Role and Challenges of Specialized Financial Institutions Jose De - - PowerPoint PPT Presentation

WORLD BANK GROUP

Finance & Markets

Role and Challenges of Specialized Financial Institutions

“Seminar on Specialized Financial Institutions in the New Edition: Role

• f Financial Inclusion for Inclusive and Sustainable Growth”

The findings, interpretations, and conclusions expressed in this presentation are entirely those of the author. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Jose De Luna Martinez

Bangkok, Thailand, August 23, 2016

Contents

1 2 3 4

Overview of SFIs – Learning from the past Features of SFIs and challenges Financial inclusion in ASEAN Final remarks

Overview of SFIs (Development Banks)

Agriculture Infrastructure International trade Industry Housing Tourism

Promote economic development

Development Banks (DBs)

Loans Guarantees Advisory services Technical assistance Households SMEs Local governments Large private firms Private financial institutions

Instruments Sectors Clients

5

• What is a good example of an SME development

bank, agriculture bank, infrastructure bank?

• How do you make a DB independent from undue

political interference?

• How can a DB become financially self-sustainable?
• Should DBs be regulated in the same way private

commercial banks are regulated?

• How should the performance of a DB be evaluated?
• How to enhance transparency and governance of

DBs?

DBs – Demand for Technical Assistance

Survey Respondents 90 DBs from 61 Countries

Africa Americas Asia Europe and Central Asia Middle East and North Africa

• 1. Angola
• 2. Côte d'Ivoire
• 3. Democratic

Republic of Congo

• 4. Ghana
• 5. Kenya
• 6. Nigeria
• 7. Rwanda
• 8. South Africa
• 9. Sudan

10. Tanzania 11. Uganda

• 12. Antigua and

Barbuda

• 13. Bolivia
• 14. Brazil
• 15. Canada
• 16. Colombia
• 17. Costa Rica
• 18. Curacao
• 19. Dominican

Republic

• 20. Ecuador
• 21. Guatemala
• 22. Mexico
• 23. Paraguay
• 24. Peru
• 25. Uruguay
• 26. Venezuela
• 27. Bangladesh
• 28. Bhutan
• 29. Cambodia
• 30. China,

People's Rep.

• 31. Cook Islands
• 32. Fiji
• 33. India
• 34. Malaysia
• 35. Micronesia
• 36. Mongolia
• 37. Nepal
• 38. Niue Island
• 39. Pakistan
• 40. Palau
• 41. Philippines
• 42. Samoa
• 43. Sri Lanka
• 44. Thailand
• 45. Tonga
• 46. Vanuatu
• 47. Vietnam
• 48. Bulgaria
• 49. Croatia
• 50. Finland
• 51. Germany
• 52. Hungary
• 53. Latvia
• 54. North Cyprus
• 55. Norway
• 56. Poland
• 57. Slovakia
• 58. Slovenia
• 59. Turkey
• 60. Egypt
• 61. Oman

Source: WB Global Survey of Development Banks, 2012.

Features of Development Banks

KfW (Germany) China Development Bank Brazil National Development Bank Malaysia Development Bank NABARD (India) Vietnam Bank for Social Policies Development Bank of Southern Africa Agriculture Bank of Turkey Banobras (Mexico)

There are differences in terms of:

• Policy mandates (broad vs.

narrow)

• Ownership (state-owned vs.

mixed ownership)

• Funding (deposit vs. non-

deposit taking institutions)

• Lending models (wholesale
• vs. retail)
• Regulation
• Corporate governance
• Performance

Category 1 Poor performance (20%) Category 2 Satisfactory performance (70%) Category 3 High performance (10%)

• High dependence on

government funds

• Recurrent financial

losses

• Conflicting social

and economic

• bjectives
• Limited economic

impact

• Vulnerable to undue

political interference

• Profitable institutions
• Well-administered

…but there is room to improve:

• Policy mandates
• Corporate governance
• Risk management
• Financial strength
• High innovation

capability (financial products, outreach target market in collaboration with private financial institutions)

• Right combination of

financial and advisory services

• High standards of

corporate governance and accountability

Performance - DBs

Features of SFIs and Challenges

Most DBs are fully owned by the State

• 74% of DBs are fully owned by the State.
• Private sector is a minority shareholder in 21% of DBs.
• In 5% of cases, the State is a minority shareholder.

Percentage of State Ownership in DBs

Funding Features of DBs

Features Yes No Does your institution take deposits from the general public? 41% 59% Can your institution borrow from

• ther

financial institutions or issue debt in local markets? 89% 11% Does your institution receive direct budget transfers from the government? 40% 60% Does the government guarantee your institution’s debt? 64% 36%

Policy Mandates of DBs

DBs by Type of Mandate Market niche Percent of DBs in the survey 1. Specific 53%

Agriculture 13% SMEs 12% International trade 9% Housing 6% Infrastructure 4% Local governments 3% Industrial and other 6%

2. Broad 47% Total 100%

Type of Clients Served by DBs

92% 60% 55% 54% 46%

0% 50% 100% SMEs Large private corporations Individuals and households Other state-owned enterprises Other financial institutions

How Do DFIs Lend?

Wholesale vs. Retail Lending

Only wholesale 12% Only retail 36% Both retail and wholesale 52%

How does your institution lend?

Use of Subsidized Interest Rates by DBs

• 50% of DBs that provide loans at subsidized interest rates cover the cost the

subsidies through government transfers.

• 26%

finance them through cross-subsidization (profits from profitable business lines).

• 38% finance through other means (mainly cheaper credit lines from IFIs)

Yes 50% No 50%

DFIs that Provide Some Lending Products at Subsidized Interest Rates

Minimum Return on Capital

• For institutions that are required to achieve a minimum return on capital, targets

include:

– Maintaining real capital constant (earn a return not lower than the inflation rate) – Achieving a rate of return not lower than the governments' long-term borrowing cost – Explicit return on capital

Yes 22% No 78%

Are DFIs Required by the State to Achieve a Minimum Return on Capital or Equity?

Regulation and Supervision of DBs Yes No

Is the DB supervised by the same institution that supervises private commercial banks 75% 25% Does the DB comply with the same prudential rules (capital adequacy ratio, loan classification, loan provisioning, etc.) as commercial banks? 79% 21% Is the DB rated by an international rating agency? 48% 52%

Regulation and Supervision of DBs

Corporate Governance of DBs

Boards

• f

DFIs are dominated by government representatives:

• Average board size is 9 members with a wide range of

government representatives (Ministries

• f

Finance, Labor, Social Affairs, Housing, Trade, Industry, etc.)

• Although 79% of boards in DBs have independent members,

they are a minority in the board.

• By large, the government appoints all board members and

CEOs of the DBs. Transparency

• High

disclosure

• f

annual reports and audited financial statements (90%), but less disclosure in terms of regulatory capital and capital adequacy ratio (less than 60%).

• The key challenge is to continuously balance two competing
• bjectives:

Key Challenges for DBs

Policy Objectives Financial Sustainability

Failure to balance this two objectives has resulted in:

• High dependence of DBs on government budget and transfers
• High NPLs with ultimate failure in the long-run.
• Broad, unfocused and conflicting mandates of DBs.
• DBs

competing with private financial institutions and undermining the development of a private financial system.

• Limited economic impact.

19

Areas of Opportunity for DBs

Clear Mandate Sound Governance Effective Risk Management Performance Monitoring and Evaluation

20

Development Banks

Financial inclusion in ASEAN

Adults with an account (%)

In ASEAN, 50% of adults reported having an account in 2014

ASEAN 50 2011 2014 Source: Global Findex database. Lao PDR data is 2011.

The share of adults with an account increased by 8 percentage points, from 42% in 2011 to 50% in 2014.

Adults in rural areas with account (%)

36% of adults in rural areas reported having an account

Account penetration in rural areas in high income OECD economies is 2.6 times ASEAN’s.

ASEAN 36 Source: Global Findex database. Lao PDR data is 2011.

Adults receiving wage payments by method

In ASEAN, 71% of adults reported receiving their wages in cash

The ratio of ASEAN to high-income OECD economies of people receiving wages in cash is 6 times

Source: Global Findex database. Into an account In cash

In ASEAN, 69% of adults that reported receiving government transfers did so in cash

However, some countries are moving towards cashless government transfers schemes

Source: Global Findex database. ASEAN 69

Adults that receive government transfers in cash (% of adults receiving government transfers)

How adults sent remittances? (%)

Source: Global Findex database. Note: Respondents could report using more than one method.

In ASEAN, 61% of adults that sent remittances used cash and 33% used informal channels to do their transactions

In cash Money transfer operator Financial institution Mobile phone

Source: IFC

But only 15% of all MSMEs have access to credit

Final remarks

Conclusions

• Between 2011 and 2014, ASEAN has achieved a substantial increase in

financial inclusion.

• However, 264 million (59%) of adults 15+ in ASEAN still remained

unbanked.

• With the expansion of the middle-income class in ASEAN, the demand for

access to finance and credit is expected to continue to grow.

• Many countries in ASEAN have a large opportunity for increasing

financial inclusion.

• For households in ASEAN, cash still constitutes the main means for

executing financial transactions (payment

• f

wages, government transfers, payment of bills, receiving and sending remittances).

• A large number of adults with accounts at financial institutions still prefer

to conduct and settle their transactions in cash.

• DBs are an important policy tool to foster development and financial

inclusion around the world

• However, many of them still face challenges to reach financial

soundness and adopt high corporate governance standards

• Some institutions underperform; they require government transfers to
• perate, are subject to political interference, have unclear mandates,

and are unable to fulfill their goals,

• Improving performance and governance of DBs requires revising

policy mandates, strengthening governance structures, revising regulation and supervision, enhancing business models, and strengthening risk management.

Conclusions

Contact information: Jose De Luna Martinez, Jdelunamartinez@worldbank.org

Thank you!

WORLD BANK GROUP

Finance & Markets

The findings, interpretations, and conclusions expressed in this presentation are entirely those of the author. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.