A role for the Development Bank of Nigeria

The Central Bank of Nigeria recently approved the license for the Development Bank of Nigeria with the aim of providing support to Small and Medium Scale Enterprises (SMEs). With as many as seven functioning developments bank in Nigeria, it is relevant to analyse the roles these institutions play and whether they can further develop and diversify the economy. It is also important to see the roles these Banks have played in other countries and what lessons Nigeria can learn from them.

The Role of Development Banks

Usually, Development Banks are set up to deliver economic priorities of the government which are not adequately met by the banking sector. The rationale for this is clear: private lending in Nigeria is primarily commercial and usually short term while government projects – like infrastructure – require long-term funding. Development Banks fill this financing gap. Perhaps more importantly in a country like Nigeria, such institutions are instruments of the government which can be used to shape and coordinate development in a way private banks are unable to. In the last century, industrialising countries such as Korea have used these banks to aggressively empower priority sectors of the economy, drive economic diversification, and accelerate industrialisation.

Development Banks as tools of economic transformation

At the heart of Nigeria’s inability to industrialise is the low level of value addition across various industries. According to the World Bank, industry value added as a percentage of GDP has declined from 33% in 1995 to 28% in 2014. For a country seeking to industrialise and diversify its exports, these numbers are not encouraging. A lack of technical expertise and low levels of investment, two contributing factors to this phenomenon, are issues that Development Banks can help rectify, as they have done in other countries.

In Korea for example, Development Banks helped to transform the country from being a net exporter of primary products in the 1950s to a net exporter of manufacturing products by the 2000s. They did this by initially providing targeted support to primary goods producers and later, shifting focus to manufacturing producers, as economic priorities changed.

Nigeria mainly exports primary goods like crude oil and cocoa, and these are less profitable than exporting finished products. For the country to industrialise, we need to move towards the higher end of the value chain in agriculture, manufacturing, etc. The Development Bank of Nigeria (DBN) and sector specific banks like the Bank of Agriculture can facilitate this by providing technical advice and funding to small business struggling to move up the value chain.

But even as businesses move up the value chain, they may struggle to navigate competitive export markets due to lack of funding, information, etc. Again, there is a potential role for Development Banks in assisting these firms in access foreign markets, leveraging additional finance for them and training them on how to produce goods which are internationally competitive. For instance, the Chinese Development Bank (CDB) has been aggressive in supporting the international expansion of Chinese firms. In 2009, the CDB provided Chinese telecommunications Giant Huawei with a $30 billion credit facility which enabled it to win a contract in 2010 to provide network equipment in Brazil.

Businesses do not operate in a vacuum. They require an enabling environment to thrive, but in Nigeria, infrastructure continues to be a major constraint to the business growth. Like the CDB which has financed some of China's most significant infrastructure projects such as the three gorges dam and the country's high-speed rail network, Nigeria's Development Banks ought to be at the forefront of infrastructural development.

Improving the performance of Nigeria’s Development Banks

The dominant ownership structure of Development Banks, with the Federal Government maintaining a large equity stake, has led to undue political interference and undermined the independence of these banks. And this is not peculiar to Nigeria – before becoming the financial behemoth that it is today, the CDB was drowning in bad debt caused by excessive government interference. 

Solving this problem was a delicate balance; while it was necessary for the activities of the CDB to be in line with the government’s agenda, there was also need for them to be professional and follow market forces in selecting projects. One way the Chinese worked around this was to ensure that the CDB was involved in designing the government’s development agenda right from the beginning. This ensured that there was little reason for the government to interfere in its activities. Nigeria can take a cue from this. Fiscal and monetary authorities must coordinate constantly and deliberately with the seven development banks in the country to ensure alignment with the broader economic aims of the Federal Government. 

In conclusion, as Nigeria seeks to diversify its economy and wean itself off oil dependence, Development Banks are vital instruments for accelerating development of other priority sectors of the economy. However, for them to function efficiently, care must be taken to ensure that they are governed with professionalism and protected from undue government interference.

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