Effective Corporate Governance through Ownership: The case of DFIs in SADC

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

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

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 (1955-1990)

5. 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)

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

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

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

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

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.

11. Workings of SADC Development Finance System

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

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

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

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

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.

17. THANK YOU! Dr. Ros Thomas (CEO) SADC-DFRC P. Bag 0034 Gaborone Rthomas@sadc-dfrc.org www.sadc-dfrc.org (under construction)