Development Bank Of Nigeria (DBN); A Cliché or Reality

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The Federal Ministry of Finance through a news release dated January 12, 2016,confirmed the completion of the recruitment exercise for the Executive Management team of the Development Bank of Nigeria (DBN), and has applied for its operational license from the Central Bank of Nigeria (CBN).

The DBN is expected to have access to US$1.3bn (N396.5 billion) jointly provided by the World Bank (WB), KfW (German Development Bank), the African Development Bank (AfDB) and the Agence Française de Development (French Development Agency).  The Bank is also finalizing agreements with the European Investment Bank (EIB).

The DBN, will be providing loans to all sectors of the economy including, manufacturing, services and other industries not currently served by existing development banks thereby filling an important gap in the provision of finance to Micro, Small and Medium Enterprises (MSMEs). The DBN per the press release, will lend wholesale to Microfinance Banks which will on-lend medium to long-term loans to MSMEs. The MSMEs contribute about 48.47 percent to the Gross Domestic Products (GDP) of Nigeria but have access to only about 5 percent of lending from Deposit Money Banks (DMBs).

So, what is a developmental bank?

According to Pooja Solanki: A Development bank is essentially a multi-purpose financial institution with a broad development outlook. A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities — economic development in general, and industrial development. It is therefore a development- oriented bank. The main functions of Development banks would include:

The DBN is expected to have access to US$1.3bn (N396.5 billion) jointly provided by the World Bank (WB), KfW (German Development Bank), the African Development Bank (AfDB) and the Agence Française de Development (French Development Agency).  The Bank is also finalizing agreements with the European Investment Bank (EIB).

  1. Aspecialized financial institution.
  2. Providing medium and long term finance to business units.
  3. Unlike commercial banks, it does not accept deposits from the public.
  4. It is not just a term-lending institution. It is a multi-purpose financial institution.
  5. A development-oriented bank. Its primary objective is to promote economic development by promoting investment and entrepreneurial activity in a developing economy. It encourages new and small entrepreneurs and seeks balanced regional growth.
  6. It provides financial assistance not only to the private sector but also to public sector undertakings.
  7. It aims at promoting the saving and investment habit in the community.
  8. It does not compete with the normal channels of finance, i.e., finance already made available by the banks and other conventional financial institutions. Its major role is of a gap-filler, i.e., to fill up the deficiencies of the existing financial facilities.
  9. Its motive is to serve public interest rather than to make profits. It works in the general interest of the nation.

Now for my two pence:

  • Why another developmental bank? Why not strengthen existing ones like the Bank of Industry (BOI), Bank of Agriculture (BOA), Infrastructure Development Bank (IDB), etc.?

Per the press release; operations of the DBN will be clearly distinct from other development banks as it will focus on supporting small businesses defined by size and not by sectors. Time will confirm this!!!

  • Why wholesale lending to micro-finance banks for onward lending? Is this not the same model as BOI?

This model requires guarantee of participating banks thereby transferring the risk 100 percent to the commercial or microfinance banks. I see this as a limitation which is also the current challenge with the BOI model as well as intervention funds. I think a risk sharing model would be most ideal where the commercial or microfinance institution takes 70% and the DBN takes 30%. Well that’s my two pence.

  • Why microfinance? – The DBN is expected to lend to the micro-business people, from what I gather; mama Sikira who sells Fried bean balls (popularly known as Akara) and mama Akpabio who sells roasted plantain and groundnut will be beneficiaries of these loans.

Excellent idea to drill down, however, there are capacity issues in the financial institutions, do they have the manpower capability to manage these group of people without starting a new generation of non-performing loans in the banking sector?

I am made to understand that the DBN will be providing capacity development support for the personnel of selected institutions. Information has it that some institutions have been selected as part of the pre-operational activities of the DBN and staff audit carried out to determine skills gaps and how to mitigate them through capacity development to be provided by the DBN. I want to believe this is true and if yes, a laudable step.

  • Is this a profit-making venture?

It was difficult to get an answer as to profit or no profit. It is speculated that lending will be at single digit which is a welcome development. Considering that this group contributes 48.47% of GDP; support for this sector and anticipated growth will no doubt impact the economy. Good thing is they are not import dependent. (Don’t quote me).

Conclusion:

The DBN is a good development and will no doubt create new employment in the financial sector (just that I was left out) as well as create expansion of financial services to some previously unbanked areas. I do hope that implementation is well planned and that it does not become politicized like every other institution in the country, that only competent hands are hired to manage the Bank. Excellent implementation will improve the economic environment at the micro-business level and impact standard of living.

Rerefences

https://www.quora.com/What-is-function-of-development-bank

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