Updated: Apr 2, 2020
The role of Development Banks in Africa’s growth
What is a Development Bank?
It is argued that development banks are important because they fill the gaps left by private financial institutions, which are mostly geared towards commercial activities. The main gap that a country is usually faced with is insufficient finance for economic transformation. Economic transformation typically requires long-term finance for large-scale projects with long maturation periods, which ultimately translates into risks that other banks are unwilling to undertake and would rather avoid.
A development Bank is a national or regional financial institution designed to provide medium and long-term capital for productive investment. They finance development in all its senses, whether infrastructure projects or industrial projects, usually at the larger end of the scale; and is often accompanied by technical assistance, in poor countries. [Source:Britannica.com]
History of Development Banks
The concept of “development banking” emerged in the 1950s when development economists theorized that the growth of income is directly and positively related to savings. In other words, the more an economy is able to save and invest, the greater the country’s GDP growth. [Source: The role of Development Banks in the 21st Century]
Today, the role of development banks is dictated by specific development contexts and economic environments in which the banks operate. Their objectives of being the primary instrument in planning, financing, monitoring and evaluating development projects in accordance with national, regional and international development priorities. [Source: The role of Development Banks in the 21st Century]
What makes a Development Bank different from other banks?
Commercial banks make short-term loans, money transfers, buy and sell foreign exchange, and they deal in derivatives. Most of their loans are for periods of less than a year.
Investments banks specialize in raising long-term funds in financial markets through underwriting and issuing of securities. [Source: The role of Development Banks in the 21st Century]
Development banks, like investment banks, operate in the field of long-term finance. Their core business is to extend long-term loans for financing projects and development programs. Over time, development banks assume investment bank functions as well. Development banks give priority to financing projects that yield substantial economic, social and environmental benefits. They also provide technical assistance to improve the quality and reduce the risks of projects.
Development banks must change over time, more rapidly than commercial and investment banks as they must stay ahead of, and prepare for expected change.
Different levels in development banks
National Development Banks
A National Development Bank is a financial institution, created by a country’s government that provides financing for the purposes of the country’s economic development.
At the national level, development banks can be instrumental not only in addressing market failures, such as the lack of provision of long-term finance due to the risks and uncertainties involved but as a critical tool in supporting a proactive development strategy.
In addition, such banks provide both lending and equity participation, meaning that they have a clear interest in the close monitoring of projects, thus developing a special form of relationship banking.
Regional and International Development Banks
Regional development banks can also help mitigate informational deficiencies facing the private sector by providing a share of screening, evaluating and monitoring and, where needed, their own money, thus partnering with private investors in co-financing. A partnership between regional development banks and the private sector may take different forms. For example, regional development banks may provide long-term lending, while the private sector provides more short-term resources, or the former may provide a guarantee to cover regulatory and contractual risks, while the latter covers market risks. Regional development banks, in addition, can help address the need for low-income countries to have access to loans for financing infrastructure projects at subsidized rates.
Development banks are a key source of long-term finance in Africa. The banks do however possess a limited capacity to provide finance for large development-oriented projects on a scale that meets the needs of their respective sub-regions. This may be explained by their small capital base, and by the fact that most of their shareholders are the borrowing countries themselves, which have limited financial resources to substantially expand these banks’ capital bases.
What do development banks offer?
Equity & Quasi-Equity
Risk Management products
Trade Finance Initiatives
Development Banks & Intra-Africa Trade
Through regional integration in Africa, a fresh look at integrative intra-Africa trade initiatives should be addressed. African countries should ideally craft trade policies that will foster inclusive tourism growth, intra-Africa trade, as well as contribute to visa openness for a borderless and interconnected continent. [Related article: Single Visa Passport set for Africa]
The cost of intra-Africa trade is currently quite high, with the World Bank estimating it to be around 50% higher than in East Asia (the highest of intra-regional costs in any developing region). The result of these high costs is that Africa has integrated with the rest of the world faster than with itself. [Source: World Bank]
Facilitating greater intra-African trade will not only boost trade performance but could have strong impacts on poverty reduction. Through intra-Africa trading, policies to maximize the gains of trade for the poorest