The Future of Development Banks in Africa

Jul 14, 2011
For many people, development banks are synonymous with poor financial performance, inefficiencies, crowding out of the private sector, and cronyism. These development banks’ ascriptions have dominated the debate for a long time, turning the discourse about their potential role for African finance into a topic nongrata. Whilst industrial policy making was celebrated in East Asia and made big news yester-year, today’s development finance policy formulae largely abstain from making reference to their role in providing development finance.

Certainly, in a perfect world private sector solutions would be the preferred option. And yet, reality in Africa is far away from that: lacking long-term finance in general, and value chain and infrastructure finance in particular to name only a few. So why should the recipe that seemed to make East Asian economies strong, not hold at least some lessons true for Africa? In a forth coming publication, Financing Africa – through the Crisis and Beyond, my co-authors, Thorsten Beck, Issa Faye and Thouraya Triki and I take a fresh look at development banks and their potential role in African finance.

Africa is badly in need of innovative long-term finance sources, especially for infrastructure and agricultural finance.
Many African countries show that the vast majority of loans remain short-term, rarely exceeding five-years. Infrastructure financing needs remain hugely unmet. Agricultural finance in particular has been left ignored by commercial financiers for being too high-cost and high-risk, aggravated by Africa’s small scale, informality, volatility, and governance problems.

Financing Africa acknowledges the disappointing performance of many publicly owned financial institutions. With a few exceptions, these have performed poorly: low levels of profitability 2.4% and high levels of loan impairment 15.8%, to name only a few indicators.
For many development banks, political interference, lack of capacity, and the lack of economies of scale persist. All this while the typical credit subsidies provided by African development banks have failed to address underlying causes of access problems, forcing the question why they still exist at all.

We argue that instead of doing away with development banks – they should be given different mandates. Many of the above stated failures could be overcome by reorienting the current business model aiming for policy-oriented development banks being more geared towards whole-sale financing tasks. These should include managing partial credit guarantee funds, facilitating value chain finance arrangement for agriculture, and managing investment funds provided by donors and serving as conduit to private commercial banks as ultimate lenders, to name but a few.

The gap in long term financing is significant, and the lack of private investor’s attention illustrates that other solutions should be taken into consideration that might deviate from the modernist path but fill in important gaps. The stress is on gaps – Africa needs complimentary development banks – and certainly not market-replacing ones. We argue that this can be achieved if the following conditions apply (i) limited to wholesale facilities, (ii) strong private sector buy-in and participation, and (iii) clear sunset clauses and managed using sound corporate governance structures, in the interim might have their place in the financial system.

Most certainly, we believe that private sector solutions are to be preferred, and are first-best solutions. And yet these have not reached target in the African context thus far, asking for interim second-best solutions. We contend that many African countries need to pay attention to realities that call for the design and development of solutions that go beyond the pre-occupation with, for many countries, unachievable optimal policies and institutions. For as long as African financial systems remain commercial bank-dominated systems, finance will remain short-term, expensive and of limited reach.

The proposed shift in focus may not be transformational. But it is important. African finance needs a new and positive activist reform agenda - one that expands the reach of financial markets and lengthens financial contracts, yet honors the progress that has been made in making financial systems more stable – one that enables markets rather than replaces them.

Samuel Maimbo is a Lead Financial Sector Specialist in the Africa Finance and Private Sector Department of the World Bank. In his current position, Samuel guides the World Bank’s finance and private sector development activities in Malawi, Mozambique, Zambia, and Zimbabwe and plays a key role in shaping the Africa regions financial sector development strategy. He is a co-author of the forthcoming AfDB, BMZ, and World Bank publication, Financing Africa: Through the Crisis and Beyond and co-editor of the World Bank seminal work on remittances: Remittances: Development Impact and Prospectspublished in 2005. A Rhodes Scholar, Samuel obtained a PhD in Public Administration with a thesis on the design, development and implementation of banking regulation and supervision practices from the Institute for Development Policy and Management at the University of Manchester, England in 2001; a MBA (Finance) Degree from the University of Nottingham, England in 1998; a Bachelor of Accountancy Degree (with Distinction) from the Copperbelt University, Zambia in 1994.
He is also a Fellow of the Association of Chartered Certified Accountants (FCCA), United Kingdom and a Fellow of the Zambia Institute of Certified Accountants (ZICA).

Your comment

This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.