Over €500m in additional credit will be made available to Irish SMEs through the establishment of the Strategic Banking Corporation of Ireland (SBCI), the Government said.
The SBCI is a new company and it will be initially financed by Germany's KfW bank, the European Investment Bank (EIB) and the Ireland Strategic Investment Fund (ISIF), the former National Pension Reserve Fund.
The involvement of KfW follows directly from talks between the Taoiseach and Chancellor Merkel after Ireland's exit from the EU/IMF Programme on finding ways to reinforce Ireland's economic recovery.
The Government will publish a bill to establish the bank shortly, and hopes to put it through the Oireachtas by the summer recess, allowing the new organisation to start lending by the end of the year.
The SBCI will be based in the National Treasury Management Agency. The State is also in negotiations with some other development banks from other EU states, including France, on securing additional funding.
The Government said today's news marks the delivery of a key commitment in its Action Plan for Jobs 2014.
It comes as the Government published the ninth Action Plan for Jobs Quarterly Progress Report, which showed that 97 out of the 103 measures earmarked for delivery in the first quarter of 2014 have been implemented.
Taoiseach Enda Kenny said the new State-owned lender would help reinforce Ireland's economic recovery.
"Using funds from the German promotional bank KfW, the European Investment Bank and the Irish Strategic Investment Fund, the first phase will make over €500m available for small Irish business," he stated.
"The establishment of the SBCI will provide over €500m of additional credit for SME's and will be a great addition to the SME credit landscape in Ireland," commented Finance Minister Michael Noonan.
"Credit is the lifeblood of all businesses and SMEs will now be able to access loans of greater duration, with enhanced terms and potentially at a lower cost facilitated by the SBCI and its on-lending partners," the Minister said.
"This will promote greater competition in the SME lending sector, will drive economic growth and job creation in this key sector of our economy," he added.
He stressed that the new lending models - many copied from the German development bank - would be of more benefit to SMEs than simply lower interest rates. These include much longer lending terms for capital investment, and interest holidays, typically around 18 months.
The Finance Department said that initially, the Strategic Banking Corporation of Ireland will source funds externally and lend them to SMEs through loans via other institutions called on-lenders. On-lenders can be retail banks or other organisations that have the ability to assess SMEs' loan proposals.
The SBCI will provide loans that are currently not typically offered in Ireland. It will have a lower cost of funding and this cost benefit must be passed onto SMEs.
General welcome for SBCI from business interests
While ISME has welcomed the initiative, its CEO Mark Fielding said that SMEs are concerned the banks will revert to form and divert these loan funds to "safer" large businesses.
"Our banks have 'form' in this area and previous European low-interest loans found their way to less risky larger businesses, making a killing for the banks, while starving SMEs of much needed finance," he stated.
Chambers Ireland today called on Minister Noonan to make sure the new bank is in place and operational as soon as possible.
The CEO of Chambers Ireland, Ian Talbot, said that the "the vague timeline", whereby Minister Noonan hopes that the bank will be operational by the end of the year, is disappointing.
"There is an urgent need for this to be put in place and we are calling for a deadline of September 2014 to be set," he said.
Meanwhile Ibec, the group that represents Irish business, pointed out that Irish SMEs are currently paying one percentage point more for finance than the euro zone average.
The business group said that the new state backed bank must help address this challenge and provide new financing opportunities for firms that may not get funding through the existing bank network.
''The economy is recovering and businesses are more confident about investing, but many challenges remain. The new bank can help make a real difference and, if properly structured, we would expect to see considerable interest from the business community. A €500m fund looks like a good start, but it may need to be increased as demand for investment finance recovers,'' Ibec's chief economist Fergal O'Brien added.