Regional_Integration_and_Currency_Unions_in_the_Southern_African_Development_Community_(Sadc).

DEGREE: MASTERS IN DEVELOPMENT FINANCE TOPIC: AN EVALUATION OF THE PERFORMANCE OF THE DEVELOPMENT BANK OF SOUTHERN AFRICA SUBJECT: ISSUES IN BANKING AND FINANCE LECTURER: Prof. VICTOR MURINDE STUDENT: THOLUMUZI BRUNO LUTHULI STUDENT NUMBER: 15371298 AN EVALUATION OF THE PERFORMANCE OF THE DEVELOPMENT BANK OF SOUTHERN AFRICA Introduction Much of the development that Lower Developed countries have experienced would not have been realised without the involvement of Development Banks. The success of Development Banks stems from their traditional role especially in Germany and Japan where they successfully performed the role of Industrial Development and promotion. Current development banks perform more general developmental role especially infrastructure development and intervention in areas where Commercial banks view them as risky and with little or longer term benefits. The Development Bank of Southern Africa’s (DBSA) was founded in 1983 by the then South African government to fund infrastructure development projects. It has since moved from being a South African based Development Finance Institution (DFI) to a regional organisation in the Southern African Development Community (SADC). Whose role is to accelerate sustainable socio-economic development, economic and environmental development needs and improve the quality of their lives. Why the Development Bank of Southern Africa The Development Bank of Southern Africa is a 100% South African government owned Development Finance Institution. However, its area of operation is broader than South Africa and regional covering the SADC and therefore qualifies to be viewed as a regional player. Like the rest of the continent, the DBSA’s role is also defined by the lack or weakness in the development of DFI’s in the region. While in South Africa this development is more advanced because of the existence of a diversified array of DFI including the Land Bank, which also act as an agricultural bank, the Industrial Development Corporation for industries, Khula Enterprise Finance for small businesses and a recently formed housing institution, this is not the case in its neighbouring countries. Murinde (1996), alludes to this weakness which results in a weakness in development in general. According to Murinde, while the commercial banking sector is advanced, there is an obvious gap and role that DFI’s need to play and governments and central banks need to consider innovative means for making this a reality. The DBSA has taken advantage of this weakness and is servicing the entire region. This does and should not be seen as a means to crowd out local development banking development. This paper evaluates the DBSA as a regional development finance institution. Since its regional focus was only realised after South Africa’s admission as a member of the SADC Community, this evaluation will begin in 2001 when this regional function became fully fledged. Development banks compared to other types of banks While Murinde (1996) and Cameron compares development banks to industrial banks because of certain similarities, it may also be necessary to compare these banking institutions to their commercially inclined sisters. The reason for this is that in Africa, there are no industrial banks and development banks, where they operate, also act as industrial banks. However, the German-Japanese banking model (Murinde, 2004 citing Hu, (1981)) and its ability to consolidate the industrial revolution through providing entrepreneurial guidance to the budding industrial sector and taking an active role in industrial development, may provide the necessary lessons. Also important is that if development banking was to be improved, this will have to done with the assistance and collaboration of the commercial banks because of their relative strength in the continent. It is therefore incumbent to do this comparison to determine the existing gap and therefore the amount and level of intervention towards a creation of development banking divisions within commercial banking sectors. Important to note is that development banks in Africa are more closer to and influenced by their colonial past Anglo-Saxon (Murinde, 2004:16) model which is characterised by financial orthodoxy and emphacise short term financial performance. This also means that the existing development banks are more closer to commercial than their developmental role. Development indicators and financial ratios utilised A balanced approach to evaluation need to be taken to ensure representativeness and that investment does not only cover profitability but that profitability itself is sustainable through including in the mix developmental and technological functions. The following financial ratios were utilised for this purpose: Operating Costs to Income (OCI) refers to what it costs (administratively) in percentage terms when compared to income. Return on Assets (ROA) refer to profit inclusive of interest earned or the financial performance of the bank. Long Term Debt to Equity (LTDE) and Reserve to Loan Ratio (RLR). The developmental and technological functions The developmental function represents the major function and responsibility for which the bank was set up to do. The ability of the clients of the bank to repay loans. In the case of the DBSA, the amount of interest charged is below that of the commercial banks while investment on development activities increases. This ensures that development is prime in the bank’s activities. Technologically, a development bank need to act as a financer and importer of technology either as part of the industrial innovation function or for its own development and expertise. Strengths and weaknesses of the indicators used These indicators are a good pointer to whether the bank’s performance is good or not so good. What may not be fully indicated is that the DBSA receives permanent government funding of R3.8billion per annum. The problem presented by the availability of subsidies and concessionary borrowed funds whose interest rates are less than the normal rate requires that these funds be removed when determining financial performance using the SDI. An SDI of zero, for instance, would denote that the bank is self-sustaining given the current on-lending rate (Murinde, 2004: 20). This makes the SDI a more reliable measure of sustainability of a development bank. However, the SDI only measures reliance on subsidies and therefore not very comprehensive. The Development Bank of Southern Africa: A case As stated earlier on, the DBSA act as a development bank for the SADC region. The bank is wholly owned by the South African government (DBSA Financial Report, 2005/6: 2). It is the International Finance Unit that provides support to countries such as Angola, Botswana, the Democratic Republic of the Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe. The bank has, since the establishment of NEPAD also funded initiatives related to it in the continent. Some of these initiatives are implemented beyond the borders of the SADC region but continental in nature (DBSA Annual Report, 2004/5: 26). This means that while most projects of the New Partnership for Africa Development (NEPAD) are funded either continentally, by the African Development Bank (AfDB) or through other international development finance institutions like the World Bank, where appropriate and depending on need, the DBSA becomes an active actor. The performance of the Development Bank of Southern Africa explained The following are the performance figures for the years that the bank has been operating as a regional bank responsible for the SADC region and also due to the support it also provides to NEPAD programmes. |2002/1 |2002/3 |2003/4 |2004/5 |2005/6 |Mean | |Total assets |18643 |20919 |23684 |24719 |26480 |22889 | |Total liabilities |9745 |10688 |12487 |12757 |13261 |11788 | |%Investment in development activities to total assets |64 |68 |67 |66 |68 |66.7 | |Return on assets |3.2 |6.1 |3.2 |3 |3.5 |3.8 | |Operating costs to income |27.7 |17.4 |26.4 |35.8 |30.8 |27.6 | |Reserve to loan ration |75 |72.4 |72 |76.6 |76.4 |74.5 | |Average interest rate loans |12.8 |13.5 |11 |11.1 |11.1 |11.9 | | From the table above, it is obvious that the Development Bank of Southern Africa is doing relatively well financially. As mentioned earlier, the element of government subsidy skews this finding in that t is questionable whether this performance is sustainable in the long run. However, the good thing is that in terms of percentage investment, more than two thirds of it (66.7% average) is invested in development activities making and ensuring that the bank remains mainly developmental. Operating costs to income (OCI) has remained between 26% and 35% except again for the year 2002/3 where this figure was low (17.4%) possibly resulting from a higher interest rate charged (13.5%). Return on assets (ROA) is steady at an average of 3.8% except for the year 2002/3 where it reached 6.1%. This higher than average yield is not explained though the average interest during this period is also higher than the entire operating period (13.5%) when compared to the 11.9% average. [pic] According to the graph above, total assets have remained constant with the slope linear. It needs to be noted that the bank operates with a reserve of about 25% at any given time. This may be viewed as incompetence by some but may also be seen as a means for ensuring that it operates within the boundaries of affordability beyond which it might have to charge more for its products. Policy proposals to enhance the bank’s performance The DBSA is a South African bank created by South African initially as a South African institution. Because of this history, it has not moved that much from its initial reasons for its creation in a country that has a multitude of other supporting development banking institutions like the Industrial Development Corporation (IDC), Khula Enterprise Development Finance, and the Land (Agricultural) Bank. Further to this, South Africa has sub-national (fourth tier) development finance institutions like the ITHALA in the province of KwaZulu-Natal, for instance, and Limpopo Development Agency in Limpopo. This means that its focus on the development areas where other development finance institutions exist is limited in its South African operations and this is replicated beyond the borders of this country. It is proposed that the bank reconsider its role beyond the borders of South Africa and while its strategic continental role is acknowledged, it requires to also be more realistic and sympathetic in the manner in which it conducts business. DBSA as a regional bank has a challenge of ensuring that the technological development of the countries where it has a presence be improved. This requires investments in technological and human capacity in the entire SADC region and this presents a challenge for the bank and the resources it has at its disposal currently. As a regional player, the DBSA is also required to assist in the development of national development finance institutions in countries where it has a presence. This results from the fact that with a developed national, and where resources allow, sub-national development finance institutions, the role of DBSA becomes more defined and support related while the other institutions busy themselves with the business of “knowing the borrower, neighbour, property values and the economic environment” (Murinde, 2004: 13 citing Grzyminski (1991)). This is the close relationship that led to the success of the industrial banks which current development banks need to emulated to register the necessary success. Conclusion The involvement of the DBSA in SADC and other African countries, especially NEPAD programmes, is an indication of the lack of development and also support, at regional and national level, for development finance institutions. While the AfDB has played an active role in this area, its resources are overstretched and this is the main reason why the DBSA had to come in and assist. The countries of SADC may have to consider being full or real partners with representation in the DBSA’s board to be able to be part of the important decisions concerning the operations of the bank. However, this may require not just participation but also financial contribution which multi-lateral institutions like the World Bank, can assist with. Bibliography Cameron R. (1972) Banking and Economic Development. Oxford: Oxford University Press. Delphos William A. (2004) Inside the World’s Development Finance Institutions. Thompson South-Western: Canada. Development Bank of Southern Africa (2002/3) Annual Report Development Bank of Southern Africa (2003/4) Annual Report Development Bank of Southern Africa (2004/5) Annual Report FitzGerald E.V.K. and Vos Rob (1989) “The Foundations of Development Finance: Economic Structure, Accumulation Balances and Income Distribution” in FitzGerald E.V.K. and Vos Rob (Eds.) Financing Economic Development: A Structural Approach to Monetary Policy. 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