Development bank has 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.
Development bank should protect its own financial position in the pursuit of socio-economic benefits. The main purpose of development bank is to bring the country to a higher level of development. In recent years, Ghana has taken steps to launch another new 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 the 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 with the National Investment Bank Act (Act 163) with government holding 75% stake and the public 25%. It had authorized capital of £10 million at the time.
Its objects were wide-ranging but not limited to industrial development; to carry out the business of assisting industrial, commercial, agriculture and other enterprise 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 the sectors of the economy-Public, private and the Co-operatives with the view of establishing more industries.
Its sources of funding were much wider than the conventional commercial banks; ‘’for the purpose of its operations in the co-operative 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 & Co-operative 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 accept mortgage security, accept and discount bills. It was to open accounts or make agency arrangement with any bank or financial institution both within and outside Ghana.
Government had majority share of 51% and other institutions; BOG, Commercial banks, local government bodies, Co-operative 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 the specific sectors of the economy with the passing of Bank for Housing and Construction Decree (NRCD 135) in 1972. The state had 50% stake and the balance giving 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 Bank 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 building on such terms and conditions as may be determined by the board;
- Assisting 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 works including roads and bridges;
- Encouraging and facilitating the participation of capital derived within or outside Ghana in any housing or civil engineering schemes in Ghana;
- Financing and undertaking urban redevelopment programs;
- Financing of roofing loan schemes particularly in the rural areas;
- Counselling and encouraging the production and utilization of building and construction material production in Ghana;
- Participating in joint venture projects relating to building and construction;
- Entering into arrangement with government, statutory corporations, institutions, companies, firm or person being an employer, for the construction through the medium of the bank, of houses for the employees;
- Carrying out any projects intended to promote the tourist trade in Ghana.
The bank was also giving a novel function ‘’as far as practicable to develop and promote improvements in building skills of building contractors and to 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 of 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 have 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 of which the DBG will pay by itself
Capital
Initial capital of $250 million government equity with funding sources as follow:
- Government of Ghana;
- European Investment Bank credit facility of €170 million;
- World Bank credit facility of $250 million; and
- German Development Bank (KfW) credit facility of €46.5 million
Business commencement Date
DBG is scheduled to be launched in July, 2021. However, we are almost in the middle of the planned launch scheduled month but there has not been an indication of the inauguration coming on.
Functions of DBG
The bank is a wholesale bank to lend financial institutions for un-lending to businesses.
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 will truly serve the industrial and export strategy of the economy by proving patient and long-term credit to businesses.
When DBG is set up, it will encourage industry 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;
- Provide partial Guarantee Window
- Digital platform to facilitate 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 live 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 competitive selective basis in appointing officers and staff.
- There shall be 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 structure are put in place for its operation.
- Environment very conducive for DBG to operate. Businesses are yenning for such opportunity.
Operations
It is a non-deposit-taking wholesale bank under the companies Act of Ghana and licensed by 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 the 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 the Acts that set them up. The circumstances of setting them up could be the same now as well as the previous. The previous development banks had specific purposes but the ultimate aim was to provide long-term funds to help industries and agriculture to grow the economy. The new bank has similar mandate or objective of providing long-term funds for industries to grow. Another difference could be the mode of operations of the new bank vis a vis the old banks. The new bank is to operate branchless banking and also not to accept deposits.
Anticipated Associated Risks/Challenges of the New Bank
- Political interference
- Historically we know how successive governments had interfered in the affairs of such government institutions in terms of appointment of board and other key management personnel into sensitive positions. These officers put aside their professional knowledge and bit the wishes of the 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 fail to pay such loans thereby affecting the cash flows of the institutions concerned. Changed of government is another factor where the institution must ‘dance’ to the tune of the party in power. The appointment of the board is the problem here since they would be appointed by the Executives of the 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 of 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. Eg. 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
- Overburden 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 has resulted in job loses, collapsed of trust/confidence in the banking system, liquidity challenges as owners/shareholders of these institutions mis-used depositors funds for their personal interest.
There should be good evaluation system to monitor its performance.
BOG has a serious role in this regard to play its supervisory role properly to ensure the survival of DBG and the banking sector as a whole even though it had played and will continue to play the following roles.
- It played part in the draft legislation and the regulations
- Had to clear the participating financial institutions before 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 criterial. There should be an independent body to carry out the fit and proper test aside BOG and the Executives.
Conclusion
Ghana is a developing country with very poor infrastructure, deficit in housing units, lack of capital for businesses to start or expand, assessing credit has been one of the daunting tasks for businesses. Developments has been the agenda of all the successive governments. Commercial banks are mostly interested in their profits will not venture into other critical and priority sectors. Attempt had been made by various governments to develop the country to the level where citizens by establishing three development banks-NIB, ADB and BHC with specific objectives to ensure development in the area of interest. However, they did not live up to their objectives due to factors within and without their jurisdictions. These 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 the objectives and the functions of 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 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 the existing banks taking cue from the bad operational practices, political interferences and other factors that did not help in achieving their objectives. If they had lived up to their objectives, Ghana will 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 would be our guide for the 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’’
www.ghanaweb.com
