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The Role and Functions of Development Banking

The Role and Functions of Development Banking



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Published by kamaruzzaman007007
Role and Functions of Development Banking
Role and Functions of Development Banking

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Published by: kamaruzzaman007007 on Dec 16, 2009
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THE ROLE AND FUNCTIONS OF DEVELOPMENT BANKINGIntroductionDevelopment Banks or Development Finance Institutions (DFI’s) as these are normally called inthe financial world are a post World War II phenomenon. Their establishment in Africa, Asiaand other developing countries in most cases coincided with the attainment of independence.Their mission being
“to expedite the pace of development in accordance with the national  priorities and aspirations of the people”.
DFI’s fall into two broad categories viz. national DFI’s and regional DFI’s. Most of the nationalDFI’s in the developing world have been in existence for two to three decades. They wereestablished to serve as handmaidens of their governments in the implementation of their development plans.In places like India, a majority of the applicants for financial assistance from the DFI’s in theinitial stages were existing large industrial houses, or Managing agency firms. These institutionshad resources of men, material and money and were therefore, able to conceive, plan andimplement new or expansion projects successfully. Therefore, there was no problem of arrears.In the wake of socialist policies pursued by these newly independent states, further growth of large industrial houses and managing agency firms through DFI assistance was consideredmonopolistic and exploitative of the majority by the minority. These were conceived asinstitution reminiscent of the former British regime. This attitude led to a greater intervention of the state in the regulation and operation of DFI’s, which in almost all cases were state owned.
In pursuit of the socialist policies, there was need for a redefinition of guidelines to be followed by DFI’s in extending credit to their clients. The new guidelines placed greater emphasis onencouraging new entrepreneurs, technocrats, educated unemployed, professionals, and small-scale enterprises and above all upon balanced regional development. All these were aimed atfulfilling socially desirable objectives. This was a beginning of a new phase in the operations of DFI’s, and called for fresh orientation. It entailed relaxation in a number of aspects likesponsors’ contribution, security margin, longer gestation period etc. Inadequate resources andabsence of any fall back reserves of the new category of sponsors and their insufficientmanagerial skills were manifest soon. Pursuit of new guidelines exposed DFI’s to greater risks,resulting in widespread sickness of the enterprises. Starting at a moderate level, the problemassumed great dimensions over a period of time, although it did have a spin off in the form of anew breed of successful entrepreneurs.Regional DFI'sRegional DFI's were established as part of the economic cooperation of blocks of neighbouringstates in Africa. Their main role being to facilitate the process of accelerating regionalintegration process.These included East African Development Bank (EADB), which was established at the timewhen the East African Community was one of the strongest unions in the whole of Africa.EADB was set to promote the economic development in the region and to act as a catalyst in promoting balanced economic development amongst member countries.Among the regional DFI's are African Development Bank (ADB), Preferential Trade Area Bank (PTA), Arab Bank for Economic Development of Africa (BADEA) and Islamic Development
Bank (IDB). In a bid to strengthen the operations of DFI's, umbrella organisations were created.These include The Association of African Development Finance Institutions (AADFI),established in 1975 in Abidjan (Côte d'Ivoire) under the auspices of the ADB.Its objective being to serve as a medium for technical exchange and cooperation between thecontinents' DFI's and to promote economic ties between African countries with a view toaccelerating the regional integration process. These objectives were to be achieved by thedissemination of technical data through publications, seminars, conferences, round-tables andmeetings. The membership of AADFI comprises 84 members including 64 ordinary members(national DFI's), 11 special members and 9 Honorary members. The World Federation of Development Finance Institutions (WFDFI) is an umbrella of sister DFI's from Asia (ADFIAP),Latin -America (ALIDE) and Europe (ADRM). AADFI is also a member of this organisation.The Present ScenarioThe progressive weakening of the financial position of most of the DFI's and their almostexclusive reliance on subsidised sources of finance, either from the national governments or fromthe external financiers has led to a rethinking on the operations of DFI's in the present-day world, particularly in market oriented, deregulated economies. This was in light of the fact that, theconventional differences between DFI's and commercial banks has been gradually disappearing.Commercial banks have increasingly undertaken development-financing functions. Also, withdevelopment of capital markets and increasing availability of financial instruments to financemodern business, the DFI's realised increasing competition for the provision of financialservices. DFI's in response are now diversifying into several fields including merchant andcommercial banking either on their own or through their specially created subsidiaries.A Development Bank is a multilateral development finance institution dedicated to improvingthe social and economic development of its member nations. Its primary emphasis is the welfareof the people. For example the Asian Development Bank's overarching goal is to reduce povertyin Asia and the Pacific. It helps improve the quality of people's lives by providing loans andtechnical assistance for a broad range of development activities.
 A development bank's policies or programs center on the following priorities
:Economic growthHuman developmentGender and developmentGood governanceEnvironmental protectionPrivate sector developmentRegional cooperation
Given below are the principal functions of a development bank 
Extend loans and equity investments to its developing member countries (DMCs) for their economic and social development.
Provides technical assistance for the planning and execution of development projects and programs and for advisory services.
Promotes and facilitates investment of public and private capital for development, and
Responds to requests for assistance in coordinating development policies and plans of itsdeveloping member countries.
Formation of Development banks In India:
Development banks were set up in India at various points of time starting from the late 1940s tocater to the medium to long term financing requirements of industry as the capital market inIndia had not developed sufficiently. The endorsement of planned industrialization at thenational level provided the critical inducement for establishment of Development banks at bothall-India and state levels. In order to perform their role, DBs were extended funds in the form of Long Term Operations (LTO) Fund of the Reserve bank of India and government guaranteed bonds, which constituted major sources of their funds. Funds from these sources were not onlyavailable at concessional rates, but also on a long term basis with their maturity period rangingfrom 10-15 years. On the asset side, their operations were marked by near absence of competition.A large variety of financial institutions have come into existence over the years to perform avariety of financial activities. While some of them operate at all-India level, others are state levelinstitutions. Besides providing direct loans, financial institutions also extend financial assistance by way of underwriting and direct subscription and by issuing guarantees. Recently, some DBshave started extending short term/working capital finance, although long term lending continuesto be their major activity.

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