By KT Reporter
Bank of Uganda Governor, Michael Atingi-Ego, has challenged national development banks in Africa to address market failure and not to distort markets. He said banks like Uganda Development Bank are supposed to derisk and crowd in the private sector.
Development banks provide high-risk, long-term financing for industrialisation and act as a catalyst for industrial development. Dr Atingi-Ego was speaking at the closing of the Uganda Development Financing Summit at Speke Resort Munyonyo.
The summit, under the theme, “Transforming Africa through National Development Finance Architecture,” was hosted by Uganda Development Bank (UDB).
He said Development Finance must be purposeful, inclusive, forward-looking, correcting market failures, catalysing private investment and de-risking projects that traditional financiers tend to avoid.
He explained that because of the limited capacity of the Development Banks to meet the long-term financing needs of the private sector, the private sector has ended up in commercial banks, which by their nature are licensed to deal in short-term liabilities.
“So going to a commercial bank to ask for a loan for a ten-year loan from a bank whose liability averages two years is really suicidal,” said the Central Bank governor.
This anomaly partly explains why those seeking short-term loans are competing with private investors and, therefore, making money expensive for individuals as well as private investors.
Dr Atingi-Ego explained that if Africa had vibrant development banks, they would finance long-term capital of the private sector, and the private sector would then cash in on the commercial banks to finance working capital.
Estimates of Africa’s development financial needs range from $900 billion to $1.3 trillion annually – about 43 per cent of Africa’s GDP. In the African context, financing for development has become even more crucial.
The cost of achieving the Sustainable Development Goals by 2030 in Africa is estimated at USD 1.3 trillion annually and around USD 234.5 billion– USD 250 billion to finance climate action.
To bridge the funding gap, African countries have been urged to boost domestic resource mobilisation (DRM), including resorting to in-country development banks like Uganda Development Bank or continental ones like the African Development Bank (AfDB).
Dr Ating-Ego acknowledges that there is still a big challenge on how to finance development banks. One of the options on the table is whether the development banks should issue corporate bonds. “Maybe, but at what cost are you going to get these bonds? Because bonds are currently priced very expensively,”
Giving the example of the government bonds, he noted that the rates may not be conducive to allowing development banks to issue corporate bonds.
“Can we maybe consider something like sustainable financing? Where development banks think of running a suitability agenda so that you can direct financing to sustainable projects?” he asked.
Lowering interest rates on loans towards development projects remains a daunting task for many African development banks. Uganda Development Bank’s current offer rate is at 12 per cent. The rates have recently come down from 15 per cent.
President Museveni on Monday said the UDB rate was still too high, but highlighted the importance of the Uganda Development Bank to the economy. National Development Banks (NDBs) are key actors in the provision of finance for economic transformation, often contributing to policy formulation given their industry expertise.
Dr Atingi-Ego suggest that national development Banks should play a leading role in value addition by creating bankable projects. Uganda is currently pushing a tenfold growth strategy with a mission to transform the lives of the people.
Commercial and development banks are expected to play a leading role in financing some of the activities outlined in the strategy. Statistics from the Bank of Uganda indicate that the commercial banks are currently extending about 12 per cent of the GDP or USD 7.5 billion.
Under the tenfold growth strategy. It is estimated that the commercial banks should contribute USD 80 billion worth of private sector credit. This should be long-term capital to put in place infrastructure to realise the major growth pillars.
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