EU launches FinancEast programme for SME support in Luhansk and Donetsk regions

Entrepreneurs in the Donetsk and Luhansk Oblasts will be able to take up a business development loan for up to 150 thousand euros, with the half of that loan repayable by the European Union

On 19 December, following Volodymyr Zelensky’s “anti-emigration” lending project, Ukraine announced the launch of a program offering “cheap” investment loans to small and medium-sized enterprises, the second program in this month.

This time, the opportunity to receive better financing terms will be provided to businesses operating in the Ukrainian government-controlled territory of the Donetsk and Luhansk Oblasts. Financing will be provided under FinancEast program funded by the European Union with the intermediation by KfW, a German state-owned bank. The project, which is going to start providing loans to entrepreneurs on 20 December, was developed by the German-Ukrainian Fund (GUF).

In the meantime, GUF will end its operations with FinancEast project and start the year 2020 in a new capacity: the creation, on the basis of GUF, of the Entrepreneurship Development Fund, an organizational platform for President Zelensky’s aforementioned “anti-emigration” program, was announced on 11 December.

Besides the two main goals (of attracting a greater number of financial institutions to the region and actually supporting small and medium-sized enterprises), the organizers set themselves a global objective of giving impetus to economic revival of the region.

However, this idea could be implemented only if the program initially succeeds; after that, the European Union would consider the increase of its budget, which at this point is insufficient, as the project’s participants admitted during a press conference.

The loan and how to receive it

The maximum loan and lease amount under this program is € 150 thousand in the hryvnia equivalent. It will be issued for the minimum of two years and without repayment option during the first year. Interest will be charged at Ukraine’s average market rate, even though it is usually higher in the Donbas.

GUF was able to agree upon such a lowering of interest rate with the three banks participating in this program – state-owned Savings Bank and Ukrgazbank and OTP Leasing – thanks, in particular, to a sound compensation guarantee, which is the project’s most important attractive element not only for borrowers but for the financial institutions as well.

“If an entrepreneur services the debt, in six months they will be compensated 50% of the total loan amount provided by the bank. Otherwise, this money will be used to compensate the creditor’s damages, and until that moment, the money will sit in an escrow account during six months,” Valerii Maiboroda, the Fund’s Acting Chairman explained during the program’s presentation.

Under this program, banks will provide the total of 80% of the entire project’s amount, while the borrower will have to deposit the remaining 20% in their own funds first. After that, the Fund will compensate 10% to the borrower.

To receive a loan for an investment project, the applicant must fulfill the following requirements:

  1. The enterprise’s annual income cannot exceed € 10 million and the number of employees 250 persons. For micro businesses, the maximum income threshold is set at € 2 million and the number of personnel at 20 persons, and for small businesses, the threshold is € 5 million and 50 employees, respectively.
  2. A large business cannot own more than 25% of the enterprise. When doing due diligence on the borrower, the bank will check all persons related to the borrower to make sure that loans are not issued to large companies.
  3. An enterprise must be active for at least a year, be profitable and have acceptable credit history, which will also be checked by the bank. According to GUF Director Valerii Maiboroda, legal entities of at least 6th class of lending risk (15% threat of default) and sole proprietorships of third class (3% threat of default) will be eligible for a loan. According to ua financial analyst Vasyl Nevmerzhytskyi, these criteria won’t be insurmountable for local businesses. “There are 10 risk classes in total, where 1 is the most reliable. However, banks in the rest of Ukraine lend money even to entrepreneurs with the seventh class of risk,” Mr. Nevmerzhytskyi said.
  4. The company’s operations must not harm the environment or social infrastructure: environmental requirements apply to all projects funded by the European Union.
  5. Naturally, an entrepreneur must be registered in the Donetsk or Luhansk Oblast, or have a production facility or agricultural land there, located not closer than 5 km from the confrontation line.

Expectations

The project’s most important advantage is the possibility to rebuild the region by investing directly in infrastructure located in it.

“Investment projects envisage leasing or financed purchase of agricultural machinery, equipment and motor vehicles, installation, construction or reconstruction of facilities, launch and so on,” FinancEast press release says.

The program has no limitations as regards the area of business, although, as OTP Leasing CEO Andrii Pavlushyn said at a press conference, his company plans to invest under this program in, first of all, the purchases of agricultural machinery and trucks – “something what small and medium-sized businesses need the most.”

In turn, Valerii Maiboroda told UBR.ua that his Fund expects to engage in this program more “good investment projects in the manufacturing sector”.

“We would like to see not just agricultural but also industrial projects. Especially in the eastern region, there is a lot of small and medium-sized industrial enterprises needing to modernize their fixed assets: during our tour in which we presented this program to entrepreneurs, we received a number of applications from that particular category of borrowers in Kramatorsk and Severodonetsk,” Mr. Maiboroda said.

Results

Despite advantageous terms, the program’s budget provided by the European Union would not allow to produce a visible effect for the Donbas economy: the participants of the press conference devoted to the project’s launch stressed that the € 9.5 million allocated by the EU “won’t last long” because of the demand that exceeds the supply in the region, but expressed the hope that the program will be subsequently prolonged. According to the bankers’ forecast, the presently-available loans will be disbursed by the end of January 2020.

At the same time, the program’s effectiveness will be measured not just by the number of investment projects but also by the number of financial institutions returning to the region with lending programs. Liudmyla Hordiiuk, Senior Project Manager at KfW, said that when they visited Donbas after starting the work on developing this project, many banks “were explicitly forbidden to issue loans in the region”, and overall, local businesses did not have access to investment financing.

“We expect that, following in the footsteps of our pioneers (even though Savings Bank and Ukrgazbank were actively providing financing there even before joining this program, albeit mostly under short-term projects), other banking institutions will catch up as well. For the first couple of months, we will look at the dynamics and, should the program’s budget increase, start to increase the number of financial institutions engaged in the program. I can tell you that a number of our partners have already expressed interest in this program,” Valerii Maiboroda expressed his expectations.

 

By Dmytro Kruhlykov

Source: UBR