Development Bank – A Different Vehicle for Economic Growth

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Ghana’s quest for a national development finance institution cannot be overstated to provide essential finance for economic development.

This is because the existing commercial banks have not been able, over the years, to adequately deliver and support the development process of the country, in part due to the maturity gap. expected.

“The maturity expectation of the depositor is short term. These loans also have a short term maturity. Banks cannot use depositors’ short-term funds to finance long-term projects, ”says Nana Otuo Acheampong, banking consultant.

Overall, the development bank is expected to improve access to credit and long-term loans for businesses, supporting critical sectors such as manufacturing, agriculture and housing, which have attracted low investment over the years. years and extend the loan period for meaningful development.

“We aim to establish the bank by the end of 2021 with an initial capitalization of around $ 250 million from the government ($ 200 million disbursed from May 2021),” the finance minister recently told members of the Association of Ghana Industries at a press conference. forum.

“The World Bank provides support of 250 million dollars, the EIB provides 170 million euros, the German Development Bank provides 46.5 million euros (level 2 capital) and technical assistance of three million euros. euros, while France is planning initial support from AFD via a partnership on guarantees. “

The European Union, through its European Investment Bank in Belgium, has granted 170 million euros to Ghana and the DBG to help channel private investment into productive sectors, new technologies and help accelerate market efforts to achieve sustainable development goals.

Access and the cost of credit are the scourges of many SMEs, looking for funds for projects that are urgent
necessary to stimulate economic growth, create jobs and improve the quality of life of the population.

It is to address some of these difficulties faced by businesses that the government is working to set up the Development Bank Ghana, an institution to reverse the trend of insufficient financial support from commercial banks to the economy and seek long-term financing to support borrowers while awaiting accelerated medium-term development.

Nana Otuo Acheampong says it is surprising that discussions of establishing DBG have sparked so much negative debate as Ghanaians confuse the operations of the Development Bank with those of universal banks.

First, the law governing a development bank is different from that governing a commercial bank. Commercial banks are governed by the 2016 Law on Banks and Specialized Depository Institutions, Law 930. On the other hand, the development bank is governed by a new law, which is known to very few people. It was promulgated in October 2020.

Development Finance Institutions Law 1032 was passed by the Ghanaian Parliament and received presidential assent on October 27, 2020.

The law establishes a framework for the authorization, regulation and supervision of development finance institutions (DFIs) in the country.

Development finance activity is defined in law to mean “the provision of short, medium and long term finance, guarantees and other credit enhancement structures to key sectors of the economy in a manner financially sustainable ”.

Both laws are the responsibility of the Bank of Ghana, which regulates both banks and SDIs as well as development institutions.

In addition, commercial banks engage in deposit-taking activities, accept deposits from the public and extend loans to them. To be considered a bank under Law 930, you must perform both of these activities.

Before Law 930, there was Law 774, which regulates non-bank financial institutions, but it is basically a one-sided bank.

“These banks grant loans but do not take deposits from the public. With the development
finance, it’s similar to Law 774. They give loans but don’t take deposits from the public, ”he says.
Law 1032 sets out four categories of licenses issued by the regulator – from the first to the fourth.

Class one will be wholesale, class two will be retail, class three will offer guarantees, and class four will combine one of the three.

“I think it’s the fourth class that can help access long-term funding,” he notes.

The law is a recognition by the government to improve economic development through large-scale private investments in productive sectors, to create jobs and improve livelihoods, and to help accelerate market efforts to achieve development goals. sustainable.

Currently, there are 66 development institutions in the world such as the Development Bank of Canada, the British Investment Bank, the Development Bank of the Philippines and the Development Bank of Rwanda.

“The general expression is economic development. My first priority for economic development will be innovation and technology. Everything is now digital, including the bank. But 90-95% of our banking apps are all imported, leaving our own science and technology students unemployed. “

“We have many science and technology universities and we are always importing technological products. We have to fund them in order to be able to develop programs. Agriculture is also a place to be favored.

Nana Otuo Acheampong says that by prioritizing agriculture, production and technology, transformation will come from access to long-term finance and the ability of the economy to do what it needs. aspires to do.

“Coming back to all the priorities, technology is now at the heart of almost everything. If we can transform with technology, we can increase the production of innovative products. With agriculture we can mechanize it, we can increase the yield in this sector as well. Thanks to digitization, people can access the products and services of the bank.

However, satellite offices would be opened in the different regions to facilitate investigations.
The finance ministry says the benefits to the economy will be huge, including job creation as existing businesses expand their product lines and new industries emerge.

The promotion of the added value of agricultural products intended for export and the reduction of the housing deficit by supporting the real estate sector are other advantages.

“The DBG is a key pillar of our efforts to quickly recover from the effects of the COVID-19 pandemic and quickly resume our path of economic transformation as set out in Ghana’s CARES / Obaatampa program,” he said. .

“It aims to be a model institution that helps the financial system play its role in helping the private sector to develop and create jobs. “

This would help overcome two important constraints in our financial system – the lack of long-term financing and the lack of adequate financing of productive sectors of the economy.

Currently, less than 15% of loans granted by banks are for five years or more, making investing in a long gestation project very difficult for the private sector.

Agriculture and the manufacturing sector respectively receive about 4% and 8% of bank loans relative to their shares in GDP and employment and the potential for economic transformation, the ministry notes.

Therefore, the main areas of intervention of DBG will be:
* Agribusiness, with a focus on off-farm value chain activities
* Manufacturing
* ICT, software and related services, including business process outsourcing and tourism
* Stimulate home ownership through affordable and longer mortgage financing
DBG is not similar to existing commercial banks in the country. It is a wholesale bank with no deposit.
It will not provide commercial loans or direct commercial loans, such as the old Housing and Construction Bank, NIB, AfDB, etc.

Rather, it will provide funds to existing commercial banks and other eligible financial institutions to provide long-term loans and other innovative products that are currently lacking in the system.

The bank will therefore complement and strengthen the operations of existing financial institutions.

The government therefore expects DBG to be a financially viable institution, capable of raising long-term funds from national and international capital markets and international financial institutions, on the basis of its own balance sheet.

Work on DBG began in 2018 with a working group of industry experts established by the government to recommend the best approach to establish a modern and vibrant development bank. Based on the recommendation of the working group, the government decided to establish DBG as a new wholesale bank that does not accept deposits under the Companies Act.

“The advantage that we foresee from an entirely new approach is that we can start from a clean slate, without financial legacy, governance and other problems,” said the Minister of Finance.

“This allows us to focus on the future and move directly to the implementation of DBG equipped with modern and solid design principles. “

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