I am Garrett Stokes, CEO of Microfinance Ireland, MFI, and I am joined here today by my colleague, Ms Deirdre Parkinson, who is marketing and channels manager in Microfinance Ireland. We thank the committee for the invitation to attend today.
Microfinance Ireland was established in late 2012 to manage the microenterprise loan fund scheme, set up by the Government under the Action Plan for Jobs. It is a not-for-profit lender and a registered charity.
The objective of the scheme, as outlined in the Act, is to promote economic development and to increase employment and enterprise by providing loans to newly established or growing microenterprises across all business sectors, with commercially viable proposals that do not meet the conventional risk appetite applied by commercial banks. We fill the gap in lending supply but are not intended to replace any current bank lending.
The purpose of the fund is to provide loans of €2,000 to €25,000 to microenterprises, be they sole traders, limited companies or partnerships, that cannot obtain funding from traditional sources. Each borrower must be creating or sustaining a minimum of one full-time job.
Essentially, MFI is mandated to underwrite loans at a risk beyond that of commercial lenders. The loans are unsecured, at an affordable fixed interest rate, and not priced for risk. This overall proposition is unique in the marketplace. All applicants are given a full and fair credit assessment and, where appropriate, applications are approved. Our objective is that applicants do not take on unsustainable levels of debt.
Recognising the market we aim to serve, our loan offering is simple and transparent. We provide loans for up to five years at fixed interest rates for working capital or investment purposes. Repayments are generally fixed throughout the period to provide certainty for the borrowers. There are no fees or charges. Applicants may request interest-only periods or seasonal repayments where the circumstances of their business require.
In addition to lending, MFI provides mentoring services to its borrowers. This is an important support in helping our borrowers develop their business acumen and supports the sustainability of the business. The mentoring services are delivered through the local enterprise office network.
Ireland’s economy is built on a foundation of entrepreneurship and microenterprises. There are approximately 220,000 microenterprises in Ireland, representing 90% of all small and medium-sized enterprises, SMEs, in Ireland. These small businesses are the lifeblood of the economy and, without these businesses, many local communities would not survive. These micro businesses tend to be small indigenous businesses, with little or no export potential, but they are essential to their local community and economy. They bring services to local communities, create jobs and play a major role in rural sustainment and renewal.
Unfortunately, many of these businesses struggle to meet the normal credit criteria of banks as they are financially weak or burdened with legacy debt, poor credit history, lack security and financial history or have other social or demographical issues impacting their loan assessment. This is particularly true for start-ups. Without State supports, many of these businesses would not exist and their communities would decline.
The rationale for the Government’s investment in the microenterprise loan fund has always been that of job creation and sustainment across all areas of the country and across all industry types. MFI continues to fill this mandate, lending to all industry types, across every county, with a particular emphasis on more vulnerable groups, including migrants, females, youth, unemployed and more mature entrepreneurs.
Some 79% of all loan approvals by Microfinance Ireland are outside of Dublin. We have a strong focus on supporting new and existing rural businesses.
MFI, as a not-for-profit lender, is highly dependent on a range of financial supports and partners to fulfil its objectives. To date, the business has spent €8.3 million of State funds, provided through the Department of Business, Enterprise and Innovation, in running the business and absorbing bad debts. The commercial banks have committed €15 million of funding for on-lending to our applicants, all of which will be drawn down before the end of 2018. The European Investment Fund has provided risk sharing guarantees for up to €50 million in lending, of which approximately half has been utilised to date.
While we are a small team based in Dublin, through our business model we have a presence in all areas of the country. We have a team of more than 30 external assessors located across Ireland who meet potential loan applicants. We also have very strong partnerships with the 31 local enterprise offices, the 49 local development companies, LDCs, or area partnerships, which assist businesses applying to us. We also have created a referral programme with the main commercial banks for bank loan applicants who are declined or deemed unsuitable to apply for bank finance.
Our marketing strategy is around promoting our offering and increasing brand awareness across the country. The majority of our marketing and public relations, PR, is local, utilising local radio through advertising campaigns, interviews and sponsorships, local press, local marketing campaigns and attending and speaking at events across the country. In addition, digital marketing and social media have proved very successful in getting our message out among our target market.
We accept loan applications via our website or directly to our office in Dublin. Loan applicants can also work with the local enterprise office or the LDCs to submit an application to us. Our loan pricing reflects this by offering a 1% interest rate discount for loan applicants coming through these channels.
It is important to emphasise that Microfinance Ireland is a loan provider, not a grant agency. Our application process is comprehensive to ensure we safeguard as much as possible both the State funding provided to Microfinance Ireland and the loan applicant. We have to recognise that microenterprises, and particularly start-ups, are inherently risky. That said, it is our policy to work with borrowers if they struggle to make loan repayments. Our first priority is to maintain the borrowers’ business and we offer a range of additional concessions in such circumstances.
To date, our loan approval rate is 45%. The level of loans actually written off is 16% but the underlying rate is higher. MFI has recently been approved to grant further borrowings to previously successful borrowers that are still too financially weak to borrow from banks. This is proving very beneficial to our customer base.
Over six years we have built strong capability, brand awareness and in-depth knowledge of how to lend to microenterprises. Microfinance Ireland is the only Government initiative directly lending to the "unbankable" microenterprise sector. Following modest beginnings in 2013, the business has grown year on year and at this stage of the fund, MFI is currently ahead of the original job numbers objective and by the end of the fund is forecasting to significantly beat it. It is doing so at a cost of less than €2,000 per job, the lowest cost of job support of any current Government initiative.
MFI will be in business for six years in October 2018 and since inception it has approved loans totalling €26 million to 1,830 businesses. Through these it has helped to support the creation or sustainment of 4,375 jobs. To give some headline figures, some 82% of businesses supported have one to three employees, 79% of loan recipients are located outside Dublin, 57% are sole traders and 56% of loans are to start-ups. At this point, MFI is attracting 1,000 applications per year. It is supporting in excess of the target of 770 jobs per annum. It is working collaboratively with the local enterprise offices, LEOs, the local development companies, LDCs, and banks. We are financially supported through the Government grant and bank borrowings and we are in receipt of a European Investment Fund EaSI Guarantee credit commitment out to 2022. MFI is certified by the EU under the European code of good conduct for microcredit provision. It was one of the first four microfinance organisations in Europe to receive this award, which is seen as the quality benchmark in Europe for the provision of microcredit. By the end of 2022, the business is forecasting to have approved €58 million in lending to in excess of 4,000 businesses, supporting the creation or sustainment of more than 9,000 jobs.
MFI is currently experiencing record numbers of applications. This is being achieved against the backdrop of recent positive trends in the Irish economy - low unemployment and increasing optimism in consumer confidence coupled with a very strong culture of entrepreneurship in Ireland. Ireland, however, still suffers from unemployment black spots in many areas of the country and in certain demographic sectors which are not achieving the same level of improvement in employment. MFI's continued growth highlights the ongoing need for microfinance support for unbankable promoters and propositions, particularly start-ups, irrespective of the economic cycle. While MFI’s model is unique in Ireland, across Europe and globally microfinance is a well established business model and is seen as a key element of the funding ecosystem. When benchmarked against similar institutions in Europe, MFI is performing well.