I welcome the opportunity to present the Microenterprise Loan Fund Bill 2012 to the House. The Bill is one of the key targeted actions in the Government's action plan for jobs 2012 to address the issue of access to credit and support lending for the most vulnerable cohort of the SME sector, namely, microenterprises. It will prove to be a practical way of facilitating additional lending to microenterprises across all industry sectors in both the locally traded and the exporting sectors. A large number of microenterprises are locally-owned businesses that give the owner enough income to support his or her family and contribute to his or her locality. No glamour or particular riches are attached, but this is the true heart and soul of Irish business and it is the Government's firm intention to support such enterprises. The microenterprise sector encompasses everyone from the corner shop newsagent, the mechanic, the solicitor, the accountant and the window cleaner to the coffee shop owner, the hairdresser and small-scale ICT players.
The aim of the Bill is to facilitate lending to microenterprises and in so doing help generate sustainable small businesses to generate jobs and return the economy to the long-term growth path destroyed by irresponsible economic policies in the recent past. Microfinance Ireland is being established to provide loans for sustainable microenterprises in these difficult times. It is being targeted at newly established or growing enterprises across all industry sectors for commercially viable proposals that do not meet the conventional risk criteria applied by commercial banks. It is part of a suite of initiatives being implemented by the Government to get the economy moving again and address the transformation of the country, thereby making it the best small country in the world in which to do business by 2016. It is through such initiatives that the Government will achieve this goal and in so doing address the need to provide sustainable employment for citizens into the future.
First, I will present some background information on the rationale for introducing a microenterprise loan fund. In February the Government launched a range of measures under the action plan for jobs 2012 to improve the competitiveness of the economy, improve supports for job creating businesses and remove barriers to employment creation across the economy. All Departments and more than 35 agencies and offices of the State are engaged in this regard, with actions to support jobs that will be delivered in this calendar year. The plan is an active engine for change that will be reviewed and revitalised every year. The introduction of the microenterprise loan fund this year is one of the key commitments the Government made that will deliver positive and speedy results for this sector. The objective of the fund is to facilitate additional lending into the economy and create jobs in the microenterprise sector. Action in this area is one of the key demands of the advisory group on small businesses which I chair at the request of the Taoiseach and the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton. The progression of this legislation to finalisation clearly demonstrates that the Government is listening to the real needs of businesses and delivering on its promises.
The formation and growth of microenterprises depend critically on access to credit. Access to credit and finance in the current risk averse lending environment is restricted for all businesses and particularly acute in the microenterprise sector. Even in good economic circumstances, banks decline applications from this sector which do not meet their criteria but which could have proved to be credit worthy had the loan been granted. Some of the factors that have discouraged banks from lending to microenterprises include poorly compiled records and accounts, especially audited accounts; low levels of technical and management skills; high bad debt levels; lack of collateral; the degree of administrative overhead and time investment required in terms of loan assessment, often with high refusal rates; and the relatively small size of lending propositions, with loan sizes averaging €16,000. However, in order to support recovery, we need to find ways to ensure credit worthy borrowers have access to lending.
I must make it patently clear at this early point that Microfinance Ireland is not intended to replace current bank lending. The banks constitute the first port of call and lender of first choice for loan applicants. Applicants will be required to confirm that they have been refused finance by a bank before their application to the fund will be considered. Microenterprises applying for loans under the fund can be in the form of a sole trader, partnership or private limited company with up to ten employees. Loans will be for amounts less than €25,000 and can be used for any business purpose. Loan applications will be made on the standard loan application form, as agreed with the Irish Banking Federation, and must be supported by a viable business plan indicating repayment capacity. Support in developing business plans will be made available through the county enterprise boards and the newly formed local enterprise offices which will further aid small companies to professionalise their engagement with institutions and help them to access much needed finance. This one-stop-shop will be a recognised centre for business in every county.
The fund is targeted at start-up, newly established or growing microenterprises across all industry sectors employing not more than ten people. It will provide loans of up to €25,000, averaging about €16,000, for commercially viable proposals that do not meet conventional risk criteria applied by commercial banks. It will afford entrepreneurs a real opportunity to get started and support the creation of new jobs linked with new fledgling businesses and the expansion of established businesses. It is intended that the fund will provide loans for some 5,500 microenterprises over time and will over a ten year period generate close to 8,000 jobs at a cost of approximately €2,500 per job. This is extremely good value in any man's language, particularly when we factor in the gains to the Exchequer. The backbone of the economy consists of the 200,000 companies employing 700,000 people. The Government respects and will service this critical engine of growth. The mobilisation of small businesses is so important to the future of Ireland.
The Government has chosen the Social Finance Foundation to manage and control the fund on its behalf. For transparency purposes, it shall establish a dedicated subsidiary called Microfinance Ireland to run the loan book attached to the fund. This will minimise overall management costs which have traditionally been high with microfinance. It will also ensure clear financial and accounting structures, enhance the possibility of European Investment Fund guarantee assistance and allow for clear accountability on the costs of running the scheme. Microfinance Ireland will work with other key stakeholders such as the county enterprise boards and the local enterprise offices to deliver a comprehensive microenterprise service to potential clients. The Social Finance Foundation has a track record in the area of microfinance which it will leverage to deliver optimal outcomes for the State in this very important area.
Governance of the new body is critically important to the Department, the Minister and the Government. Many controls, from approving the chairman, the board and the CEO to the application of the Freedom of Information and Ethics in Public Office Acts and an audit by the Comptroller and Auditor General, are being put in place to ensure best practice governance procedures will be implemented from the first day of the new body.
To underline the importance the Government attaches to this initiative, an allocation of €10 million will be made available as seed capital for the fund. In the current climate this is a clear indication of the importance the Government places on this very dynamic sector. When viewed in a macroeconomic context, microfinance is a very cost effective job creation and job protection mechanism, generating a high rate of return. In many cases the potential entrepreneurs come from the ranks of the unemployed and are, therefore, drawing State benefits. Existing employees who choose the entrepreneurial route and set up their own businesses are also likely to create a residual employment opportunity in their previous organisation. The vast majority of microfinance applicants are engaged in locally tradeable services. While many may not have the potential for growth in terms of internationally tradeable businesses, there are significant benefits to be gained from the development of a successful microenterprise sector. They provide a solid enterprise base on which the SMEs and high potential start-ups of the future can develop. There are clear societal and community benefits, in addition to the economic and job creation objectives, as individuals grow in confidence and generate positive internal benefits throughout the community and they can provide much needed competition in the locally traded sector.
In addition to contributing to the economic and social agenda, this initiative will also yield Exchequer gains in terms of employment, sustained and created, savings on welfare payments and increased direct and indirect tax payments, calculated at €23,000 per job per annum. The €10 million allocation, supplemented by €15 million borrowing from other sources in tranches of €5 million in the second, third and fourth year of the life of the fund, will generate €40 million in loan expenditure and create 3,800 jobs over a five year period. This is based on €8.8 million of loan demand and 20% bad debts. The return to the Exchequer over five years is estimated at €46.2 million.
I would now like to turn to the specifics of the Bill. Section 1 provides for the Short Title, the Microenterprise Loan Fund Act 2012, and commencement. Section 2 defines certain commonly used terms in the Bill. Section 3 provides that costs associated with administering the Bill will be subject to sanction from the Minister for Finance, with the consent of the Minister for Public Expenditure and Reform, and met from moneys provided by the Oireachtas. Section 4 provides for the establishment of the microenterprise loan fund. The fund shall consist of all grants made to the subsidiary under section 5 and all gifts and other income. Section 5 confers on the Minister the power to pay to the subsidiary €10 million and provides scope for additional Exchequer funding, if deemed necessary, subject to an absolute cap of €25 million before further Oireachtas approval is required.
Section 6 provides for the subsidiary to invest money from the fund and to vary or sell investments made. Section 7 enables the subsidiary to lend money to microenterprises using existing moneys and money borrowed from the Social Finance Foundation. Section 8 provides for the Social Finance Foundation to be able to borrow money for the purposes of the Bill. The aggregate at any one time of borrowings under the section shall not exceed €25 million.
Section 9 allows for the Minister, the Social Finance Foundation, SFF, or the subsidiary, with the consent of the Minister for Finance and the Minister for Public Expenditure and Reform, to accept a gift of moneys, the purpose of which is to benefit the fund, upon such trusts or conditions, if any, as may be specified by the donor.
Section 10 provides for the Minister to make a scheme. The scheme may make provision for various terms and conditions such as purposes for which the loan may be given, terms of the loan agreements, reports and information by the subsidiary to the Minister, audit and examination of accounts of the subsidiary and other matters.
Section 11 enables the SFF to form a subsidiary to be registered under the Companies Acts. Section 12 provides for the name and share capital of the subsidiary of €1 and that share shall be issued by the subsidiary to the SFF. Section 13 provides for the memorandum and articles of association to be consistent with the Act and to be approved by the Minister with the consent of the Minister for Public Expenditure and Reform.
Section 14 provides for a director of the subsidiary to be disqualified for various issues such as bankruptcy, conviction of an offence, and other matters. Section 15 provides for directors to cease to be a director if they are nominated as a Member of Seanad Éireann or elected as a Member of either House of the Oireachtas or the European Parliament. Section 16 provides for the disclosure of interests by directors of the subsidiary. Section 17 provides for the disclosure of interests by members of staff of the subsidiary. Section 18 provides for the non-disclosure of confidential information by any person serving as a director or staff member, adviser or consultant to the subsidiary.
Section 19 provides for the funding of the subsidiary out of moneys in the SFF and allows the Minister to make an arrangement related to the expenditure generally incurred by the subsidiary in the performance of its functions under this Act. Section 20 sets out requirements for accounts to be kept by the subsidiary and provides for auditing by the Comptroller and Auditor General. Section 21 provides for an annual report to be prepared by the subsidiary and to lay the report before both Houses of the Oireachtas.
Section 22 provides for the Minister to conduct a review of the operation of the Act not later than two years after the date of its passing. This is designed to ensure we have introduced a programme of relevance to this business sector that will achieve results and deliver on our key outcome area, namely, jobs.
Backing microenterprise by providing finance to those which struggle to get credit from mainstream lenders is designed to meet a vital need. The development of our microenterprise sector cannot be left to chance. As can be seen from this and other initiatives, it will not be left to chance. We want to reach out to more people who have the ambition and drive to set up their own small business. This initiative has a significant entrepreneurship focus. Entrepreneurship and self-employment is an important opportunity for individuals. It is about turning small acorns into large oaks. It is important for rewards such as self-worth, self-sufficiency, independence, job satisfaction and, of course, for increased income.
Entrepreneurship is also important for the economy as a whole as it leads to new jobs and is a catalyst for new innovations and wealth creation. Entrepreneurship keeps the economy fresh and moving forward. As the Taoiseach has said many times, if 50,000 small companies could create one job each, at little cost to the State, it would lead to a significant change in the economy. The SFF will help turn good ideas into great jobs. Across the country, we have a fantastically talented people with many business ideas. We must encourage entrepreneurs, especially young people, to develop these ideas into business opportunities.
The commercialisation of knowledge is very important. Entrepreneurs are attracted by the prospect of success. They need to be encouraged and supported to make their mark and build a better future for themselves and this country. Entrepreneurs who utilise this fund will also have to make the best possible use of professional advice provided through bodies such as county enterprise boards and the local enterprise offices, which will be a fantastic one-stop shop for business as well as facilitating mentoring supports. Once entrepreneurs develop a track record after borrowing moneys from this fund, they will be able to secure borrowing independently. They will have to build on their skills and this can only heighten the professionalism of the sector. In turn, this will lead to greater demand for professional services, further increasing the benefits to the economy of this fund.
The day of a bank giving money to a business and just standing back is gone. It is about working with the client, going through the monthly management accounts, due diligence, operation of the business and mentoring. I saw Senator Quinn's programme on television last night about assisting small businesses setting up. It is important to encourage start-up companies. Mentoring, support and encouragement is worth more than any money as it gives people confidence. It gives a significant sense of encouragement to a small business to have a mentor with an outside look. I congratulate Senator Quinn on his fantastic television programme.
Ultimately, it will be profitable and competitive businesses which will underpin job creation, prosperity and the broader success of the economy. This fund is another example of how the Government is taking action to ensure the business environment supports this agenda. The needs of small business, identified by the advisory group on small business, are being met. It may not be by means of a big bang but it is in a positive and methodical manner which will deliver real change to the way business is done.
This initiative is another step towards a more sophisticated and accessible financing environment for small and medium-sized enterprises, SMEs. It is just one component in the suite of initiatives aimed at ensuring the flow of credit. It will add value to the measures already taken to address the SME credit supply issue, such as the temporary partial loan guarantee scheme, and represents real value for money to the State. I must commend the civil servants involved in drafting this Bill. They have shown significant commitment and extraordinary dedication to get it drafted, sometimes working 14 hours a day with limited staffing resources.
I am glad the Bill has been introduced to the Seanad before the recess. I hope the scheme will be up and running as soon as possible as I know it will be a success. I commend this Bill to the House.