Learning Curves

IED
April2009

SupportforFinancial IntermediationinDeveloping MemberCountries

ADBhassupported476projectstotaling$16.8billion,orabout14%ofitspublicsectorlending,asofend 2007.ADBprovidescreditlines,policybasedloans,housingsectorloans,andfinancialleasinglinesin supportoffinancialintermediationinitsDMCs. Thisevaluationupdate1findsthatADBsprogramloanmodalityinsupportoffinancialintermediationfor privatesectordevelopmenthasgenerallybeensuccessfulandshouldthereforecontinue.

Background ThecreditlinemodalitywasdesignedbytheAsian DevelopmentBank(ADB)whenmostdeveloping membercountries(DMCs)wereshortofforeign exchangefortheequipmentimportsofprivate enterprises.Thecreditlineswerechanneledmainly throughgovernmentowneddevelopmentfinance institutions(DFIs).Creditlinestotaling$4.6billionhad beenextendedto25DMCsasofend2007,withmanyof thesesupportedbytechnicalassistance(TA). Despitetheseefforts,industrialdevelopmentand economicgrowthcontinuedtostagnateinmostDMCs. Theenvironmentforbusinessandforprojectsfinanced underthecreditlineswasunfavorable.Private industrialenterpriseswereoftenheldbackfrom importingequipmentandrawmaterialrequirementsby foreignexchangeconstraints.Inaddition,becausecredit linesweredenominatedinforeigncurrency,the recipientDMCsandDFIswereexposedtoforeign exchangerisk. Creditlineswereusedwhenprotectionandsupport forinfantindustrieswasadominanttheme.Once marketsbecamemoreopenandtariffprotectionand barriersreduced,theindustrieswereexposedtoamore competitivemarket.SomeDFIstransformedthemselves intouniversalbankstoaccessmarketforresources ratherthancontinuouslydependongovernment guaranteedfunds.TheirneedforcreditlinesfromADB wasreduced.
Independent Evaluation Department Asian Development Bank

SummaryofFindings Thereporthasreviewedthepastexperiencesand evolvingnatureofADBspracticesinfinancialinterme diationforprivatesectordevelopment,mainlythrough theestablishmentofsmallandmediumenterprises (SMEs).Italsoreexaminedgoodpracticesinthisareaas adoptedbyvariouscountriesandotherinternational developmentorganizations. GoodPracticesinFinancialIntermediationLending. ADBsfinancingmodalitiesandpracticesinrespectto financialintermediationforprivatesectordevelopment havechangedandevolvedovertheyearsinlinewiththe changesintheeconomicenvironment. CreditlinescouldstillbeusedforDMCsthathave acuteshortagesoflongtermresourcesforfunding investment.Theuseshould,however,besolelyonthe provisionoflongtermlocalcurrencyresourcestothe privatesectorunderswaparrangements.ADBspresent guaranteefacilityshouldalsobeusedtoprovideguaran teestolocalfinancialinstitutionstomaketherequired longtermresourcesavailableinlocalcurrency.Financial institutionsinvolvedshouldagreetoraiselongterm resourcesontheirowninthedomesticmarkets. ADBsreformbasedprogramloanpracticeshave generallybeensuccessfulsincetheyhavehelpedto expandfinancialintermediationforprivatesector development.ADBcouldcontinuetousethepolicy basedlendingpractices,withappropriateTAsupport,to furtherdiversifyandexpanditsfinancialintermediation.

6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4100; Fax +63 2 636 2161; evaluation@adb.org; www.adb.org/evaluation/

Initiatives.Variousinitiativescouldalsobetakento ensureanefficientandeffectivefinancialintermedia tionsystem:(i)improvetheinvestmentclimateto encourageprivatesectordevelopmentandforeign investmentthroughstrengtheningofpolicies,proce dures,andincentiveframeworks;(ii)makethefinancial sectormorebroadbased,competitive,andefficientto reduceoverrelianceonbankingsystems,whichcould beachievedthroughthedevelopmentofthecapital market;(iii)spreadfinancialintermediationtooutlying areasbydevelopingruralsavingsandmicrofinance services;(iv)buildinstitutionsandenhancecapacityin goodgovernance,internationalstandardsforbank regulationandsupervision,capitaladequacy,loan classificationandprovision,accountingandauditing, selfregulation,riskassessment,andmitigation, includingtheuseofriskhedginginstruments,liquidity management,debtcollectionprocedures,anduseof informationtechnologyandmanagementinformation systems;(v)privatizeandsubcontractservicesof conglomeratestoSMEstopromotefurtheropportunities topromoteprivatesectorandSMEdevelopmentand expandfinancialintermediation;and(vi)developskills, trades,entrepreneurship,andbusinessdevelopment services. FinancialAssistance.Otherformsofassistanceto increasefinancialintermediationfortheprivatesector mayinclude(i)guaranteemechanismsforlongterm depositmobilizationthroughguaranteefacilityand advisoryTAtosetupappropriateorganizations, policies,procedures,products,training,and managementinformationsystems;(ii)guarantee mechanismsforcorporatebondissuestopromote investment;(iii)expandedsupportforhousingfinance byprovidinglongtermfundstofinancialinstitutions andTAthatspecificallytargetmortgageunderwriting andservicingforeachbanktowhichADBprovides financialsupport;equityinvestmentstostarthousing financecompaniesorbanks,aswellasprovidefunding formortgageinsurancecompanieswhichcanhelp reachabroaderbaseoftheincomesegment;and guaranteesonmortgagebackedsecuritizationswhich providelongertermfundingformortgages;(iv) guaranteemechanismsforexportfinancingtoenable commercialbankstoprovideexportfinancingtothose SMEsthatlacktraditionalformsofcollateraltosecure theirexportfacilities;(v)furtherexpandedlease financingoperationsthroughADBguaranteestolocal financialinstitutionstoraisemediumtolongterm financingforleasingoperationsbyprovidingadvisory TAfortheestablishmentofthenecessarylegal,regula
Learning Curves available @ www.adb.org/evaluation/
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tory,tax,andaccountingandauditingframeworks;staff traininginleasingoperations;thestrengtheningofthe managementinformationsystems,amongothers;(vi)an Asianbondguaranteecorporationthatcouldextend guaranteesforthedevelopmentofthebondmarketsin AsiaandthePacific;(vii)expandednonperformingloan (NPL)resolutionandassetmanagementcorporations throughguaranteesonloansraisedbylocalinstitutions topurchasetheNPLsatdiscountedrates;(viii)asset securitizationtodevelopthesecondarymortgagefinance marketsandlaythefoundationforthisthroughan advisoryTA;andsettingupequityinvestments;and(ix) developmentofnonbankfinancialinstitutionstomake thefinancialsectormorebroadbased,competitiveand efficientthroughdevelopmentofsupportininvestment banks,venturecapitalcompanies,pensionsandmutual fundsandotherformsofcontractualsavingschemes, creditcards,andotherformsofelectronicbasedfinancial servicescomplementingtheservicesofdevelopmentand commercialbanks. Issues Integratedprogrammaticapproach.Anintegrated programloanmodalityhadnotbeenadoptedinthe DMCsuntilrecently.ADBhasbeguntoadoptan integratedandcomprehensiveapproachtoprogram lendingthroughprogramclusters,whilefocusingon selectedsectors. Privatesectordevelopment.Itwouldbeusefulto developstrategiesforincreasingfinancialinterme diationforprivatesectordevelopmentorDMCsand linkthesewithitsoverallcountrypartnership strategy. Flexiblemodalitiesandcontinuouspolicydialogue. ADBspracticesandmodalitiesshouldbekept flexibleandadaptableduringtimesofvolatile economicsituation.Continuousdialoguewith policymakersisneededtomonitorearlywarning signsofeconomicandfinancialdevelopments.

Feedback ADBManagementsresponseandtheChairs SummaryoftheDevelopmentEffectivenessCommittee Discussionsarenotrequiredforthisevaluation.The studywascompletedinDecember2008.

ADB.2008.SupportforFinancialIntermediationinDeveloping MemberCountries.SpecialEvaluationStudyUpdate.Manila. Available:http://www.adb.org/Documents/SES/REG/SES REG200871/SESREG200871.asp

Team Leader: Cheolghee Kim, Tel +63 2 632 4151, cmkim@adb.org