(Professor Joshua Yindenaba Abor is Professor of Finance and former Dean at the University of Ghana Business School (UGBS), Legon. He is an External Fellow at the Centre for Global Finance and a Co-Investigator of the ESRC-FCDO Research Project (ES/N013344/2) - Delivering Inclusive Financial Development and Growth led by Professor Victor Murinde at the Centre for Global Finance, SOAS University of London.)
Speaking exclusively to Business Finder on the role of development finance in reforming and ensuring a robust financial sector in Africa, particularly Ghana, Prof Abor welcomed the establishment of the new bank but stressed that the retail model, with other innovative enhancements be employed to ensure impact on business development and growth.
Establish retail banks
It was important to establish retail banks that will access capital from both the National Development Bank and other sources to support businesses and underprivileged sectors of the Ghanaian economy. “Development banks have a different orientation altogether which is supportive of growth and so if other entities are allowed to establish retail development banks then that could spur lending and improve credit management, making it more convenient for borrowers to take up funds and repay,” he explained.
Woo patient equity investors
According to Prof Abor, it was expected that for a development bank, the equity component would be strong. It was therefore critical that government encouraged equity investors “who believe in sustainability and are ready to positively impact enterprises and the society at large. “Patient equity investors who believe in the triple P, that is Profits, People and Planet must be encouraged to invest in the bank so it makes the desired impact on business development,” the former Dean of the Business School asserted.
Debt
Prof Abor argued that since the bank was not in to make supernormal profits but ensure greater impact on society and on business development, a good mix of both commercial and concessionary debt was the way to go. “If we go for purely commercial debt, we are saddling the new Bank with debts that may be difficult for to repay and there will be too much pressure on them, to the extent they could start charging commercial rates, with the attendant impact on the borrower,” Prof Abor submitted. According to the former Dean of the Business School, some debt would be important to ensure that managers of the bank perform.
Impact Assessment
Prof Abor underscored the need to constantly assess the impact of the bank on businesses and society. “There should be regular evaluation of the bank’s operations; where they are extending the credit, how is it impacting the recipients of the support?” he submitted.
The Bank, as govt sees it
Government, in its 2020 budget presented in 2019 announced that the National Development Bank will refinance credit to industry and agriculture as a wholesale bank; and also provide guarantee instruments to encourage universal banks to lend to those specific sectors of the economy. The Finance Minister, Mr Ken Ofori Atta said the Bank would be globally rated to enable it leverage foreign private capital for industrial and agriculture development in the country. “It is expected that the National Development Bank will provide cheaper and long-term funding for the growth and expansion of key companies operating in the agriculture and industry sectors. The development bank will also lend through specialized banks to key anchor industries at the Metropolitan, Metropolis and District Assemblies level to support the Governments IDIF initiative,” he said.
The importance of development finance in reviving the financial sector
Prof Abor explained that one aspect of development finance was about reforming the financial sector so that “it is able to facilitate the flow of funds to spur growth, so any inefficiency in the financial market are cured through those reforms.” Another intervention, he pointed out, was to set up alternative financial institutions like development banks that could provide long term capital to support under privileged sectors. He explained that due to the inefficiencies in the financial system (market imperfections) , other entities are unable to access long term capital, so “what you try to do is to introduce reforms to address the imperfections.”
What are development banks?
Prof Abor told Business Finder Development banks have been defined by the World Bank as institutions to include financial institutions that have at least 30 per cent of state owned shares and given explicit legal mandate to reach social and economic goals. The Professor of Finance explained that development banks were seen as important tools for solving market imperfections that will engender profitable ventures or projects that generate positive externalities. “They are financial institutions that usually provide long term subsidised financing for industrial development or supporting social and economic development,” National development banks often spring up out of a national or global crisis; when a country decides to set up a bank to address the lapses in the market, lack of liquidity in the market and support businesses to get back.
Models of development banks
According to Prof Abor, there are two main forms of development banks- the wholesale and retail models. The retail banking model is where the development bank interacts directly with customers or borrowers. This may require the bank to have branches dotted across the country so that borrowers can access development banking services. Prof Abor admitted, the retail model could be costly, since “you are dealing with borrowers all over the country and you have to maintain all the scattered branches but the benefit is that their interest rates are more affordable because the borrowers access the funds directly.”
“The other thing is that the credit risk is borne entirely by the bank since it deals directly with the customer and so has to set up its own credit management system to track the credit and repayment,” he added. In the wholesale model, the development bank channels the funds through other financial institutions. The other financial institutions will access the funds or borrow from the wholesale development banks and then on-lend to the target borrowers.
In terms of cost of operations, it will be lower for the wholesale bank because it deals directly with financial institutions and not target borrowers. “The interest rate can be higher from this arrangement because the other financial institutions are in to make profit; they borrow to on-lend and they add their margins,” Prof Abor intimated. Different countries use different models. The likes of Chile, Brazil, Germany, Canada, and recently, Nigeria, use the wholesale model. Countries like Korea, Uganda use the retail model.
A bad history
The Professor of Finance and author of the book ‘Financial Markets & Institutions,’ and Co-editor of the book ‘Contemporary Issues in Development Finance’ recalled that Ghana had had a bad history when it came to credit management. Government and its development partners set up development finance schemes to support SMEs and other businesses and borrowers failed to pay back the loans. According to Prof Abor, that history of businesses refusing to pay borrowed funds could inform the choice of the wholesale model for the planned national development bank. “People tend to consider funds administered with support from government as free money so they access and don’t pay back,”
Development Banks have a different orientation
When a small business owner or SME is approaching a development bank for support the attitude and orientation is completely different from when a commercial bank officer is dealing with an SME. The traditional bank officer is trained differently, to maximize profit, has his mind on bonuses and that’s the language he understands. The officer who works in a development bank believes in social development, economic development, they believe in achieving the triple Ps- profit, people and planet. They are more concerned about sustainability, not supernormal profit, and so they are trained to provide attention to SMEs.