A case for globally accepted and tested macro- framework (Pt. 3)
For the development bank or development finance institution to be successful there is a need to adopt globally accepted principles such as good corporate governance practises including effective and independent board, Disclosure and transparency; robust regulatory and supervisory framework, definitive mandate, stable macroeconomic stability, strong and robust risk management practices, financial sustainability and performance contract. The development bank also intended play a crucial role in the development of SMEs and agriculture sectors. The development bank is expected primarily to fill in the gaps in the supply of financial services that are not normally provided by the universal banking institutions. Such development institutions are generally specialised in provision of medium and long-term financing of projects, which require specialised skills and focus, and may carry higher project credit risks or market risks due to the longer investment tenures. In some cases, the mandated roles of the development bank include the promotion and achievement of Government’s specific social and economic objectives.
From theoretical literature perspective, good corporate governance practices including independent and effective board of directors, definitive and flexible mandate, stable macro-economic environment, strong and robust risk management practices, financial sustainability for commercial role, robust regulatory and supervisory framework, and performance contract arrangement would contribute significantly to the success of the Ghanaian development bank. Studies from other jurisdictions some development banks that used the above framework have succeeded in stimulating development, especially in countries such as India, Brazil and South Africa, and are poised to play a growing role in the development of these economies.
5.0 GLOBALLY TRIED AND TESTED FRAMEWORK FOR SUCCESSFUL DEVELOPMENT BANKS OR FINANCE INSTITUTIONS
First, good corporate governance practices are paramount for survival and sustainability of development bank in Ghana. The aim of the governance of a development finance institution is to ensure that it meets its developmental objectives while remaining financially sustainable. In broad terms, corporate governance refers to the process and structure for overseeing the direction and management of a corporation so that it carries out its mandate and objectives effectively. The most effective way to control potential weaknesses and prevent abuses is to put in place measures aimed at strengthening the governance arrangements around Board and Management, including: (i) a formal, merit-based, transparent process for appointing independent directors to the Board, as well as performance-based assessment and salaries of Management; (ii) a majority of the Board to be comprised of independent, highly qualified in development finance, professional and experienced directors who are competitively selected; (iii) encouraging minority shareholder representation and reputable international investors’ participation on the Board of the DFI; and (iv) competitive selection and appointment of key executives (including the CEO) by the Board with the participation, to the extent possible, of all shareholders. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring”.
The aim of the governance of a development finance institution is to ensure that it meets its developmental objectives while remaining financially sustainable. Good corporate governance structure has to be embedded in the legislation in Company Act 2019 Act (992) to enhance the performance of the development bank. This would be demonstrated through appointment of qualified and experienced Board of Directors (BOD) in project management and development finance, sensitivity analysis and project-modelling reinforced with proper checks and balances through an effective risk and audit functions. Bank of Ghana Notice No. BG/GOV/SEC/2021/04 on development finance institution requires that the proposed board of directors and key management staff should be qualified and experienced in development finance business, and with business and professional history for the preceding ten years this addresses skills in competencies in development finance business.
In broad terms, corporate governance refers to the process and structure for overseeing the direction and management of a corporation so that it carries out its mandate and objectives effectively”. The governance in a development bank can be more challenging than in private financial intermediaries. To begin with, the structure of development bank, ownership and control can be more complex, involving a large number of governmental institutions (ministries of finance, agriculture, housing, trade, labour, etc.), and sometimes even the legislature. These entities all have their own legitimate (and sometimes conflicting) expectations regarding the goals the DB should accomplish. The quality of governance and management has often meant the difference between the success and failure of development banks functioning in the same environment. For example, while the Brazilian development bank, BNDES, is seen to be successful owing to its strong board and management, the perception of the management of the Caixa Econômica Federal is far more critical (UN, 2006a). The analysis below does not deal with the general principles of governance and management in any detail, but focuses on aspects that are specific to development banks.
Second, independent and effective role of the board of directors is key component of successful development bank. A final key ownership task is to appoint the board of directors. An appropriately constituted, qualified and empowered board of directors is an essential pillar of good corporate governance. The Board appointment process is one of the key factors to ensure that the Development bank fulfils its objectives. A key challenge in Board composition is to ensure that the Board collectively has the mix of skills, experience in development finance, project management and finance and capacity needed to conduct the business of the National Development Bank in an efficient and professional way. The most effective way to control potential weaknesses and prevent abuses is to put in place measures aimed at strengthening the governance arrangements around Board and Management, including: (i) a formal, merit-based, transparent process for appointing independent directors to the Board, as well as performance-based assessment and salaries of executive management; (ii) a majority of the Board to be comprised of independent, highly qualified, professional and experienced directors who are competitively selected; (iii) encouraging minority shareholder representation and reputable international investors’ participation on the Board of the Development Bank; and (iv) competitive selection and appointment of key executives (including the CEO) by the Board with the participation, to the extent possible, of all shareholders (World Bank, 2016).
The government should have in place a well-established and transparent board nomination process, which ensures that the board of directors has the relevant capacity to perform its role. A second dimension of the corporate governance framework of a development bank is the role and functioning of the board of directors. In principle the board should carry out its functions of strategic guidance and management monitoring within the performance agreement between the government and the development finance institution. One key function of the board is to appoint and dismiss the chief executive officer (CEO). Without this authority it is difficult for the board to exercise its oversight function and hold the CEO and executive management accountable.
Third, for Ghana’s national development bank to succeed it needs have an appropriate mandate to ensure that it is correctly positioned within the environment. Ghanaian development bank needs definitive mandate so as to prevent ‘mission creep’ and flexible enough to give room to adjust the path of the development finance institution should its mission become less relevant. National Development Bank mandates need to be tight enough so as to prevent ‘mission creep’ and flexible enough to give room to adjust the path of the Development bank should its mission become less relevant.
The mandate or the strategic focus of the National Development Bank will be to provide access to long-term finance in key sectors including agric-businesses, manufacturing and high value services. By offering long-term wholesale financing, credit guarantees and other services, the Development bank will help increase overall lending to priority sectors and market segments. From the above mandate, could be described as definitive and flexible and this could prevent the mission creep. The latter is particularly important to the public/private approach to development finance institution – making sure that Ghana national development bank preserve their “additionality” by continually seeking to push the frontier of the production possibilities of the financial system. An example of focused DFI mandate could be the provision of funds for on-lending to MSMEs on a wholesale basis.
These funds would be on-lent only through financial intermediaries that comply with specific eligibility criteria (i.e. financial, governance) for on-lending to SMEs and Medium Enterprises. Such a mandate targets Medium Small Enterprises while leveraging the credit assessment skills of private financial intermediaries, thereby focusing these intermediaries on building skills in assessing and managing credit provided to this underserved client group.