Development Bank: critical vehicle to driving socio-economic dev’t

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Daniel Amateye ANIM

I will start this article by first extending a warm congratulations to the government for working hard to ensure that come, July 2021, the long-awaited baby ‘Development Bank’ will be launched. At its naming ceremony, I suggest that all invited guests and dignitaries must wear an African print.

Key political stakeholders and actors should be equally invited. This will epitomize a sense of nationalism and determination to have it live long into the foreseeable future. The essence of this article is to discuss potential contributions that the development bank will bring on board, more importantly, if it is done well.

What is a development bank?



Development banks basically are financial institutions established with the main aim of providing credit at a competitive rate, and sometimes, at a subsidized rate to actors in the critical sectors of the economy. Thus, development banks are specialised financial institutions which provides medium to long term finance to businesses in the private sector as well as the public sector to under capital intensive investment projects. It could be used as a vehicle to trigger industrialisation agenda of an economy.

According to Mazzucato (2011), Development Banks are among the most widely used instruments of funding and providing assistance for projects that require long-term maturity. Mostly, Development Banks make available the services of experts. These experts may provide assistance for shaping a project strategy, improving managerial frameworks, creating performance targets and monitoring its development throughout the period of repayment.

Its worth noting that, the ability of a development bank to deliver on its mandate, that is, extending credit to businesses, largely depends on the strength of its own capital accumulation. It is against this background the government promised to start the bank with a seed capital of US$500 million, with the commitment to further capitalise it to the tune of US$1 billion. Sincerely, it’s a good start, however, I will suggest that the capitalization of the development should be increase to the tune of US$2 billion.

Why a development bank?

When the news cropped-up that by July, the government will launch a development bank, it was welcome with mix-reactions. Others were of the view, whether or not it will be allowed to focus on its core mandate. The justifications provided for their pessimism is that other specialized banks such as the Agricultural Development Bank and National Investment Bank shifted from their core mandate, and therefore, couldn’t achieve its intended goal of supporting agriculture and agribusiness as well as industries. I perfectly agreed with their submissions. It is my considered view that, the managers of the economy will put systems and structures in place to ensure the success of the bank.

According to the Minister for Finance, Ken Ofori-Atta, the development bank is key because, once operational, it will provide credit to commercial banks as well as non-bank financial institutions for onward lending to businesses with the propensity to propel stimulate economic growth in the economy. The credit will focus on critical sectors such as agribusiness, with key attention on off-farm value-chain activities, manufacturing tourism etc. the minister further indicated that the development is a key pillar capable to quickly recovery the economy from the impacts of the pandemic.

Role of a development bank

  • Promotion of industrial development

Development banks are key to driving industrial development in an economy. This can be achieved by extending credit to industries so that they can adequately invest in capital intensive investments thereby expanding their operations and hence increasing productive capacity. This will result in job creation opportunities, as well as increases in government revenue through taxation. As industries employ more people, government will receive income tax, corporate tax will equally increase and as a result, government will be in a better position to meet recurrent obligations, minimise both domestic and external borrowing.

  • Supporting infrastructure development

Development bank can support huge infrastructure development projects. This is due to the fact that, it has the capacity to mobilize and extend long -term credit at a competitive rate to critical actors in both the private and public sectors of the economy. Government can equally borrow from the bank to undertake infrastructure development such as the construction of roads, rails, affordable housing units etc. in fact, development bank if properly managed could serve as propelling machinery which will anchor private-public sector partnerships, significantly for infrastructure financing.

  • Supporting SMEs development

Small and Medium Enterprises (SMEs) play a vital role in stimulating real GDP growth in an economy. The SMEs in Ghana are constraint with funding, more importantly, medium and long-terms funding at an affordable rate. Development can address this challenge by way of using partial credit guarantees while letting private lenders originate, fund, and collect on credit.

  • Driving socio-economic development

Development bank due to its strategic positioning in terms of capital, technical expertise etc. can re-align and focus on investing in less-commercially viable initiatives with the resultant effect of significantly resulting in economic growth and development in the long-run. This can be done by investing in renewable energy, water systems, mostly in rural communities, education and health infrastructure. They can equally help to execute critical and important urbanization and social impact projects.

  • Provision of technical assistance to the private sector

Development bank can provide technical assistance and management expertise to businesses in the private sector on credit management, international trade and finance, baseline survey. Same support could be extended to the government in respect of financial engineering, international finance, international trade and the dynamics in the global financial market.

Potential risk to the survival of Ghana Development Bank

As much as the following role suggest that a development is key to driving the economy and has the potential of helping to quickly recover the economy. Its equally important that we pay critical attention to potential risks with the associated with the very survival of the bank. It is hereby suggested that the following risks could curtail the progress of the bank. It includes:

  • Political risk

This risk is associated with political interference with the work of the bank. Although, the President has a constitutional mandate to appoint board members for the bank, that constitutional exercise must be done in a manner that will ensure that competent professionals are appointed. The executive must equally desist from unnecessary interference. In a simplistic term, the board must not be flooded by political party sympathizers.

  • Corporate government risk

Corporate governance is key and critical to the survival of an enterprise in an ever-changing today’s 21st century competitive global business environment. For the effective implementation of the core mandate of the Ghana Development Bank, there is the need to put in place good corporate governance structures. The policies of the bank must be clearly defined, and strict compliance must be adhered to at all times to ensure the growth and the eventual survival of the bank.

  • Credit risk

Credit is one of the key risks associated with financial institutions. It is basically the possibility of a loss resulting from a borrowers’ inability to repay a loan or meet contractual obligations as and when it falls. That is, it arises when an institutions or individual fails meet their debt obligation. In order to mitigate credit risk, a risk management mechanism must be put in place. There must be strict compliance to risk management policies. The bank must desist from extending credit to a corporate or individual based on the executives recommendation.it must be done purely on a professional ground, taken into considerations the capacity of the business to pay back the loan per the contractual obligations.

  • Funding risks.

The government must ensure that they increase the capital base of the bank to be able to effectively discharge its core mandate to the private sector. Lack of funds may defeat its purpose and therefore, the overall effect is that, it will slow down the recovery agenda of government.

Conclusion

It is the view of the writer that the potentially substantial role of Ghana Development Bank in driving economic growth and development has become more evident considering similar roles being performed by the German Development, Brazilian Development Bank, China Development and the inter-American Bank. According to Mr. Ofori-Atta, the government is poised in ensuring that Ghana Development Bank will be well capitalized and that a strong independent corporate governance structure shall be put in place.

The minister further stated that, there shall be a competitive international recruitment of its board and senior managers. Provided same shall be done, then, I can confidently conclude that, Ghana Development is indeed a propelling machinery to driving socio-economic development. Hon. Minister, lets walk the talk, lets get it done, and let us transform Ghana for the benefit of the next generation.

>>>The writer is a Development Economist and Chartered Business Consultant. Daniel is the Chief Economist at the Policy Initiative for Economic Development. He also the Director of Research and Analysis, B&FT. He can be reached on email: [email protected], Tel; 0244 47637.

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