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The value of development banks for an economy in distress

A World Bank survey defines a development bank as “a bank or financial institution with at least 30 per cent State-owned equity that has been given an explicit legal mandate to reach socioeconomic goals in a region, sector or particular market segment”

By: EBR - Posted: Tuesday, May 23, 2017

That is, the banks have a hands-on approach whereby they not only provide close project monitoring but also are in a position to nominate directors to the boards of the companies to which they lend and in which they have an equity stake.  Moreover, developing banks have in-house technical expertise that allows them to participate in decisions involving choices of technology, scale and location.
That is, the banks have a hands-on approach whereby they not only provide close project monitoring but also are in a position to nominate directors to the boards of the companies to which they lend and in which they have an equity stake. Moreover, developing banks have in-house technical expertise that allows them to participate in decisions involving choices of technology, scale and location.

by Thanos Niforos*

In a report by INTERAMERICAN DEVELOPMENT BANK development banks are defined as financial institutions “from the State whose mandate consists of promoting socioeconomic development through the financing of activities, sectors or specific economic segments”.

A standard argument for why development banks should be promoted is that such banks can fill the gaps left by private financial institutions, which are often geared towards commercial activities. 

The main gap is usually insufficient finance for economic transformation. 

The latter typically involves large-scale projects with long maturation periods, which require long-term finance and thus imply risks that banks are unwilling to undertake. In addition, many large-scale projects generate positive externalities and therefore social returns that are greater than private returns. 

The provision of long-term finance is also lacking due to the funding of financial institutions, which is often short-term. That is, long-term finance requires maturity transformation, which involves a risk that banks usually prefer to avoid. 

For these reasons, development banks are designed and mandated to fulfill this role. 

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

Concretely, development banks provide finance for long-term investment, including in capital intensive industries. 
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. 

That is, the banks have a hands-on approach whereby they not only provide close project monitoring but also are in a position to nominate directors to the boards of the companies to which they lend and in which they have an equity stake. 

Moreover, developing banks have in-house technical expertise that allows them to participate in decisions involving choices of technology, scale and location. 

Development banks can also help raise capital elsewhere by underwriting the issuance of equity securities. 
Underwriting implies a leverage capacity, but is not limited to this latter feature. Development banks can leverage resources by attracting other lenders that do not have the same technical capacity to assess a project’s viability and potential, as well as by providing guarantees. In addition, development banks can play a countercyclical role, helping sustain overall investment levels and protect the productive structure of a country during economic downturns. 

Protecting existing industries development banks are not only about correcting market failures but, rather, creating and shaping markets and strategic policies for development important in facilitating a more rapid recovery and because doing so facilitates the emergence of new and innovative industries critical for economic transformation, given the complementarities between new and established industries. 

The Greek economy is not out of the woods yet. We still need more foreign and direct investments.” And the role of a regional Development bank will facilitate and encourage investments and to work closely with Greek SMEs and international companies for all sectors of the economy.

*Wealth and Investments Manager, Former Investment Advisor at Government of Hellenic Republic

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