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Developmental Financial Institutions Strategic Choices to Build a Sustainable Operating Model Deloitte | Developmental Financial Institutions

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Developmental Financial Institutions Strategic Choices to Build a Sustainable Operating Model Deloitte | Developmental Financial Institutions Developmental Financial Institutions Strategic choices to build a sustainable operating model Deloitte | Developmental Financial Institutions During economic Introduction a recession. This has bought into focus More than 500 Public Development the importance of well-functioning DFIs disruption caused by Financial Institutions (DFIs) around the to the overall economic development of Covid-19, DFIs have world play an important role for countries economies. and sectors in helping them attain their emerged as a source of planned visions. DFIs are specialized DFIs are experiencing an emerging finance and preferred institutions aimed at fulfilling certain policy renaissance worldwide objectives of providing finance to those DFIs are experiencing a renaissance vehicles to deliver market segments that are unlikely to be worldwide. The policymakers are financial stimulus funded by commercial financial sector. recognizing the importance of DFIs in Apart from this DFIs are also particularly playing countercyclical roles, meeting support provided by important to the general market during economic, social, environmental the governments. This crises, when they can counteract the development challenges and enhancing pro-cyclical nature of financial markets structural transformation. As a result, both has bought into focus that constrains credit during economic developed and developing countries alike the importance of well- downturns. The importance of these have recently established or are planning DFIs has come to the fore due to the to build new DFIs. functioning DFIs to the economic disruptions caused by Covid overall development of 19. During economic disruptions caused In terms of presence of DFIs across by Covid-19, DFIs – on a national, regional different geographies, DFIs are spread economies. and multilateral level – have played an evenly with 25% located in Africa, 20% in important role in enabling economic Europe, 20% in the Americas, 31% in Asia, recovery. DFIs have emerged as a and 4% in Oceania. Figure 1 shows that in source of finance and preferred vehicles terms of aggregate numbers of DFIs and to deliver financial stimulus support average numbers of DFIs by sub region provided by the governments to support (the total number of DFIs divided by the struggling industries, invest in necessary number of countries in a given sub-region). infrastructure and lead the way out of Figure 1: National Development Financial Institutions across different regions 100% 5.00 80% 4.00 60% 3.00 40% 2.00 20% 1.00 0% 0.00 Malenisia Polynesia Micronesia Central Asia Eastern Asia Western Asia Southern Asia Northern Africa Eastern Europe Western Europe Northern Europe Southern Europe Northern America Sub-Saharan Africa Southern Eastern Asia Australia New ealand Latin America Carribean Total No of DFIs Avg. No of DFIs Source : Mapping Development Finance Institutions Worldwide: Definitions, Rationales, and Varieties. Jiajun Xu, Xiaomeng Ren, and Xinyue Wu 02 Deloitte | Developmental Financial Institutions Illustrative examples of activities focused on establishment and promotion of DFIs • Asian Infrastructure Investment empowerment, and climate change Monetary Affairs and Development Bank (AIIB) and New Development for sustainable development (G24) and the Global Green Growth Bank (NDB) have been founded through greener and cleaner Institute have jointly launched recently with a focus on addressing investment has been recently the Infrastructure Finance in the vast infrastructure financing established Developing World Working Paper gaps in developing and emerging • The European Union (EU) with an Series in an effort to “play a catalytic economies. aim to promote establishment role in the creation and success • US has decided to build a new DFI of National DFIs has launched of new development finance U.S. International Development Investment Plan for Europe, that institutions” Finance Corporation (USIDFC) to emphasizes “effective involvement • Kingdom of Saudi Arabia has catalyze market-based, private- of National Promotional Banks recently launched National sector development (NPBs) is necessary to enhance Development Fund which is a • UK government established British impact on investment, growth and holding company structure for eight Business Bank (BBB) dedicated to employment due to their particular existing sectoral development funds making finance markets work better expertise and knowledge of the aimed at efficiently utilizing capital for small business local context base of these funds and expand the • FinDev Canada, catering to • The Intergovernmental Group scope to infrastructure financing. entrepreneurship, women’s of Twenty-Four on International The renewed focus on DFIs is also broadly Challenges faced by Developmental Inadequate performance assessment reflected across the vast breadth of Financial Institutions or transparency: Large proportion of missions and activities that DFIs engage Lack of clarity in DFI mandates: Lack DFIs don’t follow a structural approach in. Key intervention areas of DFIs across of clearly defined mandate and target to pursuing goals through concrete economies has been across Large borrowers for financing often impede business targets, and very few undertake infrastructure projects, SME financing, the financial and operational efficiency impact assessments studies of their Trade Financing, Agriculture, Housing, etc. of DFIs. A myriad of influences such as activities. Even when the mandate and Due to the different operational nature existence of different authorities, funds targets are clearly defined, it remains of these DFIs and more importantly, and government entities with different difficult for stakeholders to measure risk-intensive sectors they operate in, it developmental agendas can blur the performance and target achievement is imperative that the DFIs achieve the question of “what services or target which inadvertently hampers the process optimum balance of effectively addressing audience can the DFI service effectively?”. of identifying deficiencies and undertaking a policy objective while being operationally This drives complexity and, in some cases, improvements to mitigate those gaps, or sustainable. This paper aims to highlight leads DFIs to undertake engagements that those deficiencies. the key challenges faced by DFIs and they are operationally not geared up for. the potential interventions that a DFI can undertake to ensure sustainable operations and reduce dependency on Government funding. 03 Deloitte | Developmental Financial Institutions Political interference: At times, political Inadequate risk management process stakeholders tend to demand forms of and policies: In line with the nature of immediate support or special initiatives the institution, DFIs serve a wide range that do not fit a DFI’s mission. As a result, of customers, which are associated with actual activities frequently end up diverging high risks. Given the inherent risks, and from the mandate, or from the DFI’s actual lack of adequate supervision it is often capability to handle or deliver. This often observed that policies, processes and risk results in below par execution of the management framework deployed by DFIs mandate as the DFIs lack the required are not commensurate to the risk being expertise in fulfilling the operations. undertaken or reflective of complexity of operations. Paucity of financial sustainability principles in operations: DFIs are Lack of governance: The quality of expected to ensure development governance and management has often outcomes take precedence over meant the difference between the success profitability. There is often a tendency and failure of DFIs functioning in the same to structure products which enable the environment. As DFIs are primarily owned credit flow to the target segments but fail by the state, the board and management to build in a safeguarding mechanism to of the DFIs is many a time nominated by ensure that the DFIs don’t incur losses. the Government. Due to this it is often Additionally, since majority of the DFIs are observed that the ownership role of the set up by the Governments, they receive state creates a potential conflict of interest direct funding from government transfers in the governance of DFIs and hinders the or have been dependent on government board members and management from transfers for recapitalization to cover being objective and independent. losses or re-alignment of their balance sheet. This availability of on tap source Way Ahead: Addressing the key of funding provides an easy way out and challenges leads to lack of motivation on part of the Having identified key challenges that may DFIs to ensure sustainability in operations keep DFIs from realizing their full potential and preservation of core capital. - the paper aims to list below the key interventions that can help DFIs boost their impact across their chosen areas of activity DFIs often have a tendency to structure while operating in a financially sustainable manner and be able to generate enough products which enable the credit flow resources to accomplish their mandate. to the target segments but lack of Establish clear mandates to enable clear specific targets suitable safeguarding mechanism such DFIs should evaluate the current mandate on the following dimensions and identify as adequate governance, robust policies if there is a need to enhance the mandate further. and processes and paucity of financial • Whether mandate is able to provide clear focused direction for the operations
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