WORLD BANK GROUPFinance & Markets

Role and Challenges of Specialized

Financial Institutions

“Seminar on Specialized Financial Institutions in the New Edition: Role

of Financial Inclusion for Inclusive and Sustainable Growth”

The findings, interpretations, and conclusions expressed in this presentation are entirely those of the author. They do not necessarily represent the views of the International Bank for

Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Jose De Luna MartinezBangkok, Thailand, August 23, 2016

Contents

1

2

3

4

Overview of SFIs – Learning from the past

Features of SFIs and challenges

Financial inclusion in ASEAN

Final remarks

Overview of SFIs

(Development Banks)

Agriculture

Infrastructure

International

trade

Industry

Housing

Tourism

Promote

economic

development

Development Banks (DBs)

Loans

Guarantees

Advisory

services

Technical

assistance

Households

SMEs

Local

governments

Large private

firms

Private financial

institutions

Instruments SectorsClients

5

- What is a good example of an SME development bank, agriculture bank, infrastructure bank?

- How do you make a DB independent from undue political interference?

- How can a DB become financially self-sustainable?

- Should DBs be regulated in the same way private commercial banks are regulated?

- How should the performance of a DB be evaluated?

- How to enhance transparency and governance of DBs?

DBs – Demand for Technical Assistance

Survey Respondents

90 DBs from 61 Countries

Africa Americas Asia Europe and Central Asia

Middle East and North Africa

1. Angola 2. Côte d'Ivoire 3. Democratic

Republic of Congo

4. Ghana 5. Kenya 6. Nigeria 7. Rwanda 8. South Africa 9. Sudan 10. Tanzania 11. Uganda

12. Antigua and Barbuda

13. Bolivia 14. Brazil 15. Canada 16. Colombia 17. Costa Rica 18. Curacao 19. Dominican

Republic 20. Ecuador 21. Guatemala 22. Mexico 23. Paraguay 24. Peru 25. Uruguay 26. Venezuela

27. Bangladesh 28. Bhutan 29. Cambodia 30. China,

People's Rep. 31. Cook Islands 32. Fiji 33. India 34. Malaysia 35. Micronesia 36. Mongolia 37. Nepal 38. Niue Island 39. Pakistan 40. Palau 41. Philippines 42. Samoa 43. Sri Lanka 44. Thailand 45. Tonga 46. Vanuatu 47. Vietnam

48. Bulgaria 49. Croatia 50. Finland 51. Germany 52. Hungary 53. Latvia 54. North Cyprus 55. Norway 56. Poland 57. Slovakia 58. Slovenia 59. Turkey

60. Egypt 61. Oman

Source: WB Global Survey of Development Banks, 2012.

Features of Development Banks

KfW(Germany)

China Development

Bank

Brazil National Development

Bank

Malaysia Development

Bank

NABARD (India)

Vietnam Bank for Social Policies

Development Bank of Southern

Africa

Agriculture Bank of Turkey

Banobras(Mexico)

There are differences in

terms of:

• Policy mandates (broad vs.

narrow)

•Ownership (state-owned vs.

mixed ownership)

• Funding (deposit vs. non-

deposit taking institutions)

• Lending models (wholesale

vs. retail)

• Regulation

• Corporate governance

•Performance

Category 1

Poor performance

(20%)

Category 2

Satisfactory

performance (70%)

Category 3

High performance

(10%)

• High dependence on

government funds

• Recurrent financial

losses

• Conflicting social

and economic

objectives

• Limited economic

impact

• Vulnerable to undue

political interference

• Profitable institutions

• Well-administered

…but there is room to

improve:

• Policy mandates

• Corporate governance

• Risk management

• Financial strength

• High innovation

capability (financial

products, outreach

target market in

collaboration with

private financial

institutions)

• Right combination of

financial and advisory

services

• High standards of

corporate governance

and accountability

Performance - DBs

Features of SFIs

and Challenges

Most DBs are fully owned by the State

• 74% of DBs are fully owned by the State.

• Private sector is a minority shareholder in 21% of DBs.

• In 5% of cases, the State is a minority shareholder.

Percentage of State Ownership in DBs

Funding Features of DBs

Features Yes No

Does your institution take deposits from the general

public?

41% 59%

Can your institution borrow from other financial

institutions or issue debt in local markets?

89% 11%

Does your institution receive direct budget transfers

from the government?

40% 60%

Does the government guarantee your institution’s

debt?

64% 36%

Policy Mandates of DBs

DBs by Type of

Mandate

Market niche Percent of

DBs in the

survey

1. Specific 53%

Agriculture 13%

SMEs 12%

International trade 9%

Housing 6%

Infrastructure 4%

Local governments 3%

Industrial and other 6%

2. Broad 47%

Total 100%

Type of Clients Served by DBs

92%

60%

55%

54%

46%

0% 50% 100%

SMEs

Large private corporations

Individuals and households

Other state-owned enterprises

Other financial institutions

How Do DFIs Lend?Wholesale vs. Retail Lending

Only wholesale

12%

Only retail36%

Both retail and

wholesale52%

How does your institution lend?

Use of Subsidized Interest Rates by DBs

• 50% of DBs that provide loans at subsidized interest rates cover the cost the

subsidies through government transfers.

• 26% finance them through cross-subsidization (profits from profitable

business lines).

• 38% finance through other means (mainly cheaper credit lines from IFIs)

Yes

50%

No

50%

DFIs that Provide Some Lending Products at Subsidized Interest Rates

Minimum Return on Capital

• For institutions that are required to achieve a minimum return on capital, targetsinclude:

– Maintaining real capital constant (earn a return not lower than the inflation rate)

– Achieving a rate of return not lower than the governments' long-term borrowing cost

– Explicit return on capital

Yes

22%

No78%

Are DFIs Required by the State to Achieve a Minimum Return on Capital or Equity?

Regulation and Supervision of DBs Yes No

Is the DB supervised by the same institution that supervises private commercial banks 75% 25%

Does the DB comply with the same prudential rules (capital adequacy ratio, loan classification, loan provisioning, etc.) as commercial banks? 79% 21%

Is the DB rated by an international rating agency? 48% 52%

Regulation and Supervision of DBs

Corporate Governance of DBs

Boards of DFIs are dominated by government

representatives:

• Average board size is 9 members with a wide range of

government representatives (Ministries of Finance, Labor,

Social Affairs, Housing, Trade, Industry, etc.)

• Although 79% of boards in DBs have independent members,

they are a minority in the board.

• By large, the government appoints all board members and

CEOs of the DBs.

Transparency

• High disclosure of annual reports and audited financial

statements (90%), but less disclosure in terms of regulatory

capital and capital adequacy ratio (less than 60%).

• The key challenge is to continuously balance two competing

objectives:

Key Challenges for DBs

Policy Objectives

Financial Sustainability

Failure to balance this two objectives has resulted in:

• High dependence of DBs on government budget and transfers

• High NPLs with ultimate failure in the long-run.

• Broad, unfocused and conflicting mandates of DBs.

• DBs competing with private financial institutions and

undermining the development of a private financial system.

• Limited economic impact.

19

Areas of Opportunity for DBs

Clear

Mandate

Sound

Governance

Effective Risk Management

Performance Monitoring and

Evaluation

20

DevelopmentBanks

Financial inclusion in ASEAN

Adults with an account

(%)

In ASEAN, 50% of adults reported having an account in 2014

ASEAN

50

2011 2014

Source: Global Findex database. Lao PDR data is 2011.

The share of adults with an account increased by 8 percentage points,

from 42% in 2011 to 50% in 2014.

Adults in rural areas with account

(%)

36% of adults in rural areas reported having an account

Account penetration in rural areas in high income OECD economies is 2.6

times ASEAN’s.

ASEAN

36

Source: Global Findex database. Lao PDR data is 2011.

Adults receiving wage payments by method

In ASEAN, 71% of adults reported receiving their wages in

cash

The ratio of ASEAN to high-income OECD economies of people

receiving wages in cash is 6 times

Source: Global Findex database. Into an accountIn cash

In ASEAN, 69% of adults that reported receiving government

transfers did so in cash

However, some countries are moving towards cashless government

transfers schemes

Source: Global Findex database.

ASEAN

69

Adults that receive government transfers in cash

(% of adults receiving government transfers)

How adults sent remittances?

(%)

Source: Global Findex database.

Note: Respondents could report using more than one method.

In ASEAN, 61% of adults that sent remittances used cash and

33% used informal channels to do their transactions

In cashMoney transfer operator

Financial institutionMobile phone

Source: IFC

But only 15% of all MSMEs have access to credit

Final remarks

Conclusions

• Between 2011 and 2014, ASEAN has achieved a substantial increase in

financial inclusion.

• However, 264 million (59%) of adults 15+ in ASEAN still remained

unbanked.

• With the expansion of the middle-income class in ASEAN, the demand for

access to finance and credit is expected to continue to grow.

• Many countries in ASEAN have a large opportunity for increasing

financial inclusion.

• For households in ASEAN, cash still constitutes the main means for

executing financial transactions (payment of wages, government

transfers, payment of bills, receiving and sending remittances).

• A large number of adults with accounts at financial institutions still prefer

to conduct and settle their transactions in cash.

• DBs are an important policy tool to foster development and financial

inclusion around the world

• However, many of them still face challenges to reach financial

soundness and adopt high corporate governance standards

• Some institutions underperform; they require government transfers to

operate, are subject to political interference, have unclear mandates,

and are unable to fulfill their goals,

• Improving performance and governance of DBs requires revising

policy mandates, strengthening governance structures, revising

regulation and supervision, enhancing business models, and

strengthening risk management.

Conclusions

Contact information:

Jose De Luna Martinez, Jdelunamartinez@worldbank.org

Thank you!

WORLD BANK GROUPFinance & Markets

The findings, interpretations, and conclusions expressed in this presentation are entirely those of the author. They do not necessarily represent the views of the International Bank for

Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.