DBG must not become financial burden to the state – finance expert

DBG must not become financial burden to the state – finance expert
Dr. Vera Fiador

Finance expert at the University of Ghana Business School, Dr. Vera Fiador, has urged the management that will steer affairs of the new national development bank to ensure that it becomes financially independent of government in order not to be a burden to the state.

Her comments come on the back of the finance ministry saying that the Development Bank Ghana (DBG) will start operations with seed funding of US$500 million by end of the year and operate by providing credit lines to existing commercial banks at affordable rates, where those commercial banks will, in turn, on-lend to the private sector at rates cheaper than the prevailing lending rates.

With such a model, Dr. Fiador said in an interview with the B&FT, the development bank won’t operate as a strict profit-making entity, hence, efforts should be made to ensure that it is financially sustainable in order not to burden the country.

“We have the government funding that usually is a cost to the state, so, typically, every spending from the government is not expected to yield returns. On the flip side, we have private banks that are seeking profit. Now the development bank is supposed to be somewhere in the middle because they are filling in a gap where government does not want to be in that space, because, it has a bit of commercial frame.

And of course, the private banks do not want to be there because it doesn’t earn that much. So the issue is that the development bank is actually doing a blend of the two, with profit laced with social returns, which ultimately reduces the returns that can be made. So it [DBG] cannot go the pure private route which requires very high returns but, then, it can make enough to ensure that it reinvests some of the money that is made from that line of business.

So the development bank should make enough returns to ensure that it doesn’t become a burden to the state but, at the same time, it should get something that will allow it to grow in its own capacity and not one that is drawing from the state,” she said.

Financial structure of the bank

The World Bank has already provided US$200 million to support government to establish the Development Bank Ghana. Government has further secured €170 million facility from the European Investment Bank for the establishment of the bank. And, additionally, government has said it will allocate budgetary support to the bank in order to make it adequately liquid to support the private sector.

Purpose of the bank

Though the rationale of establishing the bank has been questioned by many, as previous national development banks have failed to live up to their mandates, government has said the impact the pandemic has brought on the economy makes it imperative for DBG to be set up to hasten the recovery process.

“The Development Bank Ghana is going to play 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,” President Akufo-Addo has said.

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.

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