1. Effective Corporate Governance through Ownership: the case of DFIs in SADC
Dr. Ros Thomas (CEO)
The Third Pan-African Consultative Forum on Corporate Governance
WABA
Dakar
8-10 November 2005

2. Topics to be covered: Introduction: Focus of Paper
Historical Background (failure of development finance to yield results)
The emergence of tiered DFIs
Governance Problems in national DFIs
DFIs continue to be critical actors in SADC
The DFRC’s mandate
Ownership structures of Network DFIs
Actions to improve Corporate Governance
TIB & DBZ
Concluding remarks
22/02/2019

3. Introduction: Focus of Paper
Discusses nature & import of Corp. Gov. & role that ownership & ownership structures play in respect of acceptable standards of control -- with focus on DFIs in SADC
Flawed history of public ownership & need to achieve industry best practice
Shows that ownership structure is vital for appropriate governance
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4. History: The Failure of development finance
Emergence of a tiered grouping of DFIs
World Bank/IFC (1945/+1955)
National DFIs (first 1949 – Netherlands & Finland)
“development finance” – long-term (forex loans) for productive assets in industrial and infrastructure sectors
Other sectors – agriculture/rural credits; SME finance; housing (domestic resources)
5 Regional DBs ( )
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5. The various tiers of DFIs - Global to National
The World Bank Group (WB)
Regional:
IADB, AfDB, AsDB, IsDB, EBRD
Sub-Regional:
CDB, AnDF, CABEI, EADB, WADB, MIB, SPDB, BADEA, PTAB
National:
DFIs for Industry & Infrastructure, Agriculture & Rural Credit, Small & Medium Enterprise, Micro-enterprise, Housing Finance, & Gender Credit
(Source: DFS 98)
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6. History: The Failure of development finance
Governance Problems in African DFIs
1990s - development finance & role of DFIs underwent fundamental re-examination
Theory: perceived need for development finance sign of temporary imperfections in market – did not suggest need for DFI
Private finance reluctant to bear risk of difficult country environments
General picture for African DFIs reflected issues relating to governance
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7. Failure of development finance…
Governance Problems in African DFIs?
Political influence resulting in credit diversion
Subsidies on cost of funds on-lent & non-performing assets
DFIs operations aggravated weakness of local banking & financial systems
DFI lending considered to have led to negative growth & income distribution in Africa - crowding out activities (lending to parastatals & TNC subsidiaries)
Resource allocation on basis of fiat rather than market signals – failed to allocate credit productively (scarce forex lent to SOEs with poor operational and financial performance – contaminated portfolios
Erosion of financial discipline & resource misallocation through politically directed credit, poor selection (?appraisal skills?), inadequate sectoral diversification & risk concentration – most DFIs insolvent
Over-exposure to cyclical & default risk because of excessive exposure to large enterprises/ projects financed
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8. But DFIs still critical actors in SADC…
Despite problems (DFS 98): -
DFIs & development finance will remain part of financial landscape because:
Financial systems remain underdeveloped
DFIs offer a range of financial & other services for industry
They are important in sectors like agriculture; housing and SMEs
In absence of capital markets, liberalization programs failed to emphasize continued importance of DFIs
They can be revamped/ adjusted to meet challenges
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9. But DFIs still critical actors in SADC…
However -
DFIs still dealing with some adverse macroeconomic conditions:
Have not quickly corrected inadequate structures
Remain too dependent on financing from MDBs/RDBs
Lack insufficient institutional capacity & shortage of appropriate Human Resources
Still bound to politically mandated functions that do not respect commercial and financial viability
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10. DFRC’s Mandate in respect of DFIs
DFS 1998 – Member States agreed on need for DFRC – established to serve all DFIs
Tasked to facilitate the following:
Dealing with non-performing assets;
Increase financial autonomy & independence;
Encourage cross-border strategic alliances & operational partnerships for the efficient & optimal use of development finance;
Help corporatize and privatize financially sound DFIs; &
Encourage cross-shareholdings in each other.
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11. Workings of SADC Development Finance System
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12. Ownership structure of DFIs in SADC…
Either wholly/ majority state owned
Countries with low credit rating & severe fiscal constraints, public ownership hampers financing of institutions
Access to lines of credit restricted
Cannot rely on fiscal transfers for re-capitalization or loan funding
Ownership in some being broadened through privatization
Do not fall within purview of Banking Act
Do not specify prudential requirements
E.g. % of risk weighted assets
Often no capital adequacy, non-accrual, provisioning & statutory reserves policies
Board of Directors reflects significant influence of Public Owner – susceptible to Govt. interference
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13. Action to Improve Corporate Governance? (TIB/DBZ)
In light of failures alluded to…
SADC Govts changing ownership structures & strengthening laws & regulations
Changing Board representation (incl. Pvt. Sect) to capture variety of skills & experiences
Inviting equity participation from private sector to dilute Govt influence
DFRC mandated to support this process
FIRST (2003) – Needs Analysis and Skills Audit
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14. Action to Improve Corporate Governance? (TIB/DBZ)
Critical institutional weaknesses highlighted…
Corporate Governance (10 out of 18 DFIs audited)
Risk Management as an essential ingredient of Corp Governance identified
Capacity Building Workshops/ Seminars -
Chairpersons of Boards – May 2005
Other Directors (Audit/ Asset-Liability/ Credit) at country level December 05 and early 2006
Risk Management training – November 2004 & early 2006
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15. Improving Corporate Governance…
Institutional Strengthening ? (TIB/DBZ)
Support for reform initiatives
Two different strategies on ownership being tried
TIB – shift from merchant-type bank to DB
DBZ – shift from DB to private company
Framework for involvement
Reforming Countries
Round Table discussion – with major stakeholders to:
formulate strategy
address shareholding; mandate (target sectors)
organizational structures (separate out shareholder, board & management responsibilities to ensure independence)
Technical Assistance for institution through DFRC once strategic plan in place and being implemented
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16. Concluding Remarks…
Corp. Gov. critical for DFIs – to ensure market confidence
Allows - lines of credit by MDBs/RDBs/ stronger NDBs
As Govt shareholding recedes - accountability/ openness in business dealings and attracting private sector involvement more important
Must ensure strong corp. gov. in their borrowers
To manage portfolio properly and risks arising
DFRC’s efforts with DFIs will continue to focus on raising corp. gov. to industry best practice.
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17. www.sadc-dfrc.org (under construction)
THANK YOU!
Dr. Ros Thomas (CEO)
SADC-DFRC
P. Bag 0034
Gaborone
(under construction)
22/02/2019