The Third PanAfrican Consultative Forum on Corporate Governance

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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

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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 DFRCs 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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DFRCs 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
• DFRCs 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
• Rthomas_at_sadc-dfrc.org
• www.sadc-dfrc.org (under construction)