The latest report from the Central Bank of Ireland concerning the small and medium enterprise (SME) Irish credit market, shows Irish SMEs pay nearly twice the interest rate of other euro area member states. The report refers to data released between 31 December 2014 and 30 June 2015.

The mean SME interest rate in Ireland, 5.5%, is the highest for this group of countries and is almost 2% higher than the euro area average of 3.6%.

Second in line for high interest rates in the euro countries is Cyprus, followed by Portugal.

Interpreting the statistics, the Central Bank says interest rates are, in general, higher in countries with a larger share of non-performing loans.

“For example, the previous SME market report showed that SME default rates are highest in Cyprus, Slovenia, Ireland, Greece, Italy, Spain and Portugal,” it says.

Reacting to the statistics, Eddie Downey, IFA president, said the high cost of borrowing faced by farmers who are investing in their businesses is unacceptable and must be addressed.

“The latest figures from the Central Bank show conditions for SMEs, including farm businesses, are tougher in Ireland than almost anywhere elsewhere in the Euro area, both in terms of cost and availability of finance”, he said.

“The withdrawal of a number of commercial banks following the credit collapse has led to a significant increase in market concentration and erosion of competition, which has in turn contributed to more difficult lending conditions.”

Downey added that on borrowings of €100,000, the higher interest rate for Irish SMEs, in comparison with equivalent businesses in the Eurozone, amounts to an extra repayment cost of over €2,000 per year.

IFA Farm Business chairman Tom Doyle said figures from the Central Statistics Office show agriculture and the agri-food sector have been a driving force of export-led recovery.

“Agriculture has the highest percentage of performing loans in the SME sector. Policy responses, such as SME lending targets for the pillar banks and the establishment of the Credit Review Office, have been put in place to provide an adequate flow of credit to Irish SMEs. While these initiatives have been important, they have proved insufficient as Ireland still maintains one of the highest levels of credit constraint for SMEs of any Eurozone economy.”

Doyle called on the government to insist that the lower cost of borrowing that the commercial banks are facing are fully reflected in reduced interest rates for agricultural loans.

Difference in rates between SMEs and large businesses

The Central Bank report also displays the difference between interest rates for SMEs (on loans below €0.25m) and large enterprises (on loans above €1m). The interest rate differential is high in Ireland and ranges from 2.8% to 3% during 2014. The corresponding figures for EU1 and EU2 are 1.3% to 1.4% and 1.8% to 2.1% respectively.

Rejection rates

Overall, rejection rates on finance applications have grown across all categories since the previous report, from 14% to 16%.

Rejection rates have grown fastest for small SMEs since the last six-month survey, up to 19% from 11%.

Reasons for borrowing

Although it is still the most common reason for SME finance applications (48%), borrowing for working capital has generally decreased, while borrowing for growth/expansion (25%) and vehicles/equipment (29%) has increased across all SME size categories.

Borrowing for new vehicles or equipment shows the biggest increase (up 2%) since the last survey.