THE RELEVANCE

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					                                THE RELEVANCE
                                       OF
                             DEVELOPMENT BANKING
                                     IN THE
                      CURRENT SOCIO-ECONOMIC ENVIRONMENT

                                             by
                              Hon. George Theophilus, SLC, CBE

INTRODUCTION

Development banking has its origin in the immediate post-war period with the establishment of
the Bretton Woods Institutions, The World Bank and the International Monetary Fund. The
World Bank is generally recognized as the pioneer development bank created to help in the
reconstruction of Europe after the 2nd World War. The practice of development banking with its
emphasis on concessionary long-term credit and rigorous project appraisal has through the World
Bank established deep roots worldwide since then; hence the regional developments – IADB,
Asian Development Bank, African Development Bank and CDB – and the national development
banks in Latin America, Asia, Africa and the Caribbean.

The World Bank refers to these satellite development institutions as Development Financial
Institutions (DFIs) and the CDB refers to its affiliate institutions as “Development Finance
Corporations” (DFCs). Not surprisingly the wags and cynics have mischievously relegated them
to the Hades of “doomed financial institutions” (DFIs).

Notwithstanding the cynics, governments worldwide saw in the World Bank model a panacea for
solving their development problems through the provision and administration of subsidized
credit. Having been adopted by governments as part of the public domain, Development Banks
have been saddled with contradictory public and political expectations – churning commercial
returns and economic rewards while at the same time pursuing policies and practices of an
inherently social and welfare nature. These institutions were entrusted with the painstaking
Herculean task of undertaking the residual risks of the financial system (including, inter alia,
financing low income housing, the small farmer, the small businessman and the small man
generally), but yet expected to adhere to a non-market administered pricing policy which treats
the rate structure not so much as the price of credit risk but as an incentive for risk-taking and
investment. “Entrepreneurship made easy”. An attenuated rate structure would, it was
concluded, enhance the prospect of viability of projects and thereby broaden the scope of
productive employment-generating activity and the demand for development credit. The high
cost of commercial bank credit was then deemed a major stumbling block to development.

The World Bank and the regional development banks have, however, generally financed
sovereign projects and activities and their loans to other entities have in the main been supported
by government guarantees. Sovereign debt then and, to lesser extent, today has been regarded as
gilt-edge assets with a negligible risk co-efficient.




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The International Finance Corporation (IFC), a subsidiary of the World Bank, has however been
involved in private sector financing without the requirement of government guarantee.

BACKDROP

The post war and post colonial enthusiasm for development banking as an instrument of
modernization was reflected in the enactment of pristine legislation imbued with impeccable
standards of financial prudence, professional management, managerial independence and
rigorous operating practices and policies. Conceptually the development banks were expected to
focus their credit activities on projects with satisfactory internal and economic rates of return
and, in particular,

             (a)          specialize in industrial financing

             (b)          concentrate on long-term financing and avoid traditional commercial bank
                          short-term working capital loans and financing of the import/export sector

             (c)          mobilize local resources through the creation and issue of new financial
                          instruments such as long-term bonds and debentures

             (d)          attract and secure foreign currency resources to complement scarce local
                          loanable funds and the stock of foreign exchange

               (e)        apply the tools of systems analysis in the evaluation of projects and

               (f)        contribute generally to the pursuit of distributive justice.

These national development institutions were born, as it were, in the halcyon days of:

       (i)           international economic stability
       (ii)          cheap money from multilateral, bilateral and national sources
       (iii)         low inflate rates except the OPEC induced inflation of the early 1970s;
       (iv)          growing international trade and improving multilateral economic relations;
       (v)           confidence in industrial development as the salvation of third world economies;
       (vi)          faith in and pursuit of Keynesian economic prescriptions to deal with issues such
                     as unemployment, demand management etc. and
       (vii)         general endorsement of international economic aid and transfers as a moral
                     imperative.

The development banks were not all fortunate to be born in these propitious times. In fact many
were established in the 1970s and early 1980s in the wake of the OPEC revolt with its spillover
effects characterized by:

       (a)           stagflation
       (b)           rising interest rates,


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       (c)     contracting international economic aid
       (d)     rampant budgetary and balance of payment deficits
       (e) the abandonment of the gold standard with its corollary, floating exchange rates

       (g)     the initiation of the Euro dollar and the freeing of exchange rates and

       (h)     the emergence of Friedman, instead of Keynes, as the guru of economic policy-
               making in the metropolitan countries.

In the OECS, we had to contend also with the sterling crisis, the abandonment of the EC dollar
by Barbados and the change of the peg of the EC dollar from sterling to the US dollar.

The world of finance has, in consequence of the foregoing factors, been radically transformed.
With abundant Euro currencies and petro- dollars and growing internationalization and
integration of financial systems, giant financial supermarkets have emerged and the
specialization which characterized post-war financial institutions have virtually vanished.

This development has been further facilitated by a general relaxation of prudential financial
regulatory requirements in the area of interest rates, services, branching, licensing, etc.
Commercial banks which were conceived as specialists in short-term financing have become
giant financial octopuses with tentacles spreading from short through medium to long-term
financing and from foreign exchange dealings to such diversified services, including, leasing,
factoring, underwriting, insurance, issuance of commercial paper, mortgage backed securities
and other derivatives etc.

In addition, modern technology is transforming the character and structure of financial services
both nationally and internationally. The internet, ATMs, credit and debit cards etc. are now
common-place and in wide-spread use.

Variable rate structures, reverse mortgages and financing of consumer durables from equity in
rising property values have acquired legitimacy and trust departments of commercial banks now
provide broad financial services, as already indicated.

These fundamental changes in the ambiance of financial institutions and the increasing
diversification and integration of their services cannot but have implications for the structure,
performance, viability and focus of development banking institutions. Commercial banks and
other financial intermediaries, having successfully penetrated the lines of business conceptually
associated with development banking, are therefore threatening the survival, growth potential
and viability of development banks; hence the premature desire to write the epitaph of
development banking. The issue of relevance, if not burial, brings into sharp focus the latent
possibility that development banks as a genre of financial institutions have served their time and
should gracefully bow out. End of chapter.




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POLITICAL ECOLOGY

Like a corbeau hovering over a frail limping reptile, development banks have from inception
been stalked by issues of necessity and relevance. sandwiched between ideologies and notions
of socialism and capitalism, development banks have been eulogized when socialistically
inclined governments assume the reins of power but acquire the unpleasant odour of the skunk
when a political directorate with capitalist notions of economic management assumes office.
Whatever the colour of the political directorate, once established, development banks must
inevitably face:

     (a)      differential notions of the approach to Ward and Rustow’s crises of distribution
              and economic development

     (b)      the contretemps between economic rationality as perceived by technocrats and
              political rationality as envisaged by the political directorate

     (c)      the clash between the social welfare objectives of the political directorate and the
              pursuit of financial viability by prudent development bankers


     (d)      the problem of reconciling risk management in the interest of viability with the
              utilitarian objectives of governments

     (e)      the inherent conflict between the perception of development banks as an
              instrument for the dispensation of favours and rewards to the proletariat and the
              management pursuit of positive discrimination in favour of the credit- worthy and
              trustworthy

     (f)      the inherent disconnect between policy accountability to Cabinet and Parliament
              and the institutional need for operational autonomy and

     (g)      the problem of reconciling indicators for measuring success in the quantitative
              political sense in contrast to the qualitative expectations of the bureaucracy.
Relevance

Given the tensions inherent in the Jekyll of politics and the Hyde of business which characterize
development banking and the myriad changes which have taken place in the financial
environment in the last forty (40) years, could it be that development banking has outlived its
usefulness and is on the way to becoming the dinosaur of the financial system?

Not so fast. Development is a dynamic concept – the broadening and deepening of choices and
opportunities underlying any development thrust presupposes the need for incremental
adjustments in response to changing economic circumstances. If this is true of development it is
equally valid in the sphere of development banking. Development banks, by definition, are
instruments of national development and as such must facilitate public sector response to the
vicissitudes of the challenge of development.

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If St Lucia is to be taken as the base for assessing the relevance of development banking, it may
be prudent to examine the developments which have taken place in the economic and financial
environment in the last thirty (30) years.

The financial landscape has changed significantly. Total asset base of financial institutions in St
Lucia in 1983 was $320m. Today the figure has multiplied seventeen fold - $5,466m. In the
same vein, total deposits in 1983 amounted to $245m; it has risen to $3,339m (a fourteen-fold
increase).

In 1981, the year SLDB opened its doors to the public, there were five (5) commercial banks:

           (1)    Barclays
           (2)    Canadian Imperial Bank of Commerce (CIBC)
           (3)    Royal Bank of Canada (RBC)
           (4)    Bank of Nova Scotia (BNS)
           (5)    St Lucia Cooperative Bank


In 2010 there are six (6) commercial banks (including two mergers):

           (1)    First Caribbean (merger of CIBC and Barclays)
           (2)    Bank of St Lucia Ltd (BOSL) (merger of SLDB and NCB)
           (3)    1st National Bank
           (4)    Bank of Nova Scotia
           (5)    Royal Bank of Canada
           (6)    RBTT Bank

It is worth noting that the total assets of Eastern Caribbean Financial Holding (ECFH) only
(including BOSL) is twice the budget of the Government of St Lucia.

Since then a number of institutions, non-bank financial institutions, have emerged

            (1)   Financial Investment & Consultancy Services Ltd(FICS)
            (2)   Sagicor Finance (originally Amalgamated Finance)
            (3)   MICROFIN
            (4)   Fast Cash
            (5)   CMMB
Added to this are the illegal excursions into banking business of insurance companies,
particularly CLICO and British American. The disaster of Cimpex has since been forgotten.

The institutional milieu has been further crowded by the establishment helter-skelter of a number
of institutions by St Lucia governments:

           (1)      SEDU
           (2)      BELFUND

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             (3)       OPSR
             (4)       PRF
             (5)       PROUD
             (6)       NCA
             (7)       NCF
             (8)       NDC
             (9)       NIC (absorption of SMFC - NCF and broadening the scope of its financial
                       activities).
             (10)      CDF

I would have to appeal to Machiavelli for technical assistance to be able to make sense (if not
nonsense) out of this disjointed configuration of public sector institutions. Political rationality, if
that is what it is, defies the logic of economic efficiency and rationality. Presumably the urge for
political patronage by way of employment and board directorships outweigh any consideration
for the benefit of scale economies and the avoidance of unnecessary duplication of avoidable
expenses.

Of even greater significance for development banking is the fundamental reorientation of
commercial banking, from reliance on mere spread to fee income generation as the main source
of financial oxygen for survival. In the early 1980s, commercial bank spread was in the range of
8% to 10% with nominal lending rates from 12% to 20% and deposit rates from 4% to 10%.

Today apart from the zero rating of demand deposits and chequing accounts, bank deposit rates
range from 1.5% to 6.75% and lending rates have plunged to a low of 7½% to 10%.

In this new dispensation, the traditional development bank posture of reliance on interest rate
incentives and differential can no longer be sustained, particularly in an environment where

       (a)          the average cost of funds of commercial banks has been dramatically reduced
                    by a strategy of pegging fixed deposit rates below the savings rate and

       (b)          lending rates have been attenuated by cut throat competition and consumer
                    credit rates, particularly car loans, are now even amortized.

So the wide spread enjoyed by the commercial banks have been severely squeezed and the
competitive advantage derived from that source by development banks in the past has now been
marginalized.

In St Lucia, NIC, a public sector institution with unparalleled scope for domestic resource
mobilization, has entered the fray by the virtual takeover of SMFC and offering large chunks of
cheap funds to its subsidiary thus enabling SMFC to compete effectively not only with the
commercial banks but also the resuscitated development bank.

Even the patriarch and benefactor of development banking in the region, the CDB, which once
frowned on the intermediation of its scarce development resources through private commercial
banks has joined the fray and on-lends as a matter of course to profitable commercial banks. In

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fact some of the senior staff of the CDB have been heard whispering somewhat conspiratorially
their concern and reservation about lending to small development banks compared to the giant
commercial banks with a record of creditworthiness and excellent credit rating.

THE TASK AHEAD

Given the foregoing, it may be deduced that the future of development banking in the region is
bleak and the prospect of survival and success of any new development bank, daunting and
doubtful. That conclusion is probably premature and will only be valid if the Government of St
Lucia which gained political mileage from the reactivation of the development bank should
regard the new SLDB as a mere reincarnation of its predecessor and fail to take the necessary
measures to strengthen the sinews of the new institution.

As long as development is about broadening and deepening human choices and opportunities,
there will always be a case to be made for development banking. Social and economic choices
are infinite. In our current socio-economic circumstances the contribution which a redefined
development bank can make to the improvement of the quality of life of our people is
immeasurable.


The following measures are, in my view, paramount if the new SLDB is to serve a meaningful
purpose and thrive in the new financial environment:

       (1)        a long-term government commitment of equity through direct budgetary
                  resources, grants and credit. The directors and management must enlist the
                  firm commitment of the government in this regard and not allow pleasant
                  prevarications or rhetoric to become a substitute for real action to shore up the
                  institution in a merciless competitive environment.

                  Let it not be forgotten that the former SLDB was merged but its services
                  remain active within the bosom of BOSL, an institution whose financial
                  capacity far outweighs that of the Government of St Lucia. A penniless
                  development bank cannot compete effectively in the current financial market
                  place;

       (2)        consolidation of public sector development agencies and services and
                  integration into the service structure of the new SLDB. Is there any logic or
                  financial sense in the continuance of SMFC as a separate and distinct
                  institution offering mortgages and the establishment of a development bank
                  providing the same service and scraping for funds to provide an effective and
                  competitive service in an environment where it is “out-financed” and easily
                  marginalized through low cost of NIC funds to SMFC and equally low cost of
                  funds of major private sector commercial entities.

There are numerous ill-defined development windows in the development edifice of the
Government of St Lucia:

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             (1)     SEDU
             (2)     OPSR
             (3)     BELFUND
             (4)     PRF
             (5)     PROUD
             (6)      NCA ( National Conservation Authority)
             (7)      NCF
             (8)      NDC
             (9)      National Housing Corporation
             (10)     CDF

SEDU, for instance, was largely established as an act of revenge for SLDB’s refusal to grant
credit to a notorious bad debtor recommended by a Minister of Government. The service SEDU
provides was already professionally developed and delivered by the old SLDB.

Equally the services provided by OPSR and BELFUND are not by any means inconsistent with
the service structure of the SLDB. Its charter clearly envisages the provision of these services;

       (3)     mobilization of grant and concessionary funds from bilateral sources including
               Taiwan, Trinidad & Tobago, Venezuela, etc.

       (4)     use of SLDB as a depository for significant deposit and other liquid funds of
                   (a)   NIC
                   (b)   St Lucia Government
                   (c)   Foreign Governments
                   (d)   Other Public Sector institutions

This could be used as a window for short-term credit and augment the liquidity of the SLDB;

       (6)     aggressive government promotion of SLDB to ensure that institutions such as
               CDB, EIB, Caisse Centrale, EU, OPEC Fund, Kuwait Fund and US Foundations
               (including the Gates Foundation) see the SLDB as a safe haven for parking
               surplus funds).

       (7)     drawing on the surplus financial assets of the financial system to steer resources
               to the development bank. Government could offer special concessions to
               financial institutions to make this an attractive window of investment of their
               surplus funds

       (8)     redefining of development credit to allow the development bank to finance
               selective projects involved in the purchase and refinancing of existing enterprises.

               In the past, the development bank in keeping with the strictures of CDB has
               wantonly avoided credit for activities which do not appear to have any scope for
               additional and incremental growth. This limitation is ill-conceived and inherently

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               flawed. The maintenance of assets in production by refinancing has all the
               characteristics of a development project. Without refinancing the productive base
               of the nation would shrink

       (9)     entry of SLDB into fee income services including brokerage, property
               management and development, factoring, leasing, etc. Is there not a case for
               centralizing through SLDB the financial brokerage services of the government
               and its agencies

       (10)    reactivation and financing of a venture capital fund for SLDB financing of high
               risk ventures


       (11)    issue of bonds by the SLDB

       (12)    government guarantee of bonds issued by the SLDB

       (13)    direct involvement and management of industrial, tourism and agricultural
               projects - SLDB as the new entrepreneur on the block.

Development banking is as relevant today as it has ever been. Today, even more so. Its role
needs to be redefined and refocused to enable the institution to establish a niche for itself in the
changed financial circumstances of St Lucia and the region.

The institution must be given scope and scale to effectively assist government to respond to the
growing challenges of development in a changing world. In providing the institution with scope
and scale government would be contributing to its prospect of viability and thereby enabling it to
accumulate surpluses for financing development activities in keeping with public policy. In so
doing the burden on the public sector budget would be reduced and government would be able to
divert resources to other projects.

In short, SLDB must be put in a position with certain prospects of profitability so as to:

       (a)        avoid reliance on the government for funding and thereby reduce the demand
                  on the public purse

       (b)        contribute meaningfully to the development effort from its resources and
                  reserves and

       (c)        initiate and finance development projects conceived by its own board and
                  management consistent with public policy.

The Government should establish urgently a Task Force to consider the measures that should be
adopted to facilitate the effective functioning and operation of the new SLDB.




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