To avoid the mistakes that led to the challenges which have resulted in existing development banks digressing from their original purpose for which they were established, banking consultant Dr. Richmond Atuahene, has proffered some solutions to government which includes ensuring that only competent and qualified people are appointed to manage the affairs of the new development bank.
His comments come on the back of news from the finance ministry stating that government has secured €170 million facility from the European Investment Bank for the establishment of the Development Bank of Ghana (DBG), which forms part of the measures to support businesses and bring the economy back to normality post COVID-19.
While not condemning the intent of the establishment of the new bank, Dr. Atuahene says given the history of how existing development banks failed to execute their core mandates, he fears the new bank may suffer the same fate if things are not done differently.
He said among the challenges that led to the previous development banks have to do with the role of the state as owner and at the same time appointing authority of board members and management. This led to weak and poor corporate governance as there was always undue interference in the board and management of the banks.
Besides the weak and poor corporate governance, he adds, lack of skills and expertise in development finance of the board members is also a major cause of the failure of the former development banks.
Again, Dr. Atuahene adds, government was directly involved in lending by dictating to the board which projects it should make money available for rather than allowing the board to assess the risk involved before deciding. If government pushes the board to fund a certain project and it leaves power, he said, that project will die with that government because the next one will not continue it.
Another challenge he highlighted has to do with supervision failure. This, he said, is because the central bank was using the Banking Act 1970 which didn’t specify how development finance was to be carried out. All banks were using the universal bank approach. The then existing regulatory framework governed by the Banking Act 1970 did not provide a clear guidance of minimum capital for development finance.
Solution
To ensure that same ill-fate is not suffered by the new development bank, the seasoned banking consultant has proposed some measures to government. These include, good corporate governance, a clear and properly defined mandate, robust risk management structures, less government interference, and sound macroeconomic environment.
“We need to have very good corporate governance structures. Those who are appointed to the board must have variant experience in development finance. Do the members have variant experience in project finance, project management, project evaluation in the targeted sectors the development bank will operate in? Other than that, it will fail as the others did.
Secondly, the development bank must have a definitive and flexible mandate. The mandate will even determine the type of people we choose on the board.
Again, you must have strong and robust risk management practices for long term projects. If you are going to invest in a sector, we must have people who understand that sector and knows all the risk associated with it in order for the bank to make well-informed decisions,” he said.
“Then, also, there should be less government interference in the administration of the bank. Government should not dictate to the bank which area to channel funds to or which company must be supported. That should be left to the risk assessment of the board.
Again, supervision is very key. An independent and effective regulation of development finance is a basic condition of sound governance and ensuring financial sustainability. It should not be supervised and regulated with the same principles of universal banks. The regulator must come with a clear methodology.
Macroeconomic stability is very key to the establishment of any development bank. Sound fiscal discipline, balanced economic growth, balance of payment stability, price stability and limited internal and external distortions are very necessary and important to the success of the development bank,” he added.
He further stated that government must have solid plans that will ensure the bank is adequately funded each year, so it doesn’t become starved of finances to operate.
“There is urgent need for complementary funding. There should be provision in the budget for every year to support the bank. Another principle for the success of any development is the mandate flexibility and definitive in economic transformation and agenda. A development bank should have a specialized mandate and not to be jack of all trades,” he said.
President Akufo-Addo has assured his government will do everything in its power to ensure the development bank plays a very important part in the rapid economic transformation of Ghana, following the onset of COVID-19.
“We want to restructure the economy and move it from being a mere producer and exporter of raw materials, to one that places much greater emphasis on value addition activities. We see this Bank (DBG) as one that will play a pivotal role in this,” he said during a meeting with the executives of the European Investment Bank in Belgium.
The President indicated that the design and operation of the Bank, which has been on the drawing board for the last two years will satisfy the highest standards, scrutiny and best practices of Development Banks across the world, assuring further that the €170 million facility from the EIB will be used for the purposes for which it was sought.
