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southern african
development community
development finance
resource center
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
southern african
development community
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resource center
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
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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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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 (1955-1990)
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The various tiers of DFIs - Global to National
Global:
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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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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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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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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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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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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Workings of SADC Development Finance System
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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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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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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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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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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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THANK YOU!
Dr. Ros Thomas (CEO)
SADC-DFRC
P. Bag 0034
Gaborone
[email protected]
www.sadc-dfrc.org (under construction)
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