Development Banking and its importance around the world by Myriam Stern Velázquez.
With the transformation of the National Export Bank (BANDEX) into the Development and Export Bank (BANDEX), we have, for the first time, in the Dominican Republic, a financial intermediation entity dedicated to development financing. Indeed, Law 122-21, which created the new BANDEX, indicates, in its article 2, that the Development and Export Bank has, among its main objectives, the promotion, with financial and technical support, of development projects. or investment, viable and profitable, promoted by the public or private sector. In this regard, it is important to highlight a very particular text in Law 122-21. It indicates that, within its objectives, BANDEX is instructed to contribute to the development of Micro, Small and Medium Enterprises (MSMEs). This instruction in Law 122-21 is nothing more than one of the ways in which development banking can have a high impact on, pardon the redundancy, the development of a country.
Therefore, in this article we will seek to talk a little about what development banking is and its importance around the world. It is important to highlight that we will not be referring to global or regional development banking, as is the case of the Inter-American Development Bank, but to national development banking.
In principle, development banks differ from private or commercial banks in their nature and purpose. While commercial banks are profit-driven, development banks seek to align themselves with public policies and pursue a country's development. In particular, development banks must facilitate financial intermediation to different productive sectors. The definition of a productive sector will vary depending on the country. In the case of the Dominican Republic, specifically, Law 122-21, Paragraph I, Article 2, establishes that " productive sectors shall be understood to be those dedicated to the agricultural sector, including agriculture, livestock, poultry farming, forestry, beekeeping and fishing, mining, manufacturing, tourism, renewable energy, telecommunications and construction, as well as any other sector that contributes to the production of national goods and services, for the purpose of generating an exportable supply ."
In his paper “Development Banking and Productive Financing,” Daniel Titelman makes an interesting point about why development banks exist. He highlights the following: “ The existence of market failures, asymmetric information, and endogenous credit segmentation have justified the existence of public development banks (…) This allows public development banks, with renewed operational and corporate governance models, to play an important role in promoting production, either by facilitating access to financing for agents excluded from this process and/or as a catalyst and driver of new forms of financial intermediation .”
This reflection shows us a very important aspect of development banking. Due to its nature and objectives, it seeks to promote financing in sectors other than commercial banking. Such is the case, on many occasions, of MSMEs. Hence, development banking could be considered an essential tool for the inclusion and promotion of financial innovation.
Development banking is not a current concept either. Its origins, in Latin America, for example, can date back to the 19th century. Currently, there are several national development banks known globally, such as: KfW (Germany), National Bank for Economic and Social Development (Brazil), Nacional Financiera (Mexico), Banco de Desarrollo Productivo (Bolivia), Banco de Comercio Exterior of Colombia (Colombia), among many others.
On the other hand, development banks can also act as a second-tier bank, channeling financing through commercial banks. This can contribute to more effective risk management and, in addition, to reaching a larger population. In the case of BANDEX, Law 122-21 expressly authorizes the entity to serve as such. In this vein, in November 2021, Banco Múltiple LAFISE and BANDEX signed a Global Credit Line contract in order to provide financing to small and medium-sized companies in the export sector.
It is also a practice that, as a public financial intermediation entity, development banks have a guarantee from the State. This is also the case of BANDEX, which has the subsidiary and unlimited guarantee of the Dominican State in accordance with article 1 of Law 122-21. This guarantee can be of particular importance to attract financing from multilateral entities at a cheaper cost and then be able to lend those funds at a lower cost to the productive sectors.
Regarding their activities, development banks generally focus on providing financing and complementary non-financial services, such as advising clients on preparing loan applications or even structuring projects. They may also offer instruments like factoring , leasing , trust administration, and, in the case of the Dominican Republic, BANDEX can act as a guarantee fund administrator. As Titelman points out, “ In financing small and medium-sized enterprises, the supplier development program through the implementation of electronic factoring, promoted by Nacional Financiera in Mexico, has resulted in timely financing at a lower cost .”
Regarding the prospects for development banking, Romy Calderón Alcas, in her work “Development Banking in Latin America and the Caribbean,” indicates that “ development banks can act as catalysts, serving as instruments for creating markets and financial instruments initially geared toward their own clientele, but later destined to engage with traditional commercial banks, which, in turn, thus incorporate into their operations companies that previously did not qualify for their services. In this way, development banks and commercial banks are linked by a complementary relationship in their financial functions . Looking ahead, it is possible to affirm that the role of development banks will be determined by the challenges that economies will face, which can be summarized as follows: i) the need to achieve sustained and stable growth rates to generate the well-paid jobs demanded by the population, but above all to help overcome extreme poverty; ii) achieving better levels of productivity and competitiveness; and iii) achieving a Balanced and environmentally respectful regional development, as well as greater integration of production chains, especially those related to export activity. Development banks must be able to offer specific products to meet the needs of each stage of a company's development, from project conception, investment and growth stages, to the possibility of restructuring.
As can be seen, development banking can be a key element for financial inclusion and innovation. Likewise, it can meet the financial needs of a sector that may not meet the regulatory and traditional requirements of commercial banking. Development banking should be seen as a necessary public instrument to promote productive sectors and offer financing for development projects in accordance with the public policies of the State. As a public financial intermediation entity, it complements traditional commercial banking and contributes to the development of a particular State. With the promulgation of Law 122-21, the intention is that the Development and Export Bank (BANDEX) precisely meets this objective and can finance the development of both MSMEs and the projects necessary for the country.
1,2 Titelman, Daniel (2003), “Development Banking and Productive Financing”, available at: https://repositorio.cepal.org/bitstream/handle/11362/5119/S0310657_es.pdf?sequence=1&isAllowed=y (last visit: January 5, 2022)
3 Calderón Alcas, Romy (2005), “Development banking in Latin America and the Caribbean”, available at: https://repositorio.cepal.org/bitstream/handle/11362/5138/S054250_es.pdf?sequence=1&isAllowed=y (last visit: January 5, 2022)
