A structural change has occurred in finance since 2008. At global level, we have seen development financing assume a more critical role.
In this period, the World Bank’s concessional lending resource – International Development Association (IDA) – has been replenished to record levels, as a number of countries in the developing world needed to access funds from external sources to make up for income shortfalls when the prices of commodities practically collapsed in the international market in the wake of the global financial market crisis. Our very own, The Coordinating Minister of the Economy (CME) and Honourable Minister of Finance, Dr. Ngozi Okonjo-Iweala, then as Managing Director at the World Bank, led the IDA 16 replenishment to $49.3 billion, significantly higher than the level the Fund had ever attained in previous replenishment efforts.
It is far more than the circumstantial reason of the financial crisis that the global development finance institutions (DFIs) have had to step up interventions in critical areas of poverty alleviation, climate change mitigation, infrastructure financing and more, in the developing countries. It is generally known that the World Bank is resourced with people of diverse and great technical knowledge of development programming and funding.
Even in the best of times, private sector credit is often too expensive to finance long term projects, including infrastructure which are necessary to create jobs in the immediate term, while providing the basis for economic growth over the long-term. Moreover, with deployment strategies more policy-driven, the World Bank, although a very large institution, is able to quickly channel funding assistance to where it is best needed.
This point helped in no small measure in shoring up the credibility of the Bretton Woods institution after its policy booboos, together with those of its twin institution, the International Monetary Fund (IMF), earned opprobrium in the developing countries in the 1980s and 1990s.
At regional level, we have also seen a rise in the capacity to deploy financial assistance and policy advice by the African Development Bank (AfDB) and Asian Development Bank (ADB). Apart from its funding role in the development of infrastructure in Africa, the AfDB is the leading African institution that integrates the continent with international funding for climate change mitigation and adaptation.
Europe boasts of multilateral DFIs including European Bank for Reconstruction and Development, European Investment Bank and The Council of Europe Development Bank, which prides itself as “The Social development bank of Europe”. These institutions are meeting needs that are beyond the scope and interests of the private banks. They are also fostering regional integration by lending to regional and sub-regional projects.
DFI transformation in Nigeria
The Administration of President Goodluck Jonathan has performed creditably well in strengthening the national DFIs in Nigeria, in line with global trends that recognise that additional financial frameworks are needed to serve the project markets that commercial banks may term too risky to lend to. Also, certain industries, which are at very early stages of development, require knowledge beyond the areas of business as usual for the commercial banks, who charge high interest rates for the credit they give.
The DFIs become very relevant in this area, because as agents of the government, they are obligated to invest in knowledge development and provide early-stage financing to take specific industries off the ground, and prepare them to such a stage when they can begin to attract and able to afford commercial lending.
With the banking sector significantly depressed by the financial market turmoil of 2008 and 2009, the government had to step in strongly to protect existing jobs, encourage creation of new ones and even stimulate nascent and moribund industries so as to sustain economic growth.
The Nigerian Export-Import Bank (NEXIM Bank) has been in the frame of this development, and has received a lot of support under this Administration to deliver its mandate. As Nollywood’s profile steadily rose in the domestic and international environments, there was a need to support the industry to strengthen technically, and provide important infrastructure for the growth of the entertainment sector value chain.
This was the key objective of the plan to launch an Entertainment Industry Fund as announced by President Jonathan in 2011. The promise has since been kept by Mr. President. NEXIM Bank is the institution that manages the Fund. This is in line with its mandate to support businesses, including the creative and entertainment sector, which have capacities to create jobs and earn foreign exchange for the country. Through its management of the Nigerian Creative and Entertainment Industry Stimulation Loan Scheme, NEXIM Bank has helped in raising the international profile of Nollywood. “Dr. Bello,” an international film financed with the Fund was premiered in Washington DC at the Kennedy Centre last year.
Similar interventional funds have been supported by the Administration, including the Small and Medium Scale Enterprises (SMEs) industry fund, which is managed by the Bank of Industry. The DFI also manages the textile industry intervention fund. The Fund is aimed at restoring the textile industry to its former glory, when it employed more than 25,000 Nigerians and attracted significant foreign investment from India and some other Asian countries.
Today, the Nigerian project landscape is dotted with projects funded by the DFIs. To reinvigorate the institutional framework for improved performance, Nigerian Agricultural Cooperative and Rural Development Bank was restructured and rebranded as Bank of Agriculture, to increase lending to the agricultural sector. Similarly, Urban Development Bank of Nigeria Plc was transformed to Infrastructure Bank, with renewed focus on infrastructural investment. The Federal Mortgage Bank of Nigeria is also being reformed and backed by the government to raise its capacity for intervention and support government’s programme for the provision of affordable housing to Nigerians in formal and informal occupations.
Raising the Performance Profile
There is no doubt that there is much more scope for the DFIs to continue to help deliver on the Transformation Agenda of Mr. President. NEXIM Bank is working on four focal sectors, namely Manufacturing, Agro-processing, Solid Minerals and Services. These sectors form the “Mass Agenda” of the bank. More recently, there has been strong consideration for increasing our intervention in solid mineral mining. To this effect, we have been working with key stakeholders in the sector. However, the need to increase funding intervention capacity, especially low cost, early-stage, long-term funding for the industry, has been identified. Support for this agenda has come in the form of a mandate for NEXIM Bank to widen its partnership for accessing low-cost fund from other international DFIs, and consideration of an industry fund.
The trend in development financing is that interventions are scaled up in the areas where results have been achieved. While financial results are not the primary objective of setting up the DFIs, they have to be financially sustainable. Therefore, it is not incongruent to their mandate that commercial viability of projects is ascertained to guarantee moderate financial return on the lending portfolios of the DFIs. This orientation is important for prospective project owners and the DFIs. Inadequate consideration of this factor had generated certain misgivings that the Entertainment Industry Fund was supposed to be operated as a grant, whereas it is a revolving loan fund.
This is an important point because there is the need to create separate prudential guidelines for the DFIs. In certain quarters, the portfolios of DFIs are evaluated with the same yardsticks the credit assets of commercial banks are assessed for performance. This contradicts the very basis for setting up DFIs. It becomes necessary to establish DFIs as a result of the unwillingness of commercial banks to take some funding risks which DFIs are in fact mandated to take because of the development outcomes generated by the projects they fund. For this reason, Malaysia has a model which has a separate set of prudential guidelines for its DFIs; distinct from that which commercial banks have.
Social Returns
The social essence of development finance institutions is perhaps the more affirmed justification of their existence. DFIs are set up with the mandate of promoting social equilibrium in one way or another. It is important to support middle market institutions as well as grassroots businesses, and not just entirely focus support on the big businesses, although they could become multinationals and flagship businesses that symbolise the national economic stature. SMEs are very important for the spread of industry and prosperity around the country.
Funding support for women entrepreneurship is another area of intervention to help society maintain social balance. Studies around the world have shown that women are not lagging behind in business formation. But orthodoxy in financial market operations denies women entrepreneurs access to funding. Discrimination against women in terms of financial access is of the scale that requires an intervention; thus we have begun to see positive policy responses as well as supportive products from the private sector to create needed leverage for women entrepreneurship.
The social goals sit better with development finance institutions. They understand the importance of poverty alleviation and rural development. DFIs are leading providers of vital social statistics to assist policymakers and the larger market to understand the social milieu. All of these are geared toward giving citizens in all segments of society the sense of belonging to play their roles in ensuring social stability. This agenda has been strongly supported by President Goodluck Jonathan, and it is to his credit that policies of inclusiveness are being implemented by this Administration like never before.
Environmental Stewardship
Some of the most environmentally conscious financial institutions in the word are the DFIs. Environmental sustainability is one of other important development issues that moderate the pursuit of financial bottom line by DFIs. Because of the governmental relations that are involved in the funding operations of global and regional DFIs, consideration of environmental impacts of the projects they fund becomes even more important and vital for mitigating political risk. I don’t think national DFIs have any reason not to pursue environmental sustainability best practices. In any case, the Equator Principles have set codes of environmental sustainability practices for project finance which are voluntarily subscribed to by financial institutions of various hues.
A lot of awareness on this is needed in the country, coupled with investment in regulatory capacity and project development re-orientation. This is one area the DFIs can jointly adapt international frameworks to suit the local context.
NEXIM Bank has been investing in knowledge acquisition, and is seeking for technical collaboration with other development agencies to help develop carbon finance and climate change mitigation in the country.
Although hope of a global agreement for trading carbon credit from emission cuts will probably not crystalise, experts believe that funding framework at bilateral level, as well as regional funding for climate change mitigation and adaptation, will continue to flourish.
Besides, investments in environmental sustainability can generate enough returns in preservation of the natural environment and endangered species, apart from slowing down global warming and reducing environmental pollution.
•Orya is Managing Director/Chief Executive Officer, Nigerian Export-Import Bank
