Africa: Development of Standards and Guidance Notes for African Development Finance Institutions

The project was based on an initial request from Association of African Development Finance Institutions (AADFI) which had strong backing from the African Development Bank (AfDB). This project was generated because Africa still had more than 50 development finance institutions (DFIs) operating, many of them continuing to receive substantial infusions of funds from governments and viewed as important economic development tools. However many of them were largely troubled institutions, which were not being effectively supervised within their country of operation. Several of the large multinational donors were not providing much support to the African DFIs.

About 80% of DFIs were owned by governments and about half of all DFIs took deposits. The reasons for widespread poor performance (more detailed analysis is contained in the Final Report disseminated in this section) varied but usually boiled down to a high level of loan write-offs; these in turn drove from various causes including weak management, poor risk assessment and monitoring and political interference in credit allocation. Despite this there were some well functioning DFIs; some DFIs had been restructured in some countries by a process including merger; some regional DFIs were working well (for example in East Africa). Some new DFIs were in the process of creation. In many countries there was a role for well-run and regulated DFIs because commercial banks lacked means for extending term finance; the SME sector was often lacking adequate access to finance.

Implementing prudential standards for DFIs –through a country’s existing regulators- was aimed at improving risk management and ensuring that DFIs operated independently of political interference.

In developing the standards, the consultant gathered insights, information and views from a number of sources which inter alia included ADFIAP ( a parallel DFI association for Asia), World Bank and AfDB officials, Peat Marwick auditors for a large African DFI, the head of SADC-DRC (a parallel association for South African DFIs), extensive discussions with IDC and DBSA, the two largest and arguably most successfull African DFIs, and discussions with DFI executives in the Philippines, South Africa, Botswana, and Tanzania. Inputs from extensive discussions in Ghana and Nigeria were also incorporated.

FIRST consultant prepared draft prudential standards and guidelines which were approved during a two day conference in Ouagadougou, Burkina Faso in May 2006. FIRST Consultant was the facilitator and primary presenter at that conference.

As a follow-up, an AADFI forum for DFI CEOs was held in Accra, Ghana on 6-8 November 2007 with the objective to present the AADFI Prudential Standards and Guidelines that had been adopted by the DFIs in Burkina Faso to the stakeholders, particularly the ministries and central banks of African countries (which essentially supervised these institutions) for their comments and observations. The forum was attended by over 90 participants comprising CEOs and senior management staff from 60 international, sub-regional and local financial institutions, officials from ministries of finance, central banks, commercial banks, and the African Development Bank. 25 countries were represented. FIRST consultant was the facilitator and presenter for the bulk of the two days of discussions which focused extensively on how to implement, as well as on the content of the standards and guidelines.

There was a strong consensus in support of the standards and guidelines and the Forum, in its Final Communique, made the following recommendations:

a)   The AADFI Prudential Standards and Guidelines for African Development Bank and Finance Institutions adopted in Ouagadougou be moved to the implementation phase, starting the pilot stage with the following volunteer institutions participating, namely the Bank of Industry in Nigeria, the Tanzania Investment Bank, Uganda Development Bank, the Banque Nationale d’Investissement (BNI) in Cote d’Ivoire, the Industrial Development Bank in Kenya, and the National Investment Bank, Ltd. in Ghana.

b)   The various DFIs’ supervisory authorities (ministries of finance, central banks, etc.) should urgently incorporate the DFIs’ Prudential Standards and Guidelines into their national prudential regulations and for implementation.

c)   The Forum noted that the AfDB was designated at the 2007 World Bank Annual Meeting to host the Secretariat for the new Partnership on Making Finance Work for Africa (MFW4A), and recommended that i) AADFI and individual member institutions should join the partnership; ii) The AfDB should spearhead the financial sector policy reforms in Africa and ensure the full and immediate implementation of the AADFI Prudential Standards and Guidelines for DFIs in the countries; iii) The AfDB should provide technical assistance to the AADFI and member institutions to finance capacity building training and to provide grants and subsidies for acquisition of IT systems for the implementation of the DFIs’ Standards and Guidelines in the volunteered institutions. Given that only a few of the institutions that volunteered to join the pilot program were accepted, the Forum recommended that all interested DFIs should also experiment with the implementation of the standards and guidelines in their institutions.

Results

AADFI informed FIRST in June 2010 that they had started using the Prudential Standards, Guidelines and Rating System to assess member DFIs' operations. The first such exercise was conducted in 2009 and the second one is scheduled for 2011.

Lessons Learned

  • There is a continuing and important role for well managed and regulated DFIs in the financial sector of many African countries by filling gaps in funding enterprises that are not well-covered by private sector financial intermediaries; these gaps include provision of medium-term credit and certain sectors of the economy such as small to medium sized enterprises (SMEs)
  • FIRST was able to fund the important initial phases of analyzing the DFI sector, designing, drafting and garnering support for prudential standards and then passing on much of the implementation responsibility to the AfdB; FIRST, therefore, “filled a gap” in the technical assistance offered to African developing countries and acted as a catalyst for assistance with the implementation follow on work.
  • Ownership by the recipient is a major key to project success. Recipients can sometimes be much more receptive to recommendations that come from a consultant that they perceive as working for them and having their best interests at heart than from a Bretton Woods official working in an official capacity even when such officials obviously have the clients’ best interests at heart.
  • Any project, whose results require agreement by a large number of institutions and countries, as well as international validation, is going to take a long elapsed time for preparation and implementation.

Reports

  • The consultant’s Final Report. This is useful in that it surveys the DFI scene in Africa and summarizes the main areas to be covered by the prudential standards: governance, financial standards, operational standards.