Will it be tantamount to trying to resuscitating a long dead horse or bringing back from the ashes the proverbial sphinx?
By Lamin Momodou Manneh
Senior Special Adviser,
Central Bank of the Gambia
Introduction
Reflections and efforts have been underway over the past couple of years towards reintroducing specialised development banking in the Gambia, with the Central Bank and the Ministry of Finance and Economic Affairs in the forefront. I am not privileged to know where this initiative exactly stands at the moment, but I can say definitely that development banking in Africa, including in our dear country, The Gambia, has a chequered and very intriguing history. During the first three decades of independence of most African countries, development banks as specialised financial institutions had a prominent and strong presence on their financial landscape. But with effect from the early 1990s, they either began to disappear under the combined weight of political interference, bad loans and bad management or underwent radical restructuring or eventually absorbed by other banks, mostly commercial banks. This has also been the case in The Gambia, with the Gambia Commercial and Development Bank.
However, there was a rekindling of interest in, and attention to, development banks with the onset of the global financial crisis in 2007/2008. It is ironical that while development banking through specialiszed institutions virtually ceased in most African countries during the above-cited period, they have continued as important elements of the modern financial systems in a significant number of developed and emerging countries, such as Germany, Holland, Japan or Brazil. It will be useful for comprehending all this by first recalling what development banks mean and contextualising their original role and functions in modern financial systems. This will also allow us to answer the important question posed in the title of this article, whether “Reviving Specialised Development Banking in The Gambia will be tantamount to an attempt to resuscitate a long dead horse or bringing back from the ashes the proverbial Sphinx”.
What are development banks and what is their role in modern financial systems
As self-evident as it is, there is no precise definition of the development bank. Different definitions exist in the literature and focusing exclusively on one of them will be akin to the proverbial “six blindmen and the elephant”: each definition may only cover one facet of development banking, but when they are all pulled together all the essential elements of development banking could be fully captured. For instance, William Diamond and Shirley Bosky consider industrial finance and development corporations as development banks. Thus, for them, a development bank is a long-term lending institution. According to them, “Development banks are financial institutions established to lend (loan) finance (money) on the subsidised interest rate. Such lending is sanctioned to promote and develop important sectors like agriculture, industry, import-export, housing and allied activities.”
The following definition attempts to pull together all the essential elements of development banks and I quote: “ A Development bank is essentially a multi-purpose financial institution with a broad development outlook. A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (but mainly medium as well as long-term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities – economic development in general. In short, a development bank is a development-oriented bank” (Leonce Ndikumana etal, 2021). In some countries, even more specialised development banks, such as for agricultural development, housing banks or industrial development banks existed or still exist side by side with general purpose development banks.
A country’s financial system comprises of a range of interconnected financial institutions, both formal and informal as well as bank and non-bank. At the apex of the financial system of countries is normally one form or other of a central bank, responsible for controlling a country’s money supply, determining monetary and exchange rate policy as well as regulating and supervising the financial system. Over the past few years, particularly with effect from the 2007/2008 global financial crisis, central banks have played more explicit or “activist” countercyclical roles in helping to stave off recessions or maintain economies on a path of positive growth trajectories in the face of numerous headwinds through Quantitative Easing in the more advanced economies and through a variety of ways in promoting sustainable growth and development in developing countries, notably in Africa.
In most modern financial systems, commercial banks occupy the most prominent and visible position, as acceptors of deposits and providers of short-term credit. Importantly also, other elements of the financial systems include savings banks, microfinance institutions, insurance companies, pension funds and investment banks, specializing in granting of medium to long – term credit as well as capital markets that operate through stock exchanges. Side by side with these modern and formal financial institutions is a range of informal and in many instances unregulated systems of finance.
Both economic theory and empirical evidence strongly underscore the critical role that the financial sector plays in the growth, development and transformation of economies across the globe. This is evident from the functions of a financial system. Perkins, Radelet et al (2002) grouped these into four major categories: “First, the financial system provides a medium of exchange and a store of value, called money, which also serves as a unit of account to measure the value of transactions. Second, it provides channels for mobilising savings from numerous sources and channeling them to investors, a process called financial intermediation. Third, it provides a means of transferring and distributing risk across the economy. Fourth, it provides a set of policy instruments for the stabilization of economic activity”.
It is generally accepted that the classical and neoclassical constructs of financial systems and their functions did not feature explicitly the theory and practice of development banking as such, given their underpinnings of free market principles. Thus, the rationale for the creation of specialized development banks, particularly in post-independence Africa was largely under pinned by “the theories of market failure” as well as the need to more explicitly integrate the developmental functions in the role of financial systems in developing countries aspiring for rapid and transformational growth, development and poverty reduction. In this context, market failure means that the nature of commercial banks does not allow them to provide in systematic manner long-term developmental funding. And so national development banks were progressively set up in African countries as they gained their independence in the 1960s as part of their strategic and policy tool kits for achieving rapid economic transformation and indigenization.
Indeed, for a period of 30 years, development banks in a significant number of the countries largely fulfilled the strategic objectives initially set for them. But by the early 1990s, they started faltering before falling like proverbial dominos across the financial landscape of the continent. Many countries have been making efforts over the past few years to reintroduce development banks into their financial architecture for reasons like those in the post-independence era: to achieve sustainable growth, structural transformation and inclusive development as well as accelerate just energy transition. As noted above, steps are being taken currently to reintroduce development banking in The Gambia as well.
What lessons can be learnt from both the earlier experiences of development banking in the Gambia in particular and Africa as a whole as well from recent endeavors in countries where their revival has been underway over the last decade and a half, that could inform Gambia’s own efforts. These will be done in the following sections of this article.
The Gambia’s Historical Experience with Specialized Development Banking
The historical case of the Gambia being reviewed here relates mainly to the experience with the Gambia Commercial and Development Bank (GCDB). But an Agricultural Development Bank also existed. This specific review of GCDB’s case draws extensively from a study by a former Deputy Governor of the CBG, Dr Seku Jaabi, entitled “Why Banks Fail” published in October 2017. The founding of the GCDB was spurred by the urgent and acute need for a national development bank to take up the responsibilities of facilitating economic growth and development as well as increasing financial inclusiveness in the Gambia. Accordingly, the GCDB was established by an Act of Parliament, specifically No.13 of 1972 as a corporate body. GCDB started with three shareholders as follows: The Gambia Co-operative Union (GCU) with 23 per cent, The Gambia Produce Marketing Board (GPMB) with 26 per cent and The Gambia Government, which owned a majority share of 51 per cent.
It is useful to recall the stipulated original mission for GCDB, which “was to assist the economic development of the Gambia, in particular by promoting trade, industry, agriculture, fisheries, mining, public works, communications, public utilities and tourism in the country and to operate all the usual banking business concerning commercial and development banks and in accordance with the by-laws of the bank”. (The Gambia Commercial and Development Bank Act No. 13 of 1972, Section 3). This is similar to the Acts establishing national development banks in other African countries in the immediate post-independence years, which is in line with the developmental role of development banks as indicated in the introductory section of this paper. But GCDB also had an important wing for commercial banking, which represented an attempt to address the then lack of indigenous ownership of commercial banks.
In this regard, it is noteworthy that before 1972, the only financial institutions of note in the country were the British-owned Standard Chartered Bank (SCBG) and the French-owned Banque Internationale pour le Commerce et l’industrie (BICI). In line with their raison d’etre, these banks principally oriented their lending and other banking activities towards multinational corporations and well-established businesses mainly owned by foreign entrepreneurs, with only very few indigenous enterprises having access to their financial services. Thus, the establishment of the GCDB constituted an important mechanism for addressing the evident market failure in the country’s financial system at the time. As aptly noted by Dr Jaabi, the mandate of GCDB in terms of small and medium-scale enterprises promotion, financing of public enterprises and provision of agricultural credit, both directly and indirectly through the Gambia Cooperative Union placed it in an operations environment different from other commercial banks in the country.
To be continued
In filling that gap, the GCDB unequivocally became the main source of normal banking services for the local enterprises and individuals. Thus, GCDB became the country’s largest commercial bank, in addition to its role as a development-oriented financial institution. By the mid-1980s, it was accounting for almost half (49 per cent) of the total deposits compared to 35 per cent and 16 per cent for SCBG and BICI respectively. Regarding loans and advances, GCDB recorded 88 per cent, with only 9 per cent and 3 per cent for SCBG and BICI respectively. Importantly also, GCDB accounted for more than half of the total commercial assets. All this made GCDB the undisputed dominant leader in the entire local banking system after a relatively short period following its establishment.
However, the overwhelming dominance of GCDB in the country’s banking system began to create serious problems by the early 1990s. These stemmed mainly from the extensive political and social pressures to provide lending to projects that had little commercial and even economic justification. This, combined with “inept management and/or inappropriate credit risk management, led to a very significant overhang of non-performing loans. These toxic assets impaired the financial condition of the bank, thus constraining its ability to finance creditworthy borrowers, to the detriment of national economic development.” (CBG, 1992).
As in similar circumstances in other African countries, the Government of The Gambia decided to take several measures to stave off serious disruptions in the work of GCDB. These measures included the following:
· The conversion of an outstanding International Development Agency (IDA) credit of D6.4 million into Government equity in GCDB and further D9.6 million capital injection in order restore its financial health.
· The conversion of D35 million loans and advances from the public sector into long-term facilities.
· GCDB loans of D72 million guaranteed by government (much of them non-performing) were placed into a Managed Fund Account and removed from the books of the bank to restore the bank’s health.
· Restructuring the management of GCD by replacing the Managing Director and some senior management officials with an expatriate Managing Director and more professionally qualified personnel.
Despite these financial and management restructurings, the bank’s worsening financial and operational performance was not stopped. In July 1990, as part of the financial restructuring plan, GCDB was converted into a public Limited Liability Company under the provisions of the Companies Act of 1995. The assets and liabilities of the bank were transferred and vested in the company as part of the divestiture and rationalization programme of the government. (Seeku Jabbi, 2017).
But in its bid to revive public confidence in the already shaken banking system, the Government took the decision to liquidate GCDB in June 1992. This marked a historic negative turning point in the trajectory of nurturing an indigenous specialized development banking institution in the country. The good assets and performing liabilities of GCDB were sold to Meridien BIAO Bank (Gambia) Limited. The residual assets and liabilities were taken over by the Asset Management Recovery Corporation (AMRC), a corporation established by Parliament in December 1992 to expedite the effective management and recovery of the “toxic assets”.
Is there a case for reintroducing specialized development banking in The Gambia?
Making a case for reintroducing a national development bank in The Gambia must be predicated on two major considerations. The first is the state of play in the country’s financial system and the extent to which the “market failures perspectives” regarding the rationale for establishing development banks is still operational. To put this interrogation in a more direct and simpler terms, the question could be asked as to whether the country’s current financial system is providing adequate financing for developmental and potentially transformational initiatives and projects, particularly through term loans carrying reasonable interest rates, which would otherwise be considered risky by commercial banks. The second point of interrogation relates to the adequacy of current and potential demand for term loans by both the emerging and established enterprises.
Regarding the first consideration, our comprehensive review of the country’s financial system indicates that though it is still growing, it has evolved into a modern financial system, with a plethora of bank and non-bank financial institutions. There is also a budding capital market. The country’s financial system is well supervised and regulated by the Central Bank of The Gambia, which strengthened in recent years the prudential policies and regulatory framework at its disposal. The financial system is steadily but surely embracing the application of technology (fintech). However, it is also clear from the review that there is an important gap in term lending. Commercial banking is predominant and many entrepreneurs, notably those intending to embark on venture and transformational investments find their interest rates high and loan periods on the short side.
With respect to the demand side, it is undisputable that there is need for determining in more precise ways the quantum of current and prospective demand for funding from such an institution. This will require a comprehensive demand survey and analysis. But in the meantime, it is safe to assert that sufficient impressionistic evidence exists that points to significant unmet demand for term lending normally provided by development banks. For instance, during the Investment Forum event of the OIC Conference in May 2024, numerous entrepreneurs expressed concerns about the shortage of term loans on terms and conditions that are conducive for long – term investments that are normally perceived as risky by commercial banks. The country’s transformational agenda as set out in the NDP 2 and the scope provided for enhanced private sector participation will also require high volumes of term lending.
From the foregoing, we can categorically state that reintroducing specialised development banking in the country “will not be akin to trying to revive a long dead horse”. It is, therefore, our humble opinion that effective application of the following lessons will provide a solid foundation for a new national development bank in the Gambia that could flourish while meeting demand for term loans:
· The first is political will on the part of the Government of The Gambia with backing from the Central Bank to re-establish a development bank in an emerging but very competitive financial sector, dominated by commercial banks;
· The second is the willingness of the government to grant autonomy to a competent management team, i.e. free from undue political interference.
· The third is development and application of an effective governance framework for the Development Bank, with high quality board of directors, who could exercise effective and efficient oversight of the bank’s operations without fear or favor;
· The fourth is putting in place an effective supervisory framework by the Central Bank;
· The fifth is sufficient capitalization that supports adequate resource mobilisation from other sources and robust lending activities.
· The sixth is nurturing of strong partnerships with the international financial institutions such as AfDB, Afrexim Bank, Dutch FMO, KFW etc as well as corresponding banks, coupled with a guarantee fund and strong support for the domestic client ecosystem
· The seventh is appointment of a well qualified, competent and highly ethical CEO and recruitment of qualified staff; and
· Last but not least is aggressive application of technology, fintech and artificial intelligence.
The views expressed in this article are not necessarily those of the Central Bank of The Gambia
