Seminar on Specialized Financial Institutions in the New Edition: Role of Financial Inclusion for Inclusive and Sustainable Growth Role and Challenges of Specialized Financial Institutions Jose De Luna Martinez Bangkok, Thailand, August 23, 2016 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.
Contents 1 Overview of SFIs Learning from the past 2 Features of SFIs and challenges 3 Financial inclusion in ASEAN 4 Final remarks
Overview of SFIs (Development Banks)
Development Banks (DBs) Clients Instruments Sectors Households Loans Agriculture Promote economic development SMEs Local governments Large private firms Guarantees Advisory services Technical assistance Infrastructure International trade Industry Housing Private financial institutions Tourism
DBs Demand for Technical Assistance - 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? 5
Survey Respondents 90 DBs from 61 Countries Africa Americas Asia Europe and Central Asia 12. Antigua and 48. Bulgaria Barbuda 49. Croatia 13. Bolivia 50. Finland 14. Brazil 51. Germany 15. Canada 52. Hungary 16. Colombia 53. Latvia 17. Costa Rica 54. North Cyprus 18. Curacao 55. Norway 19. Dominican 56. Poland Republic 57. Slovakia 20. Ecuador 58. Slovenia 21. Guatemala 59. Turkey 22. Mexico 23. Paraguay 24. Peru 25. Uruguay 26. Venezuela 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 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 Middle East and North Africa 60. Egypt 61. Oman Source: WB Global Survey of Development Banks, 2012.
Features of Development Banks KfW (Germany) Banobras (Mexico) There are differences in terms of: China Development Bank Agriculture Bank of Turkey Development Bank of Southern Africa Policy mandates (broad vs. narrow) Ownership (state-owned vs. mixed ownership) Funding (deposit vs. nondeposit taking institutions) Lending models (wholesale vs. retail) Regulation Corporate governance Performance Brazil National Development Bank Malaysia Development Bank Vietnam Bank for Social Policies NABARD (India)
Performance - DBs 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 objectives 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
Features of SFIs and Challenges
Most DBs are fully owned by the State Percentage of State Ownership in DBs 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.
Funding Features of DBs Features Yes No Does your institution take deposits from the general public? Can your institution borrow from other financial institutions or issue debt in local markets? Does your institution receive direct budget transfers from the government? Does the government guarantee your institution s debt? 41% 59% 89% 11% 40% 60% 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 Other financial institutions 46% Other state-owned enterprises 54% Individuals and households 55% Large private corporations 60% SMEs 92% 0% 50% 100%
How Do DFIs Lend? Wholesale vs. Retail Lending How does your institution lend? Both retail and wholesale 52% Only wholesale 12% Only retail 36%
Use of Subsidized Interest Rates by DBs DFIs that Provide Some Lending Products at Subsidized Interest Rates No 50% Yes 50% 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)
Minimum Return on Capital Are DFIs Required by the State to Achieve a Minimum Return on Capital or Equity? Yes 22% No 78% 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
Regulation and Supervision of DBs 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%
Corporate Governance of DBs Boards of DFIs are dominated by government representatives: Average board size is 9 members with a wide range of government representatives (Ministries of 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 of annual reports and audited financial statements (90%), but less disclosure in terms of regulatory capital and capital adequacy ratio (less than 60%).
Key Challenges for DBs The key challenge is to continuously balance two competing objectives: 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 Development Banks Effective Risk Management Performance Monitoring and Evaluation 20
Financial inclusion in ASEAN
In ASEAN, 50% of adults reported having an account in 2014 Adults with an account (%) ASEAN 50 Source: Global Findex database. Lao PDR data is 2011. 2011 2014 The share of adults with an account increased by 8 percentage points, from 42% in 2011 to 50% in 2014.
36% of adults in rural areas reported having an account Adults in rural areas with account (%) ASEAN 36 Source: Global Findex database. Lao PDR data is 2011. Account penetration in rural areas in high income OECD economies is 2.6 times ASEAN s.
In ASEAN, 71% of adults reported receiving their wages in cash Adults receiving wage payments by method Source: Global Findex database. In cash Into an account The ratio of ASEAN to high-income OECD economies of people receiving wages in cash is 6 times
In ASEAN, 69% of adults that reported receiving government transfers did so in cash Adults that receive government transfers in cash (% of adults receiving government transfers) ASEAN 69 Source: Global Findex database. However, some countries are moving towards cashless government transfers schemes
In ASEAN, 61% of adults that sent remittances used cash and 33% used informal channels to do their transactions How adults sent remittances? (%) In cash Money transfer operator Financial institution Mobile phone Source: Global Findex database. Note: Respondents could report using more than one method.
But only 15% of all MSMEs have access to credit Source: IFC
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 of 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.
Conclusions 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 operate, 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.
WORLD BANK GROUP Finance & Markets Thank you! Contact information: Jose De Luna Martinez, Jdelunamartinez@worldbank.org 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.