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State- Owned Development Finance Institutions Jacob Yaron- Consultant

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Presentation on theme: "State- Owned Development Finance Institutions Jacob Yaron- Consultant"— Presentation transcript:

1 State- Owned Development Finance Institutions Jacob Yaron- Consultant

2 The Reasons for renewed interest in SDFIs stems from:  The intent to reduce the role of state owned banks in the financial sector in the financial sector  Evaluation that SDFIs’ performance fell below original expectations in most cases original expectations in most cases  Acknowledgement that over- reliance on traditional financial ratios is deficient traditional financial ratios is deficient  The disappointment from the naïve expectations that for profit FIs would substitute SDFIs that for profit FIs would substitute SDFIs  The recent research findings that in a few SDFIs the social gains exceeded the cost of subsidies

3 Assessment criteria  Two primary assessment criteria Were introduced in recent years  Outreach to target clientele  Self-sustainability ( subsidy independence)  Many key performance indicators have been derived from these two primary assessment criteria

4 The Subsidy Dependence Index (SDI)  Is a composite index  Measures the ratio of the (annual) subsidies against the: –a) value of the Average annual outstanding loan portfolio (OLP) and –b) against the interest income of the SDFI concerned.  The outcome of (b) indicates the % increase in the yield obtained on the OLP that is required to nullify the subsidy dependence- a sensitivity analysis

5 The Output Index (OI)  A hybrid, arbitrary index  Should reflect the priorities of the authorities  It encourages the authorities to clarify objectives and better define the target clientele  The priorities (as reflected by weights of the OI) may change over time

6 A full cost- benefit analysis of SDFI is rarely carried out  The use of these two indices could provide a far better picture than obtained from the common practice of over-reliance on traditional financial ratios such as ROA and ROE  When the SDFI is subsidized-and most are, the ROA and ROE if not adjusted to reflect such subsidies are meaningless or even misleading.  Often such financial ratios constitute the residual value of the subsidies received by the SDFI

7 Indonesia: BRI -unit Desa  Was established in 1983 replacing the poorly performed subsidized, directed credit to rice growers-BIMAS program  Is a profit center in a state owned bank  Is considered the flagship of the rural microfinance industry in the world  Introduced and continued to apply the “best practices” in microfinance

8 Main characteristics BUD Vs. Bimas Attribute BIMAS BUD, Since 1984 Institutional objective Disbursement conduit for subsidized credit Profit- making full service rural bank Financial autonomy Lending interest rates are government imposed. No separate profit center Distinct profit center with separate financial accounting. Interest rates are decided on independently pursuing self sustainability. Operational autonomy Limited- borrowers chosen by extension workers Full-borrowers selected on the basis of financial viability of their rural operation Staff evaluation, a accountability and incentives Primarily based on the volume of disbursements or on hectares “covered”. Flat salary, seniority based promotions Primarily based on the profitability of each BUD unit. Profit-related individual bonuses and promotion systems

9 Continued Target market Rice farmers Any income generating rural operation Client incentives Timely payment incentive: effectively none Timely payment incentive: Substantial interest rate rebate Up to 12% PA. Entitlement to a double size loan pending upon prompted repayment of the current one Lending interest rate 12 % PA, heavily subsidized, below inflation and deposit interest rates Around 30% PA (after rebate), not subsidized, well above inflation and deposit interest rates Main sources of finance Concessionary lines of credit and grants Clients deposits at market rates of interest Dealing with losses Soft budget constraint: Operating losses covered by Government Hard budget constraint: Loss making operations suspended The bottom line Heavy losses and substantial subsidy dependence Exceptionally high profitability and subsidy independence since 1987

10 BUD outreach and self-sustainability Outreach Average annual OLP ($ million) Number of outstanding loans (million) Average outstanding loan amount ($) Average annual deposit volume ($ million ) Number of deposit account (million) NA Average deposit amount ($) NA94164 Average annual deposit value/ average annual OLP 0.311,222.02

11 BUD’s self-sustainability Nominal Ave. yield earned on OLP (%) Nominal Ave. rate paid on deposits (%) 10, % Nominal interest spread (%) Real Ave. yield earned on OLP (%) Real Ave. interest rate paid on deposits (%) Lowest nominal lending yield on OLP needed for self sustainability (%) As above real yield Operating costs as a % of ( a) Average annual OLP (%) (b) Average annual total assets (%)

12 BUD’s financial performance Profit ($ million) (0.8) Percentage of profitable units (%) The Subsidy Dependence Index (SDI) 32.2%(13.7%)(44.5%)

13 Summary and Conclusions  SDFIs are likely to continue to function in the future though reflecting a reduced share of financial sector operations compared to years ago  Measurement of their cost-effectiveness by using the SDI and the OI could contribute substantially to improving the SDFIs’ performance and to sound allocation of scarce resources  Adequate measurement of their costs and assessment of the social desirability of their “products” should be supported by both opponents and supporters of the mere existence of SDFIs


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