FinancEast, a program financing micro, small and medium-sized enterprises in the Ukrainian government-controlled territory of the Donetsk and Luhansk Oblasts, was launched in Ukraine on 20 December 2019.
The program is implemented by the Business Development Fund with indirect management by the German development bank KfW.
– Valerii, how was the idea of this program conceived?
– FinancEast was developed under the Agreement between the Government of Ukraine and the European Union “Support from the European Union to the East of Ukraine”.
Its main purpose is to promote economic revival and development of micro, small and medium-sized enterprises (MSMEs) in the east of Ukraine and expand the presence of financial and banking institutions in this region to simplify the access to financing for MSMEs.
In a nutshell, FinancEast was established to improve the situation in the eastern regions of Ukraine affected by the armed conflict.
The program was initiated by the European Union and designed directly by representatives of the German development bank KfW and the Business Development Fund in cooperation with partner financial institutions.
– Who is eligible for participation in this program, and what are the main requirements to MSMEs?
– All micro, small and medium-sized enterprises (sole proprietorships and legal entities) with the number of personnel up to 250 persons and the annual income of up to 10 million euros in the hryvnia equivalent are eligible for participation in the program.
It is important that they are financially stable and have been operating in the Ukrainian government-controlled territory of the Donetsk and Luhansk Oblasts for at least one year.
– Can MSMEs operating in any sector of economy be eligible for participation in the program?
– Yes, MSMEs operating in all sectors of economy can participate in the program. The program’s conditions restrict financing of only those areas of activity which according to the general practice of international financial institutions are forbidden to finance.
These are the manufacture and sales of tobacco products, alcoholic beverages and the like.
– How financing under this program is provided?
– The structure of financing is not complex. 20% of the investment project’s cost is covered by the entrepreneur’s (MSME’s) down payment, and the remaining 80% is financed by one of the partner institutions: State Savings Bank, Ukrgazbank, or OTP Leasing LLC.
As part of this financing structure, the EU provides financial assistance to MSMEs in the form of subsidy covering 50% of the down payment, paying it first.
Afterwards, the EU also provides assistance in the form of compensation to repay 50% of the amount of loan or lease received by the MSME after a partner institution provided financing of the full cost of investment project.
According to the program’s terms, the maximum amount of loan or lease is 400 thousand euros in the hryvnia equivalent. The program has no minimum amount of financing.
In fact, the EU’s financial assistance performs two functions: firstly, it compensates a substantial portion of MSME’s investment project implementation costs; and secondly, it acts as a guarantee for the partner institutions, because it repays 50% of the amount of loan or lease received by the MSME.
This guarantee significantly minimizes the risks of partner institutions, allowing them to expand their operating activity in this potentially risky region.
– What does it mean by “investment project”?
– It is a list of the enterprise’s planned investments related to the purchase, construction, reconstruction, modernization, installation and launch of fixed assets necessary to conduct, expand or start business activity.
– In sum, what did investment projects of MSMEs from the east of Ukraine contain the most often?
– I think that most often, these investment projects envisaged the purchase of various agricultural machinery and equipment, such as tractors, combine harvesters, reapers, seed drills, loaders, sprinklers, etc.
At the same time, we have investment projects that envisage the purchase of equipment required to upgrade production process of industrial MSMEs.
The program’s portfolio also includes MSMEs providing cargo transportation and processing services or engaged in sales, repair and maintenance of motor vehicles.
– Let’s say I’m an entrepreneur who wants to take advantage of this program. Could you please tell me, step by step, what should I do first of all?
– Visit our website and carefully read the program’s terms and conditions.
If your enterprise meets all requirements, the next step would be to apply to any partner institution for financing of your investment project. Along with the application, you should submit the required document package.
After the partner institution approves financing of your investment project, you will have to sign a loan or a financial lease agreement.
Then, the partner institution passes the information about your investment project to us in order to get funds from the EU’s financial assistance. In turn, we regularly monitor your MSME’s conformity with the program’s terms and criteria.
These are the main important steps.
– How long does it take, approximately, from the time of MSME’s application to a partner institution to the investment project implementation date?
– Approximately one month. However, our experience shows that investment projects of some MSMEs may be implemented in 4-5 business days, while others may take longer than a month.
All depends on the complete and timely submission by an MSME of all required documents and information to a partner institution at the first stage.
– What are the program’s results so far? How much money has already been disbursed?
– Perhaps it would be fair to say that we are proud of the results. For as of July 2020, the total of 118 MSME investment projects featuring the purchase of 232 machinery and equipment units worth the total of almost UAH 513 million have been approved and financed under FinancEast program.
The total amount of the EU’s financial support provided under these projects is more than UAH 209 million.
– Valerii, should entrepreneurs in the Donbas expect this program to be extended for at least one year more?
– Well, we expected this program to last until the end of 2022. But considering the actual results achieved after eight months of implementing FinancEast, everything points out that the program will end sooner, most likely, by the end of this year.
– What have you discovered personally for yourself while implementing this program?
– To be frank, no donor has even expected, and neither did we, that this program will enjoy such a huge demand among MSMEs in the east of Ukraine.
As of today, funds of the EU’s financial assistance provided under this program have already been disbursed in full among both the financed MSMEs and those whose applications for financing are still pending review by the partner institutions.
Therefore, perhaps the biggest positive revelation of FinancEast was the realization and acknowledgment of the real, high demand for investments among entrepreneurs in the Donetsk and Luhansk Oblasts, which in turn, represents an important precondition for, and the cornerstone of, fast economic recovery of the region, subject to availability of financial support for this investment potential.
The Business Development Fund (BDF) is the legal successor of all rights and obligations of the German-Ukrainian Fund, which, in turn, was established by the German development bank KfW, the Cabinet of Ministers of Ukraine and the National Bank of Ukraine.
Source: Ekonomichna Pravda