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Reduce political influence and tighten governance to improve financial performance of national development banks

Undue political influence over national development banks (NDBs) in Africa can have a negative impact on their financial performance and encourage excessive risk-taking. A new report by the ODI recommends depoliticising the appointment of NDB executive management and increasing Board independence in order to improve financial performance.

ODI’s report, Financial performance of corporate governance: evidence from national development banks in Africa, highlights that many of the African development banks studied are performing strongly and two-thirds are profitable - comparing favourably to European Development Finance Institutions. However, almost all of those studied remain too small to have a significant economic impact and the research suggests that improved governance would lead to better financial performance.

Almost every bank studied had grown its balance sheet and lending portfolio over recent years but their ability to leverage their balance sheets in support of country development objectives is constrained by low levels of equity capitalisation. Half of the banks studied also have high non-performing loan ratios or unpaid loans – suggesting the need to improve the asset quality banks are choosing to invest in.

ODI’s report highlights that where political appointments are involved in day to day running of development banks, it can result in poorer financial performance. These political appointments included government representation on the board and in one-third of the banks in the study, the head of state had been directly involved in the appointment of CEOs and/or board members. These political appointments by the head of state were found to be particularly associated with worse financial performance.

Transparency among African development banks studied was also found to be variable. Very little information and data is publicly available, undermining their accountability. Out of 107 development banks, only 48 provided online documentation (i.e. annual reports or financial statements), and only 16 had current information and data up to 2019/2020.

ODI’s findings make the case that the internal governance of a bank has a greater influence than who or what owns it. Political interference in bank operations may be well-intentioned for developmental purposes or may be driven by corrupt practices. ODI’s researchers found that in both cases, this can lead to high-risk activities and poor financial performance. Weak financial performance undermines the ability of development banks to deliver on their mandate, their ability to fund operations and their attractiveness to international and private partners.

ODI’s report recommends that:

  • Governance structures of development banks should be reformed to increase the institutional distance between ownership and management. For example entrusting CEO appointments to the board, not to political actors and increasing the independence of the Board. Other options could include introduction international or private shareholding. These measures can help in providing sufficient independence and capacity to help mitigate against political interference, developmental or corrupt, that threatens long-term financial performance.
  • African governments should inject new equity to recapitalise well-governed and strongly performing development banks and international development partners should step up their engagement with these development banks. Well-governed banks need sufficient capitalisation from government and support from international partners, to enhance their capacity to operate at a scale that can support transformative investment and inclusive economic growth.
  • Efforts need to be made to strengthen the transparency of African development banks. Shareholders and international partners should encourage and support development banks to publish audited financial statements and annual reports on a timely basis. This is an essential component of accountability and a prerequisite for most external partners to lend and partner with these banks.

Samantha Attridge, Senior Research Fellow at ODI, says:

“There is a widely held perception that African development banks are poorly governed and suffer from poor financial performance. This is critical, as it means that these banks are not seen as attractive partners. It undermines their ability to mobilise much needed investment at scale, which ultimately weakens their development impact.The reality is that the governance and performance of development banks is mixed across the continent. There are good banks and Africa needs more of them. The important question should not be whether development banks are a good idea, but how to make them most effective. Our report makes specific recommendations which should help these banks become more effective.”

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For further information or to interview the researchers please contact Charlotte Howes at ODI on +44 7808 791 265 or at [email protected].