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.
Now you’re talking ,Leeroy. You are right on the money, this time . Please note that DBs and/or SFIs should also be deposit-taking banks like the usual private commercial banks and thus use the fractional reserve mechanism for leveraging loans from their deposits-creating credit from thin air. One issue that need s to be adressed is the use of reserve ratio adjustments to control inflation rather than only simply raising interest rates.
However , please bear in mind that compound growth on a planet of finite resorces is both impossible and undesirable from an ecological point of view and thus once optimum development of the economy has been achieved , we will need to resort to full reserve banking to control growth and maintain a steady-state economy.
Further more a more just distribution of resources and a reduction in inequality is also necessary for a stable society in the context of a steady-state economic paradigm.
Yes, but what exactly are the South African development banking institutions doing? You talk about the entire issue in theoretical terms, and then assure us that things are going fine and that the development banks are doing what they should be doing in BRICS and elsewhere. As far as I know, the Land Bank never recovered from the coup against Helena Dolny, and what is the DBSA up to? Inquiring minds want to know.
Thanks Yaj, good comment. Would like Lee-Roy to address your comment “please bear in mind that compound growth on a planet of finite resorces is both impossible and undesirable from an ecological point of view and thus once optimum development of the economy has been achieved , we will need to resort to full reserve banking to control growth and maintain a steady-state economy.”
Very important to address.
Fractional Reserve banking provides profits to banks they don’t deserve as they charge interest on loans they make with money they don’t have. So banks profits are subsidized by the borrower. If you or me do the same as a bank without a license, it is called counterfeiting which you can sit in jail for a long time. Banks are allowed to commit legalised fraud. Why? Is fractional reserve really necessary? No. A bank can rather issue a prommisary note on behalf of the borrower (buyer of services or goods) on the basis that they are sure that borrower will be able to substitute the promissory note with cash in whatever way. So the real loan then is made by the recipient of the promissory note, the seller. As with lay-buys, payment with a p note will be more expensive than cash. This interest should go to the real maker of the loan, the seller, not the bank. Banks should charge for their service of issuing a promissory note, evaluating the customer’s potential to pay back the promissory note i.e. the real loan from the seller and for any activity they have to do to ensure that cash payments from the buyer reach the seller. And whatever they need to do to reduce their risk e.g. taking out insurance on non-payment as they will have to honour the promissory note if the buyer does not. According to SA Banking act banks can make a loans of up to a total value of 800% of their assets and capital. So banks get interest from 8 times the value any other person or institution can. Fraud?