Setting up an extensive distribution network of financial intermediaries offering financial instruments at favourable conditions to a wide range of business
Financial instruments in Economic Development Operational Programme (EDOP) 2007-2013 targeted Hungarian micro and small-medium enterprises that had difficulties in getting access to finance. Due to high level of transaction costs, high risks (lack of track records and/or collateral) and low profitability the banking system did not serve SMEs at an adequate level even if they had viable projects. The market inadequacy was further extended by the severe financial crisis from 2008 on. Beyond financial instrument schemes with favourable conditions the distribution network for these schemes was crucial in reaching targeted SMEs. Therefore, the managing authority decided to set up a broad financial intermediary level involving different types of intermediaries.
EDOP was financed from structural funds (ERDF) and co-financed by the Hungarian state budget. Financial instruments in EDOP were implemented through a holding fund structure. The Managing Authority (MA) entered into a funding agreement with a holding fund manager that was responsible for the daily management of the revolving funds in EDOP. The holding fund manager made agreements with financial intermediaries concerning the three products groups: loans, guarantees, equity-type products. Alone in the loan product group 140 financial institutions were involved: 29 banks, 55 savings cooperatives and 56 microfinance institutions. This institutions were selected through open calls run by the MA and the Holding Fund Manager.
The core team that managed the set up and running the good practice was the financial instruments department of the managing authority composed of 7 colleagues.
Evidence of success
The broad financial intermediary level contributed to the full absorption of funds allocated to loan products under EDOP 2007-2013. In total close to 14,000 loan contracts have been concluded with SMEs (including the microloan contracts under the combined grant and microloan scheme). This result remarkably reduced the access-to-finance barrier of SMEs and eased the shortage of credit facilities during the years of the financial crisis.
IT systems, reporting systems of the 140 financial institutions varied to a large extent and making them report the same set of data in standard quality on the loan products of the managing authority was a challenge to cope with by the holding fund manager and the managing authority.
Potential for learning or transfer
The broad financial intermediary base included such non-banking financial institutions (particularly enterprise development foundations and some of the financial enterprises) that had long track-record with dealing with their local business actors, specifically micro- and small companies that were not served by banks. These intermediaries could use their experience well in reaching these enterprises with the loan products of the Managing Authority.
Financial intermediaries received their own financial frame that was calculated based on their financial strength. Financial intermediaries could make loan decisions up to the volume of the received financial frame. If the financial intermediaries were successful in outplacing their financial frame they could receive new allocations for outplacement.