owned but was created as a subsidiary of the Social Finance Foundation, SFF.

MFI has been an unqualified success since it was first established. An independent review of the microenterprise loan fund in December 2019 concluded that MFI fulfils a unique role for microenterprises unable to secure finance via other sources and acts as an effective countercyclical intervention in the market. The importance of MFI was particularly evident in the early days of the Covid-19 pandemic when MFI immediately pivoted to providing Covid-19 loans, which acted as a liquidity lifeline to small businesses before most of the other Government supports kicked in.

There is no doubt that MFI has proven its relevance as an essential part of the financing ecosystem for small businesses across the country. In reflection of this, the 2020 programme for Government includes a commitment to scale up MFI so that it can support greater numbers of small businesses and start-ups in accessing finance. As a first step towards this, the Department conducted a further review of MFI to assess whether its governance arrangements were consistent with Government’s ambition to scale up MFI. The review recommended the transfer of ownership of MFI from SFF to the Minister for Enterprise, Trade and Employment. This would provide better alignment between the ownership and funding arrangements for MFI. SFF participated in this review and agrees, notwithstanding the positive operational synergies between SFF and MFI, that it will relinquish its parentage to the State. The purpose of this legislation is to provide a statutory basis for that change of ownership.

Since its establishment, MFI has been funded by the Department of Enterprise, Trade and Employment by way of capital grants to the microenterprise loan fund. This has equated to an average annual cost to the Exchequer of €3.2 million per annum since MFI was established. The Strategic Banking Corporation of Ireland, SBCI, provides a significant portion of MFI financing for lending on and the European Investment Fund provides a guarantee that significantly offsets the cost of MFI loan defaults.

The existing governance structure in place for MFI already contains many of the aspects of governance applicable to State bodies. However, this legislation is required to give effect to the transfer of ownership of MFI to the Minister for Enterprise, Trade and Employment on behalf of the State and to implement a more appropriate and up-to-date governance structure. This will underpin the expanding level of MFI activity in the provision of microfinance throughout Ireland as unbankable microenterprises seek to start up, survive and flourish.

Today, the Joint Committee on Enterprise, Trade and Employment is being asked to carry out prelegislative scrutiny on the general scheme of the Microenterprise Loan Fund (Amendment) Bill 2023. This is a short Bill with a narrow scope with the intention of providing a statutory basis for the transfer of Microfinance Ireland into State ownership within the remit of the Department of Enterprise, Trade and Employment.

I thank the Chair and committee members. My colleagues and I are available to provide any additional information required, either now or at any time in the future.

An Cathaoirleach

I thank Ms Carberry. I now invite the members who wish to discuss the matter with the representatives to do so. First is Deputy Louise O'Reilly.

Deputy Louise O'Reilly

I thank the officials for coming in this morning and giving us the outline. As said, it is somewhat technical in nature, so there is not a huge amount to say about it. I have just one or two questions, related to Ms Carberry's submission.

Ms Carberry stated the existing governance structure in place for MFI already contains many of the aspects of governance applicable to State bodies. Therefore, is the intention effectively to make it a State body and stack into it additional governance and oversight functions? Will it be different? How will it work?

Ms Jean Carberry

The key difference will be that board appointments will be made through the Public Appointments Service, PAS. At the moment, there is a layer between the Minister and MFI, namely the SFF. It is responsible for board appointments. It also has an interim level of control. There would be much better alignment if the Minister were the direct shareholder. We take advantage of the PAS process. My colleague Ms Kilcullen might be able to refer to other governance changes.

Ms Fiona Kilcullen

The key thing is the board appointments. It will also make it easier to provide funding. The current structure made it more difficult to get funding in quickly during the Covid-19 crisis. It will give a standard "in" on the Estimates process. The board appointment and the Estimates process changes will comprise the key improvement and efficiency that will come to the current governance structure.

Deputy Louise O'Reilly

Will the people currently on the board transition over? Obviously, we will get information closer to the time on how it will work.

Ms Jean Carberry

They will serve out their time. When they are being replaced, appointments will be made through the PAS process.

Deputy Louise O'Reilly

My next question has probably been answered in part. Page 3 of the submission states the transfer of ownership will provide for better alignment between the ownership and funding arrangements for MFI. What would be the net effect of that? Alignment is good and synergies are brilliant, but what will all the alignment mean in making a practical difference?

Ms Jean Carberry

There will be very little difference in practice because it works very well at the moment. The key thing is that we in the Department have no control over SFF and its board. If in the future there were a complete change in direction in SFF and a different structure to it, it could cause problems because it is the owner of a company that is fully funded by the State. There are many safeguards in the MFI Act but at the same time there is discomfort. When our organisation was originally set up, SFF was a body under the auspices of the Department of Finance. We had that comfort. The Department of Finance had control over the SFF board and therefore there was comfort. We no longer have that.

Second, we plan to scale up at MFI, so it makes more sense that we would have a direct link. As we are talking about large amounts of State funding, there is a lower risk in having them directly under the Minister.

Deputy Louise O'Reilly

That is very helpful. I thank the representatives.

I have a final question. If I am reading the submission correctly, the intention is to future-proof and enable expansion.

Ms Jean Carberry

Yes.

Deputy Louise O'Reilly

Is it the intention that targets will be set in terms of expansion or being able to get more money?

As Ms Carberry said, MFI has been an unqualified success, so if something is doing well, do more of it. That makes sense. Is this all that is needed, aside from the funding that, of course, is going to be needed? To give more money out, one has to have more money in. I get that. However, when this legislation goes through, will this be the catalyst for a rapid expansion, or is it intended that the building blocks will be put in place and the expansion will happen gradually?

Ms Jean Carberry

It is the second one. Work has commenced, and there will be ongoing capacity building in MFI. A key enabler is a modernisation of its system. It was sharing a system with Social Finance Foundation, which was rather antiquated. There was a lot of manual processing of loans, which was very inefficient. One of the conditions that we imposed when we put earlier rounds of funding in was that it modernise this system.

What we experienced during the Covid-19 pandemic was a huge spike in demand for the MFI product, and it could not cope with that demand, so what we have been doing in the last couple of years is building up capacity and modernising its systems. The other thing that we want to do is to much more closely link it in to our other engines, namely, Enterprise Ireland and the local enterprise office, LEO network, so that we can get much better synergy. What we see is that Microfinance Ireland should really be the financing arm of the LEO network and Enterprise Ireland. We cannot call it a bank because it is not regulated. By bringing it into the family of the Department, we will be better placed to nurture those networks. It will be a slow burn.

Deputy Louise O'Reilly

Yes, that is the thing. They are the building blocks for expansion. On staffing and how that works, is there a transfer of undertakings for staff? Will they become civil servants? How is that going to operate?

Ms Jean Carberry

The first thing to say is that their employer does not change. In the first instance, there will be no change to the terms and conditions. The first thing that might change is that they will be eligible to join the single public service pension scheme. At the moment, Microfinance Ireland funds personal retirement savings accounts, PRSAs, for employees but they will have an option of joining the single scheme. We do not envisage any change to their terms and conditions in the immediate term but perhaps in the future, subject to conversations with the Department of Public Expenditure, National Development Plan Delivery and Reform, there might be some closer links with public service pay scales. That is to be negotiated in the future.

Deputy Louise O'Reilly

The intention is that the employer will not change but their status will change inasmuch as they will be allowed access to the new single public service pension scheme.

Ms Jean Carberry

Yes, and there is a big benefit to this that we see. Staff members did not have any certainty before because this was always something that could be discontinued at any time. It was created with a sunset clause. There was a level of difficulty in recruiting people, and a level of discomfort among staff as to whether or not there was a future. This is a very loud signal that MFI is here to stay. That is important for both its customers and the staff.

Deputy Louise O'Reilly

That is excellent. They are all of my questions, and I thank the witness.

An Cathaoirleach

I thank Deputy O'Reilly. We will move on to the Fine Gael slot, which is 14 minutes for Deputies Stanton and Bruton.

Deputy David Stanton

I thank the Chair. I do not think I will take too long. I thank Ms Carberry for the presentation, and like Deputy O'Reilly I can see that Microfinance Ireland seems to be very successful in the work it has been doing. Ms Carberry said, "A sunset clause was built in by way of a limit in the amount of funding of €25 million, so that if the programme was not a success it could be discontinued relatively easily." Could Ms Carberry say a bit more about that €25 million? Is that still the case, and how does that work?

Ms Jean Carberry

The original legislation provided for a microenterprise loan fund of €25 million and once that microenterprise loan fund was completely spent, it might not have been replenished. That was the sunset clause. There was also the fact that the parent was a body at arm's length from the Department. If this had not been a success, it could have spent the €25 million and then it could have closed down.

We have subsequently put in further funding into the microenterprise loan fund. It has €30 million in its bank account. Circumstances during Covid meant we had to put a lot of money in very fast because the loans were moving out very fast. Now the intention is that once they need further money, we will fold them into our estimates process.

To explain briefly the way the model works, MFI gets the money it lends out from the Strategic Banking Corporation of Ireland, SBCI. SBCI gets wholesale money from the ECB and, very cheaply, gives that money to MFI which MFI then lends out. It has a risk tolerance of about 30%, so about 30% of what it lends out does not come back. The Department pays for the operating costs of MFI every year and some of the losses on those loans. The other part of the losses is covered by an EaSI guarantee which is provided by the European Investment Bank. It is a nice neat model because we are really only paying for the operating costs and a small portion of the losses. The cost to the Exchequer is low.

Deputy David Stanton

The interest rate is 5.5% or maybe 6.5%, depending on whether they go through the LEOs. Ms Carberry mentioned a tolerance of 30% of failure built into the system. Will she say a little more about that? How many of the loans are not paid back because the businesses are unable to continue for whatever reason? What is the value in 2022 of that particular loss? What are the running costs of MFI? How much does it cost to operate it? Will the proposed change have any impact on the operating costs of MFI?

Ms Jean Carberry

The reason we set up MFI was to lend to businesses that would not be able to get money from the banks so de facto these are high-risk businesses. They are mostly start ups. As they do not have a credit record, that means they cannot get bank financing. A lot of evidence shows that there is a huge benefit to giving businesses this help along the way and many start ups would fail were they not able to access bank financing. MFI prides itself on being a responsible lender. A big part of the model might be described as being a Montessori for businesses. They get to learn how to interact with financing, they get loans and pay them back and they build up a credit record so that they can then go into the banks with a credit record and can sink or swim on their own.

Returning to the social responsibility element, MFI does a lot of underwriting and does not lend to businesses that it thinks will fail. It does not want to take a bright young entrepreneur and saddle him or her with a bad credit record, so it takes that very seriously. However, by their nature, start ups fail. That is a good thing, in general, because if we encourage people to fail and start again, that means we will have a more vibrant economy.

I may have to come back on the total quantum of the losses. It is approximately 30%, so if it has loaned out €80 million, then it would be approximately €24 million over the years. Again, 50% of that is covered by the EaSI guarantee, so we get that back. We consider it an investment; it is an investment in a vibrant start-up community.

Deputy David Stanton

I notice in the various packages involved that there are upper limits of €25,000. I think the maximum for certain packages is €5,000 and so on. Are there any proposals to increase those limits?

Ms Jean Carberry

We are seriously looking at increasing the limits for two reasons. One is inflation since 2012. Yesterday's €25,000 is probably getting close to today's €40,000. The second thing is that the amount of the easy guarantee covered up to €25,000 and it has been increased to €50,000. During Covid, we increased the maximum loan size to €50,000. As I alluded to earlier, MFI could not cope with the demand for loans. We want to finish the new IT system and then we will have to get approval, as one has to for all things, from the Department of Public Expenditure, National Development Plan Delivery and Reform, but our intention is to seriously look at raising the upper limit.

Deputy David Stanton

I notice that the number of employees involved is a maximum of ten. Are there plans to increase that or is it being examined in any way?

Ms Jean Carberry

In addition to the ten employees, there is also a panel of underwriters. That increases their capacity. At the moment, they are quite reliant on the underwriters. They also do some outsourcing where they need to. Any increase in staff levels would have to be subject to negotiations with the Department of Public Expenditure, National Development Plan Delivery and Reform. As they grow in scale, we would certainly consider increasing staff.

Deputy David Stanton

As the Chair pointed out initially, we are anxious to have balance. We have balance for better business established in the Department too, which is doing very good work. Is there any emphasis on minorities, female leadership and entrepreneurship and so on? Is any positive bias in that area at all built into this?

Ms Jean Carberry

That is 100% the case. The fact is that Social Finance Foundation was MFI's parent and Social Finance Foundation, as one can tell by the name, was strongly orientated towards diversity and making a difference. The culture of MFI is very much one of helping minorities. It has had various loan offerings over the years. It had an immigrant loan. It very much targets women entrepreneurs. Because it is lending to people the banks will not lend to, these are its markets, including minorities and people who need additional assistance. It is very much its space. We are very pleased that MFI has a woman as chair of the board. Unfortunately, its previous chair, who was also a woman, passed away in December. We were lucky to find another very good woman, who is leading the board. It has a balanced board and is very much in that space. I am proud of it. It is very public service orientated as an organisation.

Deputy David Stanton

Has MFI any involvement with universities and students in universities who may be contemplating start-ups? Has that been explored at all to let them know that MFI exists and what services it can provide? When one talks about young people starting up companies, universities seem to be an obvious place to target, advertise and promote the services offered by MFI.

Ms Jean Carberry

I might have to pass to my colleagues to answer that. On the flipside, I know MFI had a target of older people who had come through their career and wanted to start up a new business. Is there anything for universities, Ms Kilcullen?

Ms Fiona Kilcullen

There is an intention to target universities and start-ups at that stage. The Microfinance Ireland offering is targeted at people who cannot access standard bank lending and have no credit history, and that includes universities. The intention is to target that too.

Deputy Richard Bruton

I think Deputy Stanton has asked most of the questions. I was there when this was set up. It filled an important gap and continues to do so. It is good to see this is being placed on a more permanent footing.

I hope the credit unions will increasingly see their role in this. They have quite a lot of untapped reserves which can play an important role in communities.

Looking at performance, the €24 million loss Ms Carberry mentioned against more than 10,000 jobs works out at €2,500 per job. That does not represent bad value for money, considering MFI is dealing with the less bankable start-ups. I recall during the deepest years of the crisis after the financial crash, start-ups still created more than 100,000 jobs in Ireland over a period of five years, which was important at the time.

Does the Department intend to refresh the entrepreneurship policy that we published around 2014 or 2015? I do not remember the exact year. It is more important than ever, in an environment where there are always question marks over our reliance on external investment. It would be worth reviewing that policy to see how far down the road we have gone and what has been successful and what has not. That is one question.

I welcome improved governance, but has there been any independent evaluation of how well the PAS is performing in finding good board members? It tends to be somewhat passive in building up a wide repertoire of people who could potentially contribute. We tend to see the same names again and again. Many of them come from the public service, which is not to say that is not a good thing, but I wonder whether serving on State boards has become something that is not on the radar of people who have experience in the private sector. While it is good practice and having an independent process is important, we need some assurance that the PAS model is hunting down good talent, including minority talent. We need to see a balanced mix on our State boards. The PAS needs to have the capacity to find good people to serve on boards as they play an important role. I would be interested to hear whether any work is being done to look at the PAS and its capacity to reach people. At times when I was there, I saw nominations come up and there was not one woman among the nominees. It is hard to understand that a body charged with finding membership of boards could not find a woman with the competencies. Those are my two questions as the more detailed ones have already been answered.

Finally, will the Bill specify board membership? Will it say this is the kind of mix of skills and capacity we want to see on the board or will it be left to a Minister or the PAS to draw up the criteria for board membership?

Ms Jean Carberry

I will first answer a question the Deputy did not ask, but alluded to, relating to the credit unions. We are proud of the work we have been doing with the credit unions. We have been working closely with the division of the Department of Finance that is responsible for credit union policy. We have successfully included a group of credit unions in two of our loan guarantee schemes, specifically the Ukraine credit guarantee scheme, and we are in negotiations about including them in the new growth and sustainability loan scheme. We see that as a way of providing some risk protection to credit unions as they learn more about operating in the business sector. I agree with the Deputy that they are an important untapped source of credit for businesses and they should be our version of the German Sparkassen.

The Deputy's questions are unfortunately difficult for me to answer, because they are not my areas. On the questions on entrepreneurship policy, entrepreneurship is definitely a very important focus of the Department and of Enterprise Ireland. I am not responsible for it, so I cannot tell the Deputy if there are plans to look at it, but I will certainly bring it back to the Department. I know our new Secretary General, Declan Hughes, is a very much a passionate advocate for entrepreneurship, so I would be surprised if there were not plans to renew it.

On the issue of the Public Appointments Service, PAS, an exercise was done approximately two years ago to look at the balance on State boards. We perform better than the private sector, but there are certain boards where the balance is terrible, but they are old holdouts. I am thinking of some of the very old and esoteric State boards, which have poor balance. However, in general, we are better performers.

On the question of a review of PAS and its processes, I cannot answer that, because it is not something that falls within my remit. We will not be specifying board membership specifically in the Bill, because this is a very simple and clean Bill. We would like to take it through quickly. It is really just about the technical, statutory basis for moving ownership. However, it will be then for the Minister to look at that the issue of board membership.

Deputy Richard Bruton

Is there an intention to have a second Bill?

Ms Jean Carberry

No, I do not think we need that. Again, we need to think about the future, because things change so quickly. I think that might be too detailed to hard code into primary legislation.

Deputy David Stanton

I have two more short questions. We are putting some legislation through at the moment on co-operatives. I wonder whether co-operatives will be able to borrow if they need to from Microfinance Ireland in the future.

Ms Jean Carberry

The only criterion is to have fewer than ten employees, as well as the turnover. If they fit within that definition, which we have taken from the European criterion, I do not think there is any bar on particular structures. This could be a one-man show. It could be any kind of entity, as long as it has fewer than ten employees and a turnover of less than €2 million.

Deputy David Stanton

Head 11 states, “The authorised share capital of Microfinance Ireland shall be €1 comprising one share of €1 and that share shall be held by the Minister”. It also states in the explanatory note that, "Legal advice may be required from the AGO on this transfer." Why is there a need for legal advice? Is there a need?

Ms Jean Carberry

I will pass over to my colleague, Ms Kilcullen.

Ms Fiona Kilcullen

We think it will be covered by the current drafting, but the Bill is currently being drafted. In our discussions, that seems to be okay, but we may need to be clear about exactly how it is passing. I am not sure if that is sufficient detail. It is just to be careful. It is an abundance of caution.

Deputy David Stanton

At the moment, the share is held by the Social Finance Foundation, SFF. Is it the case that is has to be transferred, then? I refer to the golden share concept that is transferred to the Minister. It seems, as Ms Kilcullen said, to be pretty straightforward, but I am curious to know why legal advice might be needed. I take the point that one has to be careful on this.

Ms Fiona Kilcullen

The indications are that it should be okay.

Deputy David Stanton

It should be okay. I thank Ms Kilcullen.

An Cathaoirleach

During Ms Carberry's contribution, she said that MFI's IT system was not up to scratch when it was dealing with loans, etc., in the past and that it had been asked to upgrade its IT system. I might have gotten what she said wrong. Has it done that? When we transfer over, will we need a new IT system, or will we be okay?

Ms Jean Carberry

It is in the process of doing it. Ms Kilcullen is on the board of MFI, so she is very much in the loop around the process. We are very happy with how it is going.

An Cathaoirleach

As there are no further questions, that concludes our consideration of the matter. I want to thank all representatives for assisting the committee in its consideration of this important matter. The committee will further consider this matter as soon as possible. This concludes the business of the committee in public session. I now propose that the committee goes into private session to consider other business. Is that agreed? Agreed.

The joint committee went into private session at 10.20 a.m. and adjourned at 10.37 a.m. until 1.30 p.m. on Wednesday, 27 September 2023.