Ghana's Wholesale Development Banking Journey
The COVID-19 pandemic, by far, is the worst pandemic to have hit the world in almost a century. Aside the loss of lives, the measures put in place to contain the spread of the virus, even though helpful, could not mitigate the negative impact of the pandemic on the livelihoods of billions across the globe.
Closure of borders and international travel restrictions disrupted the global supply chain with dire consequences on economies. Meanwhile, COVID-19 still continues to surge in some parts of the world after more than a year of its outbreak. However, recent vaccination roll out gives some optimism of a rebound with global GDP growth projected at 5.6% in 2021, according to the World Bank.
This notwithstanding, to combat the devastating effects of the pandemic on economies, governments all over the world continue to roll out policies and programs to “build back better”.
One of such is Ghana’s COVID-19 Alleviation and Revitalization of Enterprise Support (CARES) program. The GH¢100 billion CARES program aims to stabilize, revitalize and transform Ghana’s economy to create jobs and prosperity for Ghanaians over a three and half year period. This was designed to be in two phases: A Stabilization Phase, that spanned July to December 2020 and a medium-term Revitalization and transformation Phase, from 2021-2023.
After successful implementation of the first phase, the Stabilization Phase, Ghana is now in the second phase, the Revitalization and Transformation Phase, of the CARES program. It is in line with this that Ghana’s Finance Minister, Ken Ofori-Atta, in May 2021, declared of the establishment of a new national bank, Development Bank Ghana (DBG), by the end of July 2021.
According to the Finance Minister, even though work on the DBG started in 2018, it now forms an integral part of the CARES program. This means that, it is a key pillar in the country’s efforts to quickly recover from the effects of the COVID-19 and return to its normal growth path after a sluggish growth of 0.4% in 2020.
Mr. Ofori-Atta indicated that the DBG will be a wholesale and non-deposit taking bank that will mobilize funds and on-lend to the private sector. From the explanations given so far, government has allayed fears that the new bank will compete with existing banks in the country. Instead, the DBG as an institution, is expected to play a complementary role in the financial system by supporting the private sector to expand and create jobs.
DBG to address two main constraints in the financial system
From government’s point of view, the DBG will help address two important constraints in the country’s financial system. The new bank is intended to address the lack of long-term funding as well as inadequate financing to the productive sectors of the economy. Currently, banks only provide minimal short-term loans and according to Mr. Ofori-Atta, less than 15% of loans given out by banks go beyond 5 years, making investment in long gestation projects very difficult for the private sector.
Moreover, the Agriculture and manufacturing sectors receive just about 4% and 8% respectively of banks’ loans compared to their shares in GDP, employment and potential for driving economic transformation, according to Mr. Ofori-Atta. Therefore, the DBG will focus primarily on agribusinesses with attention on off-farm value-chain activities, manufacturing, ICT, software and allied services, tourism, and homeownership mortgage finance.
Following the earlier explanations given by the Finance Minister, the Vaultz Magazine interacted with Sampson Akligoh, Director of the Financial Sector Division at the Ministry of Finance, who threw more lights on the workings of the development bank.
Mr. Sampson Akligoh, Financial Services Director, Ministry of Finance (Ghana)
Describing the workings of the bank, Mr. Akligoh intimated that “fundamentally, the development bank as we said earlier is going to be a wholesale bank, and as we explained, wholesale bank means that this is an institution that is designed to support essentially the existing financial institutions to deliver long term credit. We said long-term credit is something more than five years.
So, the fact is that, we want to solve the problem of our businesses not being able to have access to long term financing. [DBG] is a bank that is developed to learn from our history and how we think we can get the development bank to work better in our country. So, you are going to see a very big institution that is financially sustainable. It’s not going to be a commercial bank with many branches. But, overtime, the staffing could be a reasonable number. If you want to picture how it will work, it will be like the KfW, African Development Bank, Development Bank of Singapore among others. The institutions, for large part of their activities, they don’t work directly with businesses.
Justifications for the DBG
While the idea behind the establishment of the development is great, there awere several concerns raised by the citizens concerning the strategy the government has adopted.
Some experts suggested the government could have resourced any of the existing banks such as the former Bank for Housing and Construction, National Investment Bank (NIB), or the Agriculture Development Bank (ADB) to perform the roles of the new DBG. Contrarily, Mr. Ofori-Atta justified that it wasn’t possible on grounds of employment losses and the huge cost involved. Moreover, he argued that the greenfield approach had the potential to attract more private entities, particularly foreign and institutional capital.
Adding his voice to the justification, Mr. Akligoh noted that “it will therefore be very costly – financially and in terms of closure of branches and employment loss – to try to convert ADB or NIB into a viable modern development bank”.
Yet, ideally, one would have expected that a newly built bank would cost the government more than renovating and resourcing an existing bank. However, the government thinks otherwise.
In 2018, the government hinted of a possible merger of the Agriculture Development Bank (ADB) and the National Investment Bank (NIB) to form a national development bank.
However, in 2019, the government decided to support NIB and ADB with three other banks to meet the new minimum capital requirement deadline through Ghana Amalgamated Trust (GAT). In total, the government spent GH¢800.0M on these banks. The government then promised to invest in NIB and ADB, both of which had faced significant challenges, to ensure their transformation.
According to the government, its plan is to strengthen both ADB and NIB and reform their operations to support Government’s efforts in promoting agribusiness and industrialization, especially for Small and Medium scale enterprises. The government has assured that ADB and NIB will also benefit from the wholesale funds under the new National Development Bank initiative. So, clearly the justification for not using these exiting specialized banks to play the wholesale role in the financial systems has been made clear, even though some people may still have their reservations.
Moreover, most people were of the view that the Central Bank, Bank of Ghana, which is already a banker to the government and a lender of last resort to commercial banks should have played the role of the new national bank. But frankly, most governments have restricted the activities of Central Banks to enhancing monetary policy credibility. Therefore, there is no way the central bank could have been tasked to perform this additional role. Of course, most of the countries with national development banks also have central banks.
Meanwhile, looking at it from a different perspective, Mr. Akligoh detailed why the government chose the wholesale model for the new development bank. He indicated that this model has proven to be robust and has been widely used by Development Banks across the globe. Additionally, he cited the difficulties that may arise should the government decide to use the retail model.
Mr. Akligoh explained that typically, it is very difficult to manage a retail development bank, because once there is a shock affecting that particular sector, it also affects the bank and all its customers. Furthermore, he explained that retail development bank’s struggle to overcome certain principles of banking such as diversification of portfolios, and industry concentration.
Therefore, setting specific development banks to serve the consumer in certain areas is not very easy to do. But this development bank is being developed to support the nucleus of the financial system as a whole to get this done and this is a bit more robust.
Also, Mr. Akligoh indicated that the government has now passed an act that regulates the development bank in a wholesale system. According to him, the government is also planning of issuing a license that enables the development bank to do guarantees.
Ownership of the Bank
Emphasizing the ownership of the bank, Mr. Akligoh stated categorically that the new development bank is owned by the government of Ghana. However, as to whether the board is solely a preserve of the Ghanaian people, the Director of the Financial Sector Division at the Ministry of Finance said “we are opened to non-Ghanaians”.
It’s very clear. The minister has said that, as we speak, the total commitment from government is about $250 million of which $200 million have been paid. So, as we speak, government is the shareholder.
Meanwhile, past experiences in the Management of state owned enterprises in Ghana have shown that public entities are often poorly managed. As a result, Experts have called on the government to run the Bank as a business so as to be able to recover its loans. Meanwhile, Ken Ofori-Atta has assured that the government “will insist on the professional management of the bank”.
The Finance Minister further explained that the governance structure has been carefully designed to ensure that the bank is professionally managed to successfully carry out its economic transformational mandate, while maintaining financial sustainability.
A private sector-focused bank
Contrasting the operations of other development banks, for instance, the World Bank’s support to governments, the Development Bank Ghana has been designed to mainly support the private sector of the Ghanaian economy. Mr. Akligoh further explaining noted that the bank will not lend to the government, however, its activities will enable the government achieve its long-term economic development goals.
This bank is predominantly focused on the private sector. The extent to which it will help government is that, it is going to help us [government] achieve our objectives of job creation, long term credit to the economy, and whatever we need to leverage on to get it done. For example, such a big bank as it grows, if there is any need for infrastructure that can be financed in the private sector, it will facilitate that by working with some government institutions like Ghana Infrastructure Investment Fund (GIIF); the ones that of course qualify to support those objectives. But, I think it’s very clear to us [government] that it must be a private sector-focused bank that is financially sustainable.
Capitalization of the DBG
Per its nature, Development Bank requires huge capital outlays to be able to function very well and to remain sustainable to meet the changing needs of every economy. As a result, it is very critical for every government trying to establish a new development bank to ensure that it obtains enough resources before commencing its operations. Inadequate resources have been a major challenge to most development banks over the years, especially those in Africa.
In the establishment of national development banks, most countries collaborate with development partners to raise the needed funds to establish the banks. As such, the DBG is no exception. Currently, the government is partnering the World Bank, German Development Bank (KfW), the European Investment Bank (EIB) as well as the African Development Bank to establish the Development Bank Ghana.
In terms of financing, the Government of Ghana is to raise an equity contribution of $250 million of which US$200 million has already been paid. Moreover, the World Bank is providing US$250 million, whilst KfW is also providing €46.5 million tier 2 capital and technical assistance worth €3 million. Also, the Agence Française de Développement plans initial support through partnership on guarantees. The government has also already secured €170 million from the European Investment Bank.
Essence of the partnership, NOT to influence operations
Looking at the experiences the country has had working with development partners, especially with regards to the IMF bailouts, most Ghanaians raised concerns about the level of influence this partners will have on the new bank. To allay such fears, Mr. Akligoh explained the rationale behind government’s decisions to partner these institutions.
“The reality is that global capital is so important for countries like Ghana, especially because we are still developing our capital market. And one of the key interventions of the development bank is how do we leverage international capital that is cheap to support our private sector; of course international and domestic. The estimate of long term funds available in the Ghanaian economy is about 7% of GDP as compared to the monies that Ghanaians put in the bank which is about 36-37% of GDP.
So, it tells you that as a people, our savings and investment culture doesn’t support the raising of funds that can be used to lend five years and more. So, then, the tradition will be that this bank must find a way to mobilize money from the global environment where the access to long term funds are available. That is where the partnership with these institutions become very important. So, we are very practical and deliberate about that global capital that we can leverage onto as we develop our capital market through that institution as well. I’m sure over time, the balance and skill will change.
Furthermore, Mr. Akligoh indicated that knowledge sharing is one of the reasons why such partnerships are very important, especially since this is the first time Ghana is doing something of this nature.
…sometimes learning from other experiences could help you shape your course. So, it’s important for you to know that in this partnership we need to learn from KfW, from the Singaporeans and others to see what we can do to make ours better. When the Singaporeans started their development bank, they benefited from development banks such as KfW; we are also committed to learning from those experiences.
Also, he explained that development banks can expand and then look offshore just like KfW has done over the years. Currently, it is operating in Ghana even though it’s a German Development Bank. Thus, he is hopeful that “we can also grow our development bank to be pivotal in the sub-region”.
Moreover, Mr. Akligoh has allayed fears regarding concerns that these partners will interfere with the operations of the DBG, saying “the process is owned by we the Ghanaian people”.
It’s not about they having any influence on the development bank; it’s about we trying to engage people who are interested in supporting us. So, I wouldn’t say that they are going to influence us but it’s more about how do we wocgether, learn from them, get to leverage on them to access international funds to support our economy.
Kenneth Ofori-Atta, Minister for Finance and Economic Planning (Ghana)
Sustainability of the DBG
The government is aiming at raising additional funds from domestic and international private as well as institutional investors to increase DBG’s lending capacity.
In terms of sustainability, the Minister has assured that the government will not use the taxpayers’ money to pay off the loans contracted to establish the bank. The DBG is expected to pay back the loans that Government has taken on its behalf from the international financial institutions. Therefore, the government sees its contribution to DBG as investment that should be paid back and this has been stipulated in the financing agreement between Government of Ghana and the International Financing Institutions.
Retail Banks to serve as the link between DBG and Private Sector
Retail Banks, acting as the match-maker between the development bank and the private sector, will also benefit from this relationship resulting to a win-win game for playing this intermediary role. Thus, all participants are expected to be made better-off in the current wholesale model.
This is a try and tested model. If you see the way the International Finance Corporation (IFC) works in Ghana, they do a lot of transactions through the banks. There is a way that commercial banks will play that role; there is an economic incentive to that.
Meanwhile, Mr. Ofori-Atta on Wednesday, June 30, 2021 indicated that the cost of borrowing and interest issues would be addressed when all the requisite regulatory and administrative plans are put in place.
Dealing with Political interference
Studies have shown that political interference is one of the major constraints to the success of national development banks. Educing information on how the government intends to address this conundrum, Mr. Akligoh revealed that the partners will play a significant role in this regard. He averred that the influence, if any, will be minimal since in the wholesale model, the bank will not deal directly with businesses to allow people to manipulate the system.
So, the recruitment process, we are forming the board, we are doing senior management; all of these is been done by an independent firm. We have agreed with KfW and the World Bank that they will be observers on the board. In selecting the board, it will be more internationally diverse than before.
When quizzed when the bank will commence its full operation, Mr. Akligoh assured that the government will still meet the End-July target as the structure and other things needed to begin the bank are almost 99% complete. He also revealed that the model will enable customers in the private sector access their loans in the local currency.
The matching orders is that we get the bank by end of July. Our job is to do what is humanly possible and if there is anything to communicate, we will do that. But, I can assure you that the process is almost on track; we are clear that it will start working by end July.
The tale of the development bank
Even though national development banks differ in terms of their mandates, studies have shown that irrespective of policy orientation, the failure of private financial markets to deliver adequate long-term finance, forces governments to rely on development banking institutions.
However, the debate on the success story of development banks have been mixed. Whilst some of them have failed, there are also classic examples of development banks that have performed so well, meeting their mandates.
The case of Brazil and India
For instance, extant literature shows that there are countries that have relied on one large development banking institution to fast-track their economic transformation agenda. A typical example is Brazil which established the Brazilian Development Bank, also known as National Bank for Economic and Social Development (BNDES).
As of the end of 2011, the bank’s assets amounted to 15 percent of Brazil’s GDP. Founded in 1952, BNDES focused its activity on financing public sector projects in sectors that required huge infrastructure such as transport and power in the 1960s. Research shows that during these years, between 80 and 90 percent of its financing was directed at the public sector.
However, the bank went through a transition in the mid-1960s as the finances of the bank expanded. There was a structural change which saw the bank increasing its finance to the private sector with public sector financing declining to 44 percent between 1967–1971 and thereafter ranges between 20 and 30 percent.
One interesting thing in the life cycle of the Brazilian Development Bank is that, the transition from public to private sector support was accompanied by a change in the sectoral composition of BNDES financing. The bank shifted its support to sectors such as, chemicals, nonferrous metals, petrochemicals, paper, machinery, exports among others.
Moreover, BNDES played a key role in the recession that followed the 2008 financial crisis, as it was used by the Brazilian Government to distribute its stimulus packages aimed at reversing the downturn of the economy.
India is another country that has done so well in terms of development financing. However, the Indians applied a different model. Unlike the Brazilians BNDES, the Indians established several development Financial Institutions that focus on specialized sectors. The rationale behind this model was to make sure that large industries do not deprive small industries of finance. Also, India created special institutions to channel funds received from foreign donors. There were also policy banks aimed at providing finance to targeted groups, sectors and industries.
Contributing success factors to the DBG
From the above scenarios, it is clear that Ghana’s wholesale model is akin to that of Brazil, just that the DBG is starting as a solely private sector financing institution. Nevertheless, several examples of successful development banks exist that Ghana can pick some lessons from to sustain the new bank.
Some of these national development banks include KfW (Germany), the China Development Bank (CDB), and Development Bank of Japan. On the African continent, Ghana can also pick some lessons from the Uganda Development Bank, Development Bank of Namibia, and Development Bank of Nigeria. There are also regional development banks such as the African Development Bank.
Whether or not the DBG will succeed depends on how well it will be managed. A lot needs to be done to make the bank sustainable to contribute to the development of the country. It needs to be devoid of political interference if government expects any huge impact from this bank. It will require a collective effort from all, especially the financial institutions that will be selected to play the intermediary role. These institutions must ensure that they only give loans to people who are qualified and to the specific sectors that the government has outlined.
Moreover, as Janine Thorne & Charlotte du Toit highlighted in their research work on successful development banks in 2009, “development banking remains a risky initiative, but managed appropriately, it can help achieve development objectives”.
Therefore, for the new bank to be successful, the government must pay attention to the following key areas; creating an enabling environment, a focus on its mandate, regulation and supervision, governance and management, financial sustainability and performance assessment.