…. but must remain focused on core mandate
I have had few friends and colleagues who have approached me, wanting to seek some level of clarity regarding the establishment of a new National Development Bank (NDB) in Ghana. The more I engage people intermittently, I have the feeling that there is the need for more education to help clear the misconceptions, theories and all the ambiguities surrounding the proposed new bank.
We will recall that Mr Ken Ofori-Atta, the Minister for Finance in the 2019 Budget Presentation announced that they have made some progress in establishing the NDB, which is expected to focus on industry and agriculture. He added that “A technical committee appointed by the government has completed its work and has proposed that the institution should be set up as a completely new institution’’. The Minister also said that, “government has accepted the recommendations and has set-up a project team to operationalise the recommendations to launch the bank back in 2019.” It was the initial expectation of government that this Development Bank would also have the capacity of mobilising private capital towards agriculture and industrial transformation. In fact, the government was initially looking at merging the National Investment Bank (NIB) and the Agricultural Development Bank (ADB) to create this new bank. However, based on the recommendation of the technical committee, the finance minister instead, looked at creating a wholly new bank.
As usual, public sentiments were more elated, following a recent announcement in France that, President Akufo-Addo, and the leadership of the European Investment Bank (EIB), on Wednesday, 19th May 2021 agreed a EUR 170 million backing from the EIB for the establishment of the NDB of Ghana. And that the new development finance institution (DFI) is expected to be operational in the coming weeks and will increase access to long-term finance and boost job creation for thousands of businesses in key sectors, including agribusiness, manufacturing, ICT tourism and other services across Ghana.
Some of the public outcry has been the fact that, we have 22 existing Banks in Ghana, why is there the need to establish a new development Bank. Some have also said that, nine banks had their license revoked, collapsed and even consolidated, is there a need for a new development bank? The list goes on and on. These are genuine concerns which people have expressed and indeed everyone`s view needs to be respected. While the debate and anxiety continues, we need to establish some real facts, the difference between Development banks and other types of banks. This will bring some level of understanding to some individuals.
Fundamentally, a bank is a financial institution whose aim is to provide financial services. They largely contribute to economic development through financial intermediation, money creation, and asset transformation. Banks also represent the largest source of financing for businesses by providing financing directly, extending loans and buying bonds and providing financing for consumers. Banks are classified according to; 1) Basis of ownership: On this basis, banks are either classified into private and public banks. While a private bank is owned by one or more individuals, a public bank, which is also referred to as an incorporated bank is incorporated under an act and are owned by shareholders and 2) Basis of function; since banks carry out different functions, they are classified based on their roles. These include; commercial banks, development banks, industrial banks, agricultural banks, exchange banks, savings banks, and central banks.
Commercial Banks
Commercial banks are financial institutions which accept deposits from the public which are repayable on demand. These banks also lend the public for short periods. They make a profit by borrowing money in the form of deposits at a lower interest rate and lend at a higher rate. Commercial banks are classified into:
Public sector banks– These are banks where the majority of shares are owned by the government. Private sector banks– These are banks where the majority of shares are held by individuals and other private entities. On the other hand, Foreign banks are registered outside the host country but still operate in the host country.
Development Banks
Development banks are those which have been set up mainly to provide infrastructure facilities for the industrial growth of any country. They provide financial assistance for both public and private sector industries. The main objectives of the development banks are to promote industrial growth, develop backward areas, create more employment opportunities, generate more exports and encourage import substitution, encourage modernisation and improvement in technology, promote more self-employment projects, revive sick units, improve the management of large industries by providing trainings, remove regional disparities or regional imbalance, promote science and technology in new areas by providing risk capital, improve capital market in the country.
I believe EIB’s backing for the new National Development Bank seek to support Ghana’s vision of empowering the private sector to embrace new business opportunities, create skilled jobs and successfully overcome COVID-19 challenges as mentioned President Akufo-Addo. EIB’s unique technical, environmental and financing expertise is supporting priority business investment and delivering the green transition in Ghana and across Africa. It is important to highlight that, NDB is NOT a commercial bank but would rather provide long-term wholesale financing, including working capital and investment loans, to the private sector through commercial banks. Apart from the EIB, other financing supporters of the new DFI are the World Bank and the German Federal Ministry of Economic Cooperation and Development (BMZ) through the German Development Bank KfW.
India as Case Study
India has one of the biggest Development Banks and growth is India is stimulated by these Banks. Generally, working capital requirements are provided by their commercial banks, indigenous bankers, co-operative banks, money lenders, etc. The money market provides short-term funds which mean working capital requirements.
That said, the long term requirements of business concerns are provided by industrial banks, and the various long term lending institutions which are created by government. In India these long term lending institutions are collectively referred as development banks. They are: Industrial Finance Corporation of India (IFCI), 1948; Industrial Credit and Investment Corporation of India (ICICI), 1955; Industrial Development of Bank of India (IDBI), 1964; State Finance Corporation (SFC), 1951; Small Industries Development Bank of India (SIDBI), 1990; Export Import Bank (EXIM); Small Industries Development Corporation (SIDCO) National Bank for Agriculture and Rural Development (NABARD).
In addition to these institutions, there are also institutions such as Life Insurance Corporation of India, General Insurance Corporation of India, National Housing Bank, Unit Trust of India, etc., which are providing investment funds.
Differences between Commercial banks and Development banks
In spite of the above, some similarities between commercial banks and development banks is that both offer financial help to the respective customers; both are financial institutions which contribute to economic growth and both are regulated by the government.
In conclusion, the establishment of a development bank is not bad idea, the important thing is that unlike how we have seen some development banks turning into commercial banks, the purpose for its established should not be diluted. The likes of African Development Bank for instance has been very consistence with its core mandate of driving growth on the African continent and the results is clear for everyone to see. The strategy should be maintained to maintain a common objective.
Again, the maximum tenor a traditional commercial bank can lend out to private sector may be between 5-7years, this means that real sector investments which may need medium to long term funding may have to consider other funding options such as the International or Domestic Debt Capital Market. Development bank may bridge the gap.
NDB`s objective is to drive real sector economic growth post COVID 19 pandemic, expectations that it will remain committed to its mandate, put in place a good credit risk framework and support financing Ghana. Unnecessary interference from stakeholders may derail the all good intended purpose for establishing the bank.
God bless Ghana. Thank you for reading.
Credit: Miriam Amoako, http://www.differencebetween.net/business/difference-between-commercial-bank-and-development-bank/
Disclaimer: The views expressed are personal views and doesn’t represent that of the media house or institution the writer works
About the writer
Carl is a Finance and Investment professional, managing local and global Investors, Intermediaries, Banks and Non-Bank Financial Institution relationships with an International Bank in Ghana. Contact: [email protected], Cell: +233-204811911
