Development Banks: Towards a new expansion in support of sustainable development

The public development banks will be the subject of a meeting of the utmost importance for the future of the global financial system, the Finance in Common Summit, to be held in Paris between November 9 and 12, as part of the Paris Peace Forum.

Under the leadership of Rémy Rioux, Chair of IDFC (International Development Finance Club) and Chief Executive Officer of AFD (French Development Agency), successively meetings will hold aimed at giving a new impetus to the activity of development banks. Preceding the meeting of the Heads of State and Government, as well as the meeting of responsible for Funding Institutions, on November 11 and 12, the 14th AFD International Research Conference on Development entitled The Visible Hand. Development Banks In Transition, will be held on November 9 and 10 (online in the afternoon -Paris time- for compatibility of time zones). It will address the basic issues raised by the purpose and management of public development banks. Some of the brightest international specialists will discuss four key topics (Link to the agenda).

The International Research Conference itself will be preceded by research workshops to be held on November 3, 4 and 5 in the afternoon. A research programme on development banks has indeed be implemented in prepartion for the conference, funded in part by AFD and led from Beijing by INSE (Institute of New Structural Economics at Peking University, and chaired by Justin Yifu Lin, former Chief Economist of the World Bank, Doctor Honoris Causa, and former Visiting Professor at the University of Clermont), with the collaboration of several research institutions and international organizations spread around the world.

A Policy Paper Can development banks step up to the challenge of sustainable development? has been set up by Regis Marodon, who at the AFD coordinates the preparation of the conference. The document puts into perspective the potential strengths of development banks. It highlights the role they can play in accelerating development in a sustainable way and progress towards the sustainable development goals (SDGs) adopted in New York in 2015, as well as the will of the IDFC group to move in that direction. Let me thank Régis Marodon and the AFD for giving us the privilege of publishing this basic document in English and French in preview of the conference.

This policy paper is accompanied by three other papers, also prepared at FERDI for the Conference.

In The allocation of resources of national development banks: Does it fit development goals?Laurent Wagner examines from a wide range of business data around the world the comparative probability of access to public and private banks by region. He shows that the gap in favour of public banks is greater in the less developed areas. These results provide a first empirical basis for showing the specific contribution of development banks to support vulnerable areas. The research undertaken should lead to propose a system of evaluation of the extent to which public development banks allocate their funds between areas and over time according to the SDGs, in other words an assessment of their selectivity with respect to the SDGs. This assessment (the “SDGs selectivity”) would also be an instrument of accountability for the public development banks.

In the policy brief Are public development banks counter-cyclical? A brief, Florian Léon provides a brief assessment of the knowledge about the contra-cyclical nature of development banks: Despite the difficulty of generalizing from studies that have remained confined to Latin America and Europe, there are some manifestations of contra-cyclicality, which nevertheless seems to depend on the institutional framework and is not automatic. On this point the aforementioned study by Laurent Wagner suggests that contra-cyclicity appears on a broader geographical basis.

In the policy brief Development banks in Sub-Saharan Africa: Some historical lessons for a re-foundation? Paul Derreumaux, whose knowledge of the West African banking system and its evolution is exceptional, analyses the experience of development banks in sub-Saharan Africa, especially in French-speaking Africa. The enthusiasm for them in the aftermath of independence having been followed by a disappointment due to numerous failures. It was important to learn from this so that the present desired growth of development banks would be based on what the author calls a "refoundation": This involves an improvement in the environment, especially the legal one, a competitive environment allowing development banks to choose their comparative advantage and the choice of electronic means that offer them the opportunity to better finance very small businesses and farmers. Building on experience to better base the desired expansion of public development banks is indeed the challenge.

Briefly stated, for development public banks (DPBs) the SDGs are the priority, and profitability is a constraint conditioning their survival. On the opposite for private banks profitability is a priority, and taking into account the SDGs is to become a constraint.

In the future, FERDI intends to continue to work on development banks and, if given the means, to be able, at least for some of them, to assess their behavior with respect to SDGs, in particular through the allocation of their funds. To reinforce their vocation and the rationale of their expansion, development banks should be able to evidence the consistency of their operations with the Sustainable Development Goals.