RELATING TO ECONOMIC DEVELOPMENT.

SB3165

THE SENATE

S.B. NO.

3165

THIRTY-THIRD LEGISLATURE, 2026

STATE OF HAWAII

A BILL FOR AN ACT

relating
to economic development
.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

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SECTION
1.
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The legislature finds that access to
affordable, right-sized credit is essential for small business formation,
survival, and expansion in the State's geographically isolated and high-cost
economy.
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Small businesses, particularly
startups, sole proprietors, and very small employers, depend on smaller-dollar
loans to finance working capital, equipment, inventory, leasehold improvements,
and early operating expenses.

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The legislature further finds that publicly
available data from the United States Small Business Administration (SBA)
indicate that a substantial share of SBA-backed loans made to Hawaii businesses
are originated by lenders headquartered outside the State, rather than by
Hawaii-based banks and community lenders.
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This pattern reflects limited local capacity for smaller-dollar lending
and constrained lender risk tolerance in the absence of credit enhancement
tools.

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The legislature further finds that when
small business credit is primarily originated by out-of-state lenders, interest
payments, fees, and servicing revenues are more likely to leave the State,
reducing the local economic multiplier effect that would otherwise occur if
those dollars were retained and reinvested through local financial
institutions.
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Over time, this dynamic
contributes to capital leakage from the State and weakens the State's locally
rooted small business financing ecosystem.

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The legislature further finds that limited
availability of locally delivered micro-loans increases financial risk for
Hawaii entrepreneurs.
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In the absence of
sufficient micro‑lending capacity among local lenders, small businesses
may be forced to rely on higher-cost or riskier credit products, accept less
favorable loan terms, or delay business formation, expansion, and hiring
altogether.
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These constraints
disproportionately affect early-stage businesses, rural communities, and
neighbor islands.

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The legislature recognizes that other
states have successfully addressed similar capital access challenges through
state-supported loan loss reserve and credit enhancement programs that share
risk with lenders while leveraging private capital.
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In particular:

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(1)
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California
operates a long-standing small business capital access program that establishes
loan loss reserve accounts funded by borrower and lender contributions matched
by the state, enabling lenders to extend credit to small businesses that would
not otherwise qualify on comparable terms;

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(2)
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Colorado
administers a credit reserve program that uses borrower fees and state matching
contributions to capitalize lender-held reserve accounts that absorb first
losses on enrolled loans, expanding access to smaller-dollar loans while
preserving prudent underwriting standards and voluntary participation; and

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(3)
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Florida
operates a state capital access program that similarly establishes loan loss
reserve accounts through borrower and lender contributions matched by the state;
demonstrating that credit enhancement models can be successfully deployed in
tourism-driven, small-business-dominated economies with significant seasonal
cash-flow variability�conditions that closely mirror Hawaii's economic
structure.

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The legislature further finds that these
programs are effective because they are market-based, voluntary, and fiscally
disciplined, leveraging private lending rather than replacing it and expanding
access to credit without imposing mandates on lenders.

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Accordingly, the purpose of this Act is to
strengthen the State's small business financing ecosystem by establishing a
state-supported micro-lending credit enhancement program that expands local
lending capacity, retains more financial activity within the State, reduces
reliance on higher-risk borrowing options, and improves access to affordable,
appropriately sized capital for entrepreneurs in the State.

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SECTION 2.
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The Hawaii Revised Statutes is amended by adding a new chapter to be
appropriately designated and to read as follows:

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Chapter

hawaii
Micro-Lending credit enhancement program

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-1
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Definitions.
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As used in this chapter:

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"Credit enhancement" means a loan
loss reserve, first-loss reserve, partial guarantee, or other risk-sharing
mechanism approved by the department to encourage lending that would not
otherwise occur on comparable terms.

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"Department" means the department
of business, economic development, and tourism.

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"Eligible lender" means a state-
or federally-chartered bank, savings bank, credit union, certified community
development financial institution, or other financing entity approved by the
department that originates and services business loans in the State.

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"Micro-loan" means a business
loan with an original principal amount not to exceed $ ,
as determined by the department by rule.

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"Qualified borrower" means a
for-profit small business that:

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(1)
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Is
authorized to do business in the State;

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(2)
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Maintains
its primary operations in the State; and

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(3)
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Meets
size standards as determined by the department by rule.

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Hawaii micro-lending credit enhancement
program; established.
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(a)
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There is established within the
department the Hawaii micro-lending credit enhancement program to encourage
eligible lenders to increase the availability of micro-loans to qualified
borrowers through state-supported credit enhancement.

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(b)
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Participation by lenders and borrowers shall be voluntary.
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Nothing in this chapter shall be construed to
require an eligible lender to make any loan or alter prudent underwriting
standards.

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Credit enhancement mechanisms; loan loss
reserves.
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(a)
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The department may provide credit
enhancement through one or more of the following mechanisms:

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(1)
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Loan
loss reserve accounts established with participating eligible lenders;

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(2)
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First-loss
reserve arrangements that absorb a portion of initial losses on qualified
micro-loans; or

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(3)
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Other
risk-sharing mechanisms approved by the department that are consistent with
recognized state small business credit enhancement practices.

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(b)
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The
department may require, as a condition of participation, that:

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(1)
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A
borrower pay a fee of up to one per cent of the micro-loan principal, which
shall be deposited into a lender-held loan loss reserve account; and

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(2)
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The
program provide a matching contribution, in an amount determined by the
department, deposited into the same reserve account.

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(c)
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Funds
in a loan loss reserve account shall be used solely to cover losses on
qualified micro-loans in accordance with program guidelines established by the
department.

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Eligible uses; exclusions.
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(a)
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Qualified micro‑loans may be used for standard business
purposes, including working capital, equipment, inventory, leasehold
improvements, and other uses approved by the department.

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(b)
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The
department shall establish by rule any exclusions necessary to protect the
integrity of the program.

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Administration; rules; contracts.
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(a)
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The department shall administer the program and may adopt rules
pursuant to chapter 91 to implement this chapter.

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(b)
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The department may contract with a qualified third‑party program
administrator to support lender enrollment, reserve administration, compliance
monitoring, and reporting.

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Hawaii micro-lending credit enhancement
special fund.
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(a)
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There is established in the state
treasury the Hawaii micro-lending credit enhancement special fund.

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(b)
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The following shall be deposited into the special fund:

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(1)
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Legislative
appropriations;

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(2)
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Moneys
received from the federal government;

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(3)
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Grants,
awards, donations, gifts, transfers, or money derived from private sources;

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(4)
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Moneys
received pursuant to the program; and

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(5)
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Interest
earned or accrued on moneys in the special fund.

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(c)
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Moneys
in the special fund may be expended for credit enhancement, program
administration, and reporting.

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Reporting.
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No later than twenty days prior to the convening of each regular
session, the department shall submit a report to the legislature detailing:

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(1)
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The
number and dollar amount of micro-loans supported;

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(2)
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Participating
lenders;

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(3)
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Geographic
distribution of loans;

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(4)
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Reserve
contributions, claims, and recoveries; and

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(5)
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Estimated
private capital leveraged per state dollar."

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SECTION 3.
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There is appropriated out of the general revenues of the State of Hawaii
the sum of $ or so
much thereof as may be necessary for fiscal year 2026-2027 to be deposited into
the Hawaii micro-lending credit enhancement special fund.

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SECTION 4.
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There is appropriated out of the Hawaii micro‑lending credit
enhancement special fund the sum of
$ or so much
thereof as may be necessary for fiscal year 2026-2027 for the Hawaii
micro-lending credit enhancement program.

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The sum appropriated shall be expended by
the department of business, economic development, and tourism for the purposes
of this Act.

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SECTION 5.
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This Act shall take effect on July 1, 2026.

INTRODUCED BY:

_____________________________

Report Title:

DBEDT;
Micro-Lending;
Credit Enhancement; Loan Loss Reserve; Small Businesses; Special Fund; Reports;
Appropriation

Description:

Establishes the Hawaii Micro-Lending Credit Enhancement
Program within the Department of Business, Economic Development, and Tourism to
expand micro-lending capacity by providing state‑funded loan loss
reserves or other credit enhancement that absorbs first losses on qualified
micro-loans made by participating lenders to Hawaii small businesses.
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Allows borrower fees and state matching
contributions to capitalize lender-held loan loss reserve accounts.
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Establishes the Hawaii Micro-Lending Credit
Enhancement Special Fund.
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Requires reports
to the Legislature.
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Appropriates funds.

The summary description
of legislation appearing on this page is for informational purposes only and is
not legislation or evidence of legislative intent.