Stories
In many ways, the Strategic Banking Corporation of Ireland (SBCI) has been a microcosm of Ireland’s economic journey over the past nine years. Established in the aftermath of the financial crisis, it was designed to help funnel much-needed liquidity into the arms of small and medium-sized enterprises, many of whom were struggling to access capital from Ireland’s beleaguered banking system.
The state-owned bank initially operated through the main pillar banks. However, as the economy recovered, so too did its remit – and its operating model. Having started out providing liquidity, it has now pivoted to a guarantee model, advancing low-cost money to banks and non-bank lenders and then underwriting significant chunks of the debt money loaned to businesses. It has set up bespoke schemes to deal with the string of economic crises faced by businesses in Ireland such as Covid, Brexit and now the impact of Russia’s illegal war. It has also stepped in to help sectors, such as providing loans to farmers to its Agri scheme.
From a standing start in 2014, it has advanced €3.5 billion to 55,000 businesses. Last year alone, it provided funding of €633 million to more than 7,000 SMEs.
“We started off as a provider of low-cost liquidity at a time when liquidity was in short supply,” says June Butler, who was appointed as chief executive of the SBCI in September 2021. “Since then, our business model has really evolved into providing risk-sharing schemes into the Irish market. The risk-sharing schemes really helped provide different types of finance that businesses need at different points in time.”
Sitting in her office in the Treasury Dock building on the north quays in Dublin, Butler is an engaging figure who speaks passionately about indigenous businesses and her ambitions for the organisation.
Having trained with PWC, she worked across a variety of roles with Bank of Ireland before moving into SME lending.
“My exposure to SMEs grew. You can’t help but be energised by talking to Irish business owners. Their passion, their energy. I felt that lending to these businesses made a difference,” she says.
Over coffee, Butler spoke about the evolution of the SBCI, her views on the current turmoil in the banking sector, and her view on the future of the Irish economy.
We began the interview, however, by discussing the role and remit of the SBCI.
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Ian Kehoe (IK): When you talk about providing finance to 55,000 businesses, what is the general size of your clients? The SBCI is an SME lender. Are your clients more S or M?
June Butler (JB): It is across the whole gambit. It depends on the scheme or the product type. Some of our products are up to €3 million, so that would be very much the M space of the SME. But the majority of our customers are in the micro and small business space. If you think about the most recent scheme, the Covid Credit Guarantee scheme, the average loan size was €70,000 to €80,000.
IK: How do people access the various schemes? In the beginning, it was through the pillar banks, but you are now working with a broader range of lenders. What is the entry point for companies given you don’t have a branch network?
JB: In terms of eligibility, everybody comes to us first. Each scheme will have different eligibility criteria. An SME will come to us either on our website or our phone line; they’ll go through a fairly simple eligibility application. And we provide them then with a code and they take that then to bank or non-bank and all of the partners that we work with are that our funding is distributed through.
IK: You have allocated €3.5 billion. Is there a limit to how much you can advance?
JB: No, there isn’t. There are two parts to our model. We have stepped in in times of crisis, and we will continue to. So if you take Covid as a good example of a crisis that hit, we were able very quickly to adjust one of the existing schemes that we had and get funding out into the market really quickly. And then we set up a new longer-term scheme under the European temporary framework. So we will respond to crises like that; the same with Ukraine and the impact that’s having across a whole variety of areas. But the other part of our model then is more strategic and looking out into the market and looking forward to seeing where are the gaps. What are SMEs telling us that they need? Where are they having trouble accessing finance?
And we will use that insight then to work again with the departments to build a scheme that’s going to fill those gaps. The Future Growth Loan Scheme was a really good example of that. So there was lots of data that was telling us there was an investment gap in Irish SMEs, they weren’t investing as much as their European competitors. When we got behind that, it was because most banks were only doing seven-year lending. And for big investments, SMEs needed a longer term. The other barrier that that scheme really had to address was the need for security. So lots of businesses, particularly newer businesses, don’t have big amounts of collateral to pledge anymore. So that scheme, and another scheme that’s going to follow this year, will provide unsecured lending up to half a million. And that, along with a cheaper interest rate just makes it easier for businesses to get that funding.
The funding model
IK: How are you able to access and pass on that cheaper funding?
JB: So if we take the Covid, or the Ukraine scheme, the European Union will implement a temporary state aid framework to respond to those crises. And it will have a whole range of supports. Some of that is a reduction or an easing in some of the state aid measures to allow governments or countries implement different state aid measures that don’t attract any kind of penalties for businesses who are availing of it. We use those to help us put a state guarantee in place.
So for those two schemes, the Irish state guaranteed those. For ones that are a bit more strategic, like the Future Growth Loan Scheme, or the one that’s going to follow that this year, we would work with the EIB and the EIF to access their guaranteed capacity. Both of those are bespoke schemes. So we would set out the gap of what we want to fill, and work with them to put a guarantee structure in place. They charge for that, a small charge. And then we work with the department to structure that and get it out through the banks.
We then provide that 80 per cent guarantee to the banks, which gives them comfort, particularly in the longer-term space. It reduces the risk of it for them because they’re not taking as much risk. We would negotiate hard to make sure that the interest rates are reduced to match the benefit of that guarantee.
IK: On that element of risk, one of the reasons this institution was set up was because the banks had run out of road. How do you manage your own risk profile, particularly without some security? What sort of default rates do you have?
JB: When we are deciding to partner with any bank or non-bank, we would do a huge amount of due diligence in the first instance to make sure that their capital structure is sound, that they’ve got decent distribution channels so that they can get out to Irish businesses. And we would also do an awful lot of work on their underwriting criteria.
IK: So your risk is with the institution as opposed to the borrower?
JB: When we do liquidity, it is to the borrower. But for the schemes, the ultimate risk is to the underlying SME but we depend on the bank underwriting processes for that. So we would do due diligence around that before we decide to partner with them. And then under the terms of the scheme, they have to stick within their normal credit underwriting criteria. So the benefit of the guarantee is lower interest, longer term, and greater unsecured limits. And just in terms of the level of defaults, I mean, across all of the schemes, they have been lower than we would have expected. And if you take the Future Growth Loan Scheme, as an example, I think it’s really proved the concept that there is a need for longer-term funding. And the banks can make those decisions to make that longer-term funding. So we’re hoping that will create the market for that type of product.
The evolution of the SBCI
IK: In many ways, the SBCI is a microcosm of the Irish economy over the last nine years. From a banking crisis to everything from Brexit, Covid, Ukraine. You might talk about the rationale for the evolution.
JB: When we started, we were purely to provide liquidity; to provide low-cost bonding into the market to maintain the flow of credit to SMEs. So we could borrow cheaply because we’re a state organisation. We pass that cheaper funding onto both banks and non-banks. And then they are mandated to pass that discount on to SMEs. So there was a ring-fenced pool of money there to make sure that the flow of credit continued into SMEs. As the business got up and running, we moved into the risk-sharing or the guarantee space.
And our very first scheme was the Agri Cashflow Scheme in 2017. Again, at a time when farmers were challenged on a whole range of fronts, and they needed credit. That scheme was designed with the Department of Agriculture, and I suppose really took us on that journey of guaranteed products. We’re still a very young organisation, but guaranteed products are used extensively in other European jurisdictions. And we had the benefit of being members of a number of different European organisations. And in fairness, our counterparts in places like Germany or Belgium, were very good in terms of sharing their expertise and what works. Once we trialed it, then the use of those guaranteed products evolved. So we proved that we could do it with the Agri scheme. Then Brexit hit.
One of the benefits to Ireland of having an organisation like the SBCI is that you can step in and times of uncertainty. Take Brexit as an example. Nobody knew how it was going to play out; there was uncertainty in a whole range of different sectors. If you were an importer, or if you were an exporter, the credit institutions, because of the uncertainty – their credit appetite may have tightened a little. So the fact that we were able to design that Brexit Impact Loan Scheme, and step in with an 80 per cent guarantee, meant that money kept flowing to those Brexit-impacted businesses who may otherwise not have been able to access that funding. So that was where the guaranteed products really came into their own.
“The gaps that were fed back to us that we needed to address were the need for longer-term funding.”
Then we had the Future Growth Loan Scheme, which was much more strategic. So it wasn’t responding to a crisis, per se, it was looking ahead, and seeing how we could support businesses to grow to increase their exports, to maintain their competitiveness. The gaps that were fed back to us that we needed to address were the need for longer-term funding. So that was taking an Ireland Inc view, making sure that the products that SMEs needed to grow were in the market.
IK: Banks are in the business of making money and lending. You are also lending to potentially the same companies but with lower interest rates. Yet, you work together. Is there an inherent tension there?
JB: There isn’t, to be honest, because we’re not replacing blanks. We are filling gaps in the market. That’s our mandate.
IK: But if there was a commercial rationale for lending, would they not be doing it themselves?
JB: If you take the ten-year product, for example, they will not do that under their existing credit policies. They would perceive it as being too risky, given the last ten years – and the ups and downs for Irish business. Doing loans over 10 years is just beyond their risk appetite at this point in time. So they were happy to be able to do that lending when they had the comfort of the guarantee behind it.
The banks are key partners for us, because there are our distribution channels. If you look at any of the schemes, the Brexit scheme is an area where they probably wouldn’t have done much lending into those Brexit-impacted businesses without the scheme. With the Covid scheme, there was too much uncertainty in the market again; nobody knew how it was going to play out. Sometimes when we’re negotiating interest rates and making sure that the SME gets the benefit of that 80 per cent guarantee, there can absolutely be some robust conversations.
The rise of non-bank lending
IK: I want to bring up the rise of non-bank lending in Ireland. Do you see this pattern continuing?
JB: Huge change – probably seven or eight years ago, the non-bank lenders only made up between five or 10 per cent of all SME lending. Now, the latest Central Bank reports would say it is probably north of 35 per cent of the market, which, to be honest, given the competitive landscape at the moment is really good. It’s really good that SMEs have a choice of both provider and product. So a lot of the alternative lenders have very specific skill sets in relation to different products, be it invoice financing, asset finance, trade finance. And from an SME perspective, that’s really beneficial. Given the narrowing of the banking market, the more of those providers we have to provide that choice, the better.
IK: But in terms of the trend, there has been a disconnect between the banks and business. Do you see more alternative lenders coming through? Also, in terms of competition, the Central Bank does not have a competition mandate, but has raised issues around the lack of competition.
JB: Ireland is a small market. And I think the banking sector review that was completed there before Christmas called out something like 68 finance providers in Ireland. Absolutely, Ulster Bank and KBC leaving is not good for competition, they probably had around 20 per cent of our market share. But we are seeing the smaller non-banks picking that up now.
The other element that we’re working hard on to increase competition is with credit unions. The credit unions are in every community, they know local businesses, and they’re really working on building out their SME lending knowledge. We are including them in some of the schemes to help broaden their reach into the SME community. And if that model can develop, it can provide a really, really good alternative to SMEs and to Ireland in terms of SME lending.
IK: But do the credit unions have the capability to get into business lending?
JB: They’re building it, they’ve started the journey. They’re probably a couple of years into it, they’re actively hiring SME lenders. If we take Metamo for example, they are a really well-organised group of credit unions. They have partnered with Fexco, who is providing its technology. They’re automating their credit underwriting; they’re training their SME advisors. Most people don’t think of credit unions for SME lending. There’s a story to be told there. And they’re keen to do it. And they’re working on that journey. There are very solid balance sheets there that have the ability to lend. It’s developing that skill set and developing that awareness of credit unions in that sector.
New products
IK: You referenced rolling out a new product. Do you see others being rolled out also?
JB: In the short to medium term, we have three products in the pipeline. The Ukraine scheme has just launched with Bank of Ireland; we’ll be rolling out a range of new lenders on that over the coming months, and that will be available up until the end of 2024. That’s a six-year working capital type scheme. We are in the throes of developing a growth and sustainability loan scheme. That will be a 10-year longer-term investment scheme, very much focused on encouraging businesses to make those longer-term investments in the growth of their business.
What will be new in that scheme is 30 per cent of it is going to be dedicated to green or sustainability-type lending. And that’s very much the way the market is focused at the moment. And then the third scheme that we’re working on is a consumer retrofit loan scheme. You will be aware of Ireland’s climate action targets and the need to retrofit 500,000 houses by 2030. So we’ve worked with the Department of Climate on this to build a low-cost consumer loan product. So somebody will use low-cost finance, along with the grants that are available from the SEAI.
IK: That brings you into a different place – from business to consumer?
JB: It’s a really important part of what we do in terms of supporting policy implementation. So we are by our mandate, and by our setup, very much SME-focused. But there was a need in this area to incentivise and support consumers who want to retrofit to build a product that would give them lower-cost finance. We were asked to step into that area.
It is the first scheme of its type in Europe, in terms of the guarantee scheme focused on consumers. So, we’ve been working very closely with the EIB and the European Investment Fund to put that consumer structure in place. One of the things I love about the SBCI is that we are agile enough to be able to respond and flex where there is a need. That’s one of the great things about a national promotion banking institution like ourselves.
Sectors and outlook
IK: Has there been a sector that the bank has backed more than others? Or is it more agnostic?
JB: There are certain sectors that have used more of the schemes. So the agri sector would use between 35 and 40 per cent of what we’ve done so far. Part of that is the fact that we had a specific scheme for agri. The rest of it is spread very much: retail, manufacturing, services companies; we are very much spread across all sectors to be honest, because the criteria of the scheme generally are quite broad to make sure that they do have a broad reach so that every business has an opportunity to use that funding if they need us.
IK: That gives a great oversight of the wider economy. What is your view of where we are now?
JB: I think Ireland has been very resilient, I think SMEs have been very resilient. So if you look at the last few years, SMEs came into the particular Covid crisis in fairly good shape. They had deleveraged their balance sheets. They were conservative in terms of how they were running their businesses. And the government supports that were put in place during Covid absolutely helped. So there was the loan schemes from ourselves, but also a whole range of direct supports that really helped keep the businesses going. And all of the economic data would suggest we are in a fairly stable and positive position compared to some of our European counterparts.
That said, there is uncertainty in the markets, rising interest rates, inflation. A lot of the capital that would have been very freely available prior to the interest rate increase starting has started to pull back a little bit. We haven’t fully seen the impact of that yet, we haven’t seen the full impact of rising interest rates. There’s some data that would say that the level of insolvencies is starting to tick up from a very low base, but it is starting to tick off. I’m naturally optimistic. And I think that businesses in particular have proven how agile they are and how they can respond.
“We believe there’s more space in the market for extra competition.”
IK: VC or PE funding has pulled back. Is that something you think the SCBI can step into the breach on?
JB: It’s important to point out that we are part of a whole ecosystem of businesses. So we work with ISIF, who are more in that kind of venture capital, private equity space. They have invested in a number of Irish funds that would absolutely be stepping into that breach. Then you have Enterprise Ireland, who would do more of the equity investments, and Microfinance Ireland to do more of the smaller lending. That said, we are always looking for new partners.
We believe there’s more space in the market for extra competition. There will probably be more niche areas, specifically for scaling businesses who don’t fall within the remit of our schemes, that don’t fall into pure private equity or venture capital. So, some of the longer-term product design that we will be looking at would be in that space. We’re always looking to partner with new entrants, or anybody who’s willing and able to get funding out.
IK: You run a bank. There are tremors in the sector internationally. What is your take, particularly considering Silicon Valley Bank was in the business lending space?
JB: It is really interesting what happened there. Compare what’s happening now to the last financial crisis where it was really a credit crisis – one side of the balance sheet was badly managed. This crisis has been caused by the other side of the balance sheet. I don’t want to say badly managed. That’s not fair. But this was the impact of interest rates rising so quickly, and banks thinking that through to how it impacts their treasury management policy. What’s happened has shown some glitches there. The Irish banks, from my perspective, are well capitalised at the moment. We’ve been through the financial crisis, they’re very closely monitored by both the Central Bank and the European Central Bank. There hasn’t been any evidence so far of any instability there.
IK: Debt financing has never been seen as as sexy as VC funding raises. Yet, it might work for companies much better than giving away equity. How do you change the mindset?
JB: For businesses who can access debt, it’s probably a better way to fund their business. It’s more tax-efficient, you are not giving up any ownership. You’ve clearly built up the financial discipline to build a cash flow and be able to make the loan repayments.
