Development banks have been described as a form of financial intermediary providing financing to high priority investment projects in a developing economy. It is a ‘bank’ in the business of development. A development bank should protect its own financial position in the pursuit of socio-economic benefits. The main purpose of a development bank is to bring the country to a higher level of development. In recent years, Ghana has taken steps to launch another development bank since the existing ones failed to live up to their mandates.
History of Development Banks in Ghana
There have been three state development banks in Ghana so far, as follows:
- National Investment Bank (NIB);
- Agricultural Development Bank (ADB); and
- Bank for Housing and Construction (BHC)
These banks were set up to perform specific functions to ensure development of the country post-independence. Currently, two of these banks are operating – though their focus has somehow changed into commercial banking. Bank for Housing and Construction had to go through reforms but eventually ceased operation.
National Investment Bank
NIB was conceived as a development bank; the first of its kind in Tropical Africa. It was established in March 1963 by the National Investment Bank Act (Act 163), with government holding a 75% stake and the public 25%. It had authorized capital of £10million at the time.
Its objects were wide-ranging but not limited to industrial development; to carry out the business of assisting industrial, commercial, agricultural and other enterprises in general. It had the statutory authority ‘’to assist in the establishment, expansion and modernization of companies and other commercial enterprises’’. It was also charged with the task of ‘’counselling and encouraging’’ small Ghanaian business concerns, and ‘’with seeking to bring together investment opportunities; internal and external capital and experienced management’’ – authorized to put part of the initial capital of new industrial enterprises and advance funds for the modernization of existing industrial enterprises. It was further authorized to operate in all sectors of the economy – Public, private and the Cooperatives with a view to establishing more industries.
Its sources of funding were much wider than the conventional commercial banks. ‘’For the purpose of its operations in the cooperative and private sectors’’ the bank was authorized to use:
- Its general funds
- Funds borrowed generally on the bank’s own account from both internal and external sources, and
- Any funds allocated by government for employment in such sectors.
Agricultural Development Bank
ADB was set up in April 1965 under The Agricultural Credit & Cooperative Bank Act (Act 286). Its name was shortened to Agricultural Development Bank by NLCD 182 in 1967.
Its objective was to ‘’provide credit in cash or in kind to farmers and to assist them in financing the renting of materials and equipment and services, and for warehousing facilities for their produce’.’
ADB was authorized to undertake commercial banking activities – accepting deposits into savings and current accounts, lending money and accepting mortgage security, accepting and discounting bills. It was to open accounts or make agency arrangements with any bank or financial institution both within and outside Ghana.
Government had a majority share of 51% and other institutions – BoG, Commercial banks, local government bodies, Cooperative Societies and other institutions approved by the Minister of Finance – had the remaining shares.
Bank for Housing and Construction
Col. I. K. Acheampong continued Nkrumah’s policy of providing finance for specific sectors of the economy with passing the Bank for Housing and Construction Decree (NRCD 135) in 1972. The state had a 50% stake with the balance going to the following institutions:
- Bank of Ghana,
- National Investment Bank,
- State Insurance Corporation,
- Ghana Commercial Bank,
- Social Security and National Insurance Trust, and
- Other Commercial Banks or Financial Institutions and the general public.
Its objective was ‘’to carry on the business of financing and implementing housing and civil engineering schemes of all kinds’’.
The bank among others was to:
- Provide the financing of private housing schemes on mortgage basis; and may build on its own account and sell or rent commercial or residential buildings on such terms and conditions as may be determined by the board;
- Assist in the establishment, expansion and modernization of immovable property estates, commercial houses, office buildings, hotels motels and lodging houses, resettlement farms, electricity, telecommunications, irrigation and drainage and water and sewerage schemes, and all other civil engineering work including roads and bridges;
- Encourage and facilitate the participation of capital derived within or outside Ghana in any housing or civil engineering schemes in Ghana;
- Finance and undertake urban redevelopment programs;
- Finance roofing loan schemes, particularly in the rural areas;
- Counsel and encourage the production and utilization of building and construction material production in Ghana;
- Participate in joint venture projects relating to building and construction;
- Enterer into arrangements with government, statutory corporations, institutions, companies, firms or persons being an employer, for construction through the medium of the bank of houses for the employees;
- Carry out any project intended to promote the tourist trade in Ghana.
The bank was also given a novel function to ‘’as far as practicable develop and promote improvements in building skills of building contractors and promote efficiency in the construction industry generally”.
The bank was further authorized to undertake commercial banking activities: accept deposits into savings and current accounts, discounting of bills, guaranteeing, administration of estates, and trust and agency business.
Why Change of Focus in the existing Development Banks?
- Commercial interest of the banks
- Central Bank prudential requirements
- External environmental factors
- Change of policy directions
The new Development Bank Ghana – DBG
Ghana has decided to establish a new National Development Bank as a key instrument in the pursuit of economic transformation and job creation under the overall National strategy of Ghana Beyond Aid, according to the Finance Minister, Hon. Ken Ofori Atta, at a meeting with the Association of Ghana Industries (AGI).
DBG will reflect new thinking on development financing as well as lessons from past experiences and current international best practices of development banking, underpinned by good corporate governance and sound business operations – unlike a regular bank. Government will not repeat the same mistakes made with other state-owned lenders such as NIB, ADB and BHC
Ownership
For now, it is 100% government of Ghana ownership. Initial funds are loan facilities for which the DBG will pay by itself
Capital
Initial capital is US$250million government equity with funding sources as follow:
- Government of Ghana;
- European Investment Bank credit facility of €170million;
- World Bank credit facility of US$250million; and
- German Development Bank (KfW) credit facility of €46.5million
Business commencement Date
DBG is scheduled to be launched in July, 2021. However, we are almost in the middle of the scheduled launch month but there has not been any indication of the inauguration coming on.
Functions of DBG
The bank is a wholesale bank that lends to financial institutions for on-lending to businesses.
It is to raise long-term funds from both the domestic and international capital markets, and from international financial institutions based on its own balance sheet.
DBG will ensure it truly serves the industrial and export strategy of the economy by providing patient and long-term credit to businesses.
When DBG is set up it will encourage industries to do more in terms of expansion and job creation, as they will become more competitive – especially within the context of the African Continental Free Trade Area, with an overarching goal to support economic growth.
It is to address these critical challenges in the economy:
- Lack of long-term funding of up to 15-years credit facility;
- Lack of adequate funding to productive sectors;
- Provision of a partial Guarantee Window
- Digital platform for facilitating Factoring of invoices
Focus Sectors
- Agribusiness – Off-farm value-chain activities
- Manufacturing
- ICT-software, business-process outsourcing
- Tourism
- Housing
Factors that warranted DBG establishment
- The existing development banks failed to operate according to their mandate
- High cost of funds from the traditional financial institutions
- To provide innovative and long-term financing instruments for specific sectors
Governance Structure
According to the Act, there shall be a competitive selective basis in appointing officers and staff.
- There shall be an Independent and strong Board, who will report to the appointing authorities
- Strong and professional management members
- Other staff
Success story of DBG
- Commitment by government – government has so far shown commitment to its establishment by committing resources to it
- Commitment by international stakeholders – We know they will ensure the right structures are put in place for its operation.
- Environment is very conducive for DBG to operate. Businesses are yearning for such opportunity.
Operations
It is a non-deposit-taking wholesale bank under the companies Act of Ghana and licenced by the Bank of Ghana. It is to have no branch network and operate with very minimal staff.
Differences and similarities between New and the Existing/Previous Development Banks
There is no clear distinction between the new and previous development banks in terms of objectives; raising long-term funds to finance long-term financial needs of critical and specific sectors of the Ghanaian economy, aside from the Acts that set them up. The circumstances of setting them up could be the same now as the previous ones. The previous development banks had specific purposes, but the ultimate aim was to provide long-term funds to help industries and agriculture grow the economy. The new bank has a similar mandate or objective – of providing long-term funds for industries to grow. Another difference could be the mode of operations for the new bank vis a vis the old banks. The new bank is to operate branchless banking and also not accept deposits.
Anticipated Associated Risks/Challenges of the New Bank
- Political interference
- Historically, we know how successive governments have interfered in the affairs of such government institutions in terms of appointing board and other key management personnel into sensitive positions. These officers put aside their professional knowledge and comply with the wishes of government. Also, government interfered with the decision-making process of the institution.
Due to political victimization, such officers feared and/or failed to make/take the critical decisions to help the cause of the institution; thereby departing from its core mandate or affecting its operations. Politicians sometimes forced officers to approve unmerited loans to their friends and cronies who failed to pay such loans; thereby affecting the cash flows of the institutions concerned.
Changes of government is another factor whereby the institution must ‘dance’ to the tune of the party in power. The board’s appointment is a problem here, since they will be appointed by Executives of government. Their independence and allegiance may be questionable. There is therefore a risk factor here. Also, the appointing authorities may appoint members of political parties, friends, family-members and/or cronies.
- Unprofessional attitude of officers in making/taking critical decisions on appraisals and assessments
- Lack of proper and coordinated structure
- Mis-match of portfolios
- Businesses relying on other government sector operators to operate – e.g. ECG, GWCL, GRA, Local government Authorities – where inefficiencies seem to be predominant may affects the businesses, which may eventually affect the cash flows of DBG
- Overburdening DBG with so many operational functions and core values with the aim of solving all the developmental challenges of the country could be a challenge; as the existing development banks failed their objectives, all the developmental projects could be put on DBG.
- Failure of the international capital markets to accept and deal with DBG.
How can DBG survive
Ghanaweb reports the Governor of the central bank on 7th June 2021 as saying the Regulator will ensure strict supervision of the new bank.
We all know how the BoG went to sleep with its supervisory duties/role and the consequences that we are all witnessing in the banking and financial sector in Ghana currently – the collapsed of commercial banks, savings and loans companies, finance houses and micro finance institutions, and consolidation of others. These actions with the intention of correcting their actions and inactions have resulted in job losses; collapse of trust/confidence in the banking system; liquidity challenges, as owners/shareholders of these institutions mis-used depositors’ funds for their personal interests.
There should be a good evaluation system to monitor its performance.
The BoG has a serious role in this regard – playing its supervisory role properly to ensure the survival of DBG and the banking sector as a whole, even though it has played and will continue to play the following roles.
- It played a part in the draft legislation and the regulations
- Had to clear the participating financial institutions before their doing business with DBG
- Had to ensure that the legislation setting up DBG is strong and also enforced by managers of the institution
- The appointed officers and directors must pass the Fit and Proper criteria. There should be an independent body to carry out the fit and proper test aside from the BoG and the Executives.
Conclusion
Ghana is a developing country with very poor infrastructure, a deficit in housing units, lack of capital for businesses to start or expand; accessing credit has been one of the most daunting tasks for businesses. Development has been the agenda of all successive governments. Commercial banks are mostly interested in their profits and will not venture into other critical and priority sectors. Attempts have been made by various governments to develop the country to some level by establishing three development banks – NIB, ADB and BHC – with specific objectives to ensure development in their area of interest. However, they did not live up to their objectives due to factors within and outside their jurisdictions. These factors leave the country with huge developmental challenges. In an attempt to address these challenges, the Akufo-Addo-led government is establishing DBG. This is a huge responsibility on the in-coming DBG.
A critical perusal of their objectives and functions shows these three (3) developments banks captured every developmental agenda our country needed to develop its economy without setting up a new development bank.
Some may have the view that the objectives of these development banks have failed the test of time. I may disagree with such assertions. There are a number of development banks in other jurisdictions which were set up before ours; they are operating and currently performing their original core mandates as the focus of their operation.
Learning from our history, their success will depend on departing from the experiences of the existing banks – taking a cue from the bad operational practices, political interferences and other factors which did not help in achieving their objectives. If they had lived up to their objectives, Ghana would not be a third-world country but a first-class country with well-developed infrastructure. I hope DBG will not become a ‘dispenser’ of government funds as we experienced previously; and history will be our guide for success of the new bank. Long live Ghana, long live DBG!
About the writer
He is a Banking and Financial Professional. He is an Associate Member of the Chartered Institute of Bankers (Ghana). He has over twenty years working experience, mostly in the Banking/Financial Services industry.
Contact: [email protected]
Reference
Anin, T.E. (2000) ‘’Banking in Ghana’’ Woeli Publishing Services pp 72-77
Article by: Pena, Alberto D. ‘’Principles of Developing Banking’’
Article by: Eva Gutierrez, Heinz P. Rudolph, Theodore Homa, Enrique Blanco Beneit (2011) ‘’Development Banks Role and Mechanisms to Increase their Efficiency’’
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