National Development Banks could help stimulate growth

Role of National Development Banks in economic growth

In Summary

•NDBs are considered more flexible that conventional finance institutions

•NDBs support SMEs, which comprise a significant contributor to overall economic growth

A key requirement to achieving Africa’s economic transformation is the availability of long-term investment through which the continent’s productive capacities can be maximised. Through targeted and coordinated investments, traditional barriers to trade will be minimised and a conducive environment created that enables businesses to thrive.

In addition, innovative ideas that leverage on new techniques, processes and technologies to achieve productive and value adding outcomes will be actualised.

While the financing required to unlock Africa’s economic potential may be formidable, National Development Banks (NDBs) could play a principal role in bridging the financing gap, so long as they receive adequate legislative and institutional support.

Traditionally, NDBs are purposed at providing counter-cyclical finance – i.e. financing projects or investments that conventional finance institutions would ordinarily shy away from due to relatively low risk appetites. However, the role of NDBs has expanded in the recent past to include encouraging innovation and structural transformation; enhancing financial inclusion; supporting infrastructure financing; and promoting environmental sustainability.

With a clear mandate to maximise development opportunities as opposed to profit-seeking, NDBs are considered more flexible that conventional finance institutions. This flexibility, coupled with clearly elaborated functions and mandates as well as good governance principles that leverage on international best practices, enables NDBs to spearhead economic inclusion through SME support, as well as support industries and sectors that align with overall government policy, for instance renewables and energy efficiency. This calls to mind Germany’s KfW and China’s CDB which have played prominent roles in the expansion of the renewable energy sectors in Germany and China, respectively.

In the African context, perhaps the primary function of NDBs is to identify industries and sectors that require additional intervention in order to achieve enhanced development. This is particularly key with respect to sectors that are conventionally considered too risky for commercial finance institutions. To this extent, NDBs play a catalytic role in incentivising growth and development in a manner that serves both a commercial and socio-economic function. This socio-economic function is best evidenced in the support offered by NDBs to SMEs, which comprise a significant contributor to overall economic growth within the continent.

Closer home, it is encouraging that the government is placing more importance on the role of NDBs as a path to economic growth that enables direct investments in priority areas, for instance, SMEs, energy, manufacturing and infrastructure. This is seen through efforts to create a single highly geared multipurpose development finance institution – the Kenya Development Bank (KDB) – that will leverage on lessons learnt from NDBs in the Asian and European markets.

The proposed KDB, which will be formed through the merger of industrial and Commercial Development Corporation, IDB Capital and Tourism Finance Corporation, is intended to be a strategic government development institution with the capacity to secure and mobilise long-term funding towards priority development initiatives.

Karen Kandie