EU bank's growing interest in SMEs

The European Investment Bank (EIB) is probably one of the European Union's least-known institutions. Which is a shame, because it has lots and lots of money, much of which is used to finance small businesses start-ups.

The Luxembourg-based EIB was created by the 1958 Treaty of Rome, which also gave birth to the European Union. It has an operating capital of 100 billion euros and is underwritten by the EU's 15 national governments. Like any other bank the EIB raises funds on the international money markets and its 'AAA' credit rating - the best there is - means it is extremely successful on this score.

For most of its history the EIB's main task has been to finance major infrastructure projects both within the European Union and further afield. EIB money helped to build the channel tunnel, the French high-speed rail network, new motorways in Spain and countless other European construction projects, for example.

The bank still devotes most of its resources to multi-billion euro schemes of this kind, but in recent years it has also begun to turn its attentions to the needs of the Union's small and medium-sized enterprises (SMEs).We have always had a remit to help small business development, but for the past three years we have had the possibility to get involved in a number of new areas including venture capital, explains EIB spokesman Adam McDonagh.

Access to venture capital is regularly cited as one of the biggest single problems facing small businesses in mainland Europe today. At the June 1997 EU summit in Amsterdam, EU leaders finally recognised that something needed to be done to remedy the situation and gave the EIB permission to dip into its reserves to in order to fund risk capital operations.

It is not possible for us to borrow money to finance these sorts of schemes because the risk is too high, explains McDonagh.

Under the bank's Amsterdam Special Action Programme (ASAP), drawn up after the 1997 summit, the EIB was allowed to draw on 1 billion euros from its reserve to finance venture capital operations in the EU over the next three years. It was given clearance to spend a further 1 billion euros over the same period at this year's dot-com summit, which was held in Lisbon in March.

We don't give money to SMEs directly because we simply don't have the resources to deal with the number of applications that would involve, the EIB spokesman says.

Instead, the bank makes money available to approved regional or sectoral venture capital funds throughout the EU, which then on-lend the money to companies on the ground. This means that SMEs often receive funding from the EU bank without realising it.

The EIB is currently in the process of handing over responsibility for its venture capital activities to the European Investment Fund - a subsidiary it owns in partnership with the European Commission and a consortium of private banks. Aside from risk capital, the EIB also provides a significant amount of money to the Union's high street banks to help fund more traditional loans for SMEs.

I estimate that these global loans to national banking sectors represent around 20% of our annual lending, says McDonagh. Last year, the EIB lent a total of 30 billion euros, he added.

As with the funds made available to capital-riskers, the EIB's working methods mean that SMEs on the ground have no direct contact with the bank in Luxembourg.The local banks take the credit risk and make the lending decisions although of course we do monitor how our money is being used and sometimes carry out spot checks, the EIB spokesman says.

Once again, this means the EIB is often an anonymous benefactor with the final recipients of its funds unaware of where part of their loan came from. However, the bank says it has plans to change things on this score.We are starting to tell our partner banks that they must explain when EIB money forms part of a loan, says McDonagh.

The bank is convinced that its pro-SME activities since 1997 have had a positive effect and have gone some way to easing the small business community's venture capital woes.People are certainly using this finance. The statistics show the curve is going up all the time, says McDonagh.

The investment bank's latest programme for encouraging small business innovation is the Innovation 2000 Initiative or i2i. This scheme is designed to pick up where the ASAP leaves off and concentrates on the issues highlighted at this year's summit in Lisbon.

The new programme puts particular emphasis on SMEs in hi-tech sectors and firms working in the new economy, explains McDonagh.In total, we expect to lend between 12 and 15 billion euros to firms in the areas covered by i2i, he adds.

So next time you and your bank manager are engaging in a bit of financial arm-wrestling, bear in mind that some of the cash you are trying to land may well have come from an obscure EU bank in Luxembourg.