Lee-Roy Chetty
Lee-Roy Chetty

The role of development banks in times of crisis

Within a historical context, development banks (DBs) have been a critical instrument for governments and administrations to promote and facilitate economic growth. This has traditionally been achieved through providing credit as well as a plethora of advisory and capacity building programs to households, small and medium enterprises and large private corporations, whose financial needs are not sufficiently served by private commercial banks or local capital markets.

In the devastating wake of the 2008 financial crisis, the majority of DBs in Latin America, Asia, Africa, and Europe, have assumed a counter-cyclical role by scaling up their lending operations exactly when private banks experienced temporary difficulties in granting credit to the private sector.

Despite the slew of privatisations of state-owned financial institutions (SFIs) that has occurred over the past 3 decades, SFIs still continue to constitute an integral role in the global financial system. On average SFIs account for 25% of total assets in banking systems around the world. In the European Union, for example, SFIs represent 30% of the total financial system. Within a developing world context, the Brics regional formation which includes, Brazil, Russia, India, China and South Africa, contributes a level of market share of SFIs which is substantially higher than any region in the world.

DBs are typically the largest type of SFI.

During the peak of the global financial crisis between the periods of 2008-2010, most DBs played a counter-cyclical role by providing credit to private firms that were temporarily unable to access funding from private commercial banks or capital markets. This policy decision has re-defined the role of DBs during periods of economic distress. Moreover, the advent of the financial crisis has triggered new debates on the role of the state in the economy and, in particular, the financial sector.

DBs also continue to facilitate an active role in economies all around the world by providing credit to select sectors as well as fostering new investments in priority global activities such as clean renewable energy, bio-technology, environmental projects, as well as other traditional sectors and activities.

Due to their strong focus on SMEs and other entities not served by other mainstream financial institutions, DBs have emerged as an essential part of the financial inclusion agenda. They play an important role in serving new clients directly or through a network of private financial intermediaries, mitigating credit risks, and even developing innovative financial instruments to finance promising business ventures.

The aftermath of the global financial crisis continues to pose major risks for the world economy. Therefore, the fundamental role that DBs play within a turbulent macro-economic environment will continue to prove paramount. Thus, in the short to medium term, there are mitigating reasons for governments and administrations around the world to continue to modernise their DBs as well as provide them with the tools in order to become more effective and successful in fulfilling their policy mandates.

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