Do we need a new bank to lend to SMEs?

The grandly-titled Strategic Banking Corporation of Ireland (SBCI) was unveiled by the Government on Thursday to much fanfare. The idea is that this new entity will provide cheap credit to the cash-starved SME sector. It will piggyback on the prime credit ratings held by the European Investment Bank and Germany's KfW.

A minimum of €500 million will be made available in the first year but Minister for Finance Michael Noonan said this could rise to €4 billion over five years.

The entity will effectively be a wholesaler of funding. The money will be channelled through a number of lenders – not just the established retail banks, but potentially through insurance companies, pension funds and possibly new lenders to this market.

It's part of a wider push by John Moran, the departing secretary general of the Department of Finance, to increase the amount of non-bank funding available in the Irish market. Across Europe, about 80 per cent of lending comes from banks and the balance from non-traditional sources. In the US, the figures are almost the other way around. Moran would like to see it at about 50-50 in Ireland.

SMEs are the heartbeat of the Irish economy and this additional funding is to be welcomed. Even Mark Fielding, the chief executive of lobby group Isme, gave his approval and he's not a man to hand out plaudits lightly.

However, some issues remain to be addressed. New legislation is required to be enacted before the this new strategic bank can formally begin its work. The plan is to get this done by the end of this year but the Government’s track record on such matters is patchy.

The board of KfW has yet to formally sign off on its involvement, something that is likely to be decided at a board meeting next week.

Bankers were yesterday scratching their heads as to how the process will work. We know banks will be expected to pass on the preferential rates of credit yet the risks will reside solely with the lenders.

And whether the figure is €500 million or €800 million a year, it's small beer in the context of overall SME lending. AIB and Bank of Ireland were mandated last year to provide €4 billion each in credit to SMEs, targets they comfortably met.

And do we need another State bank to disburse this money? We already own AIB and Permanent TSB, hold about 14 per cent of Bank of Ireland, and have the new Ireland Strategic Investment Fund. The proof will be in the pudding.