We can enhance NDB effectiveness and economic transformation by learning from successful examples. | © shutterstock.com
The views expressed in the Let’s Talk Development blog are solely those of the author(s).
Industrial policies seek to transform the productive structure of economies. This blog explores the role of National Development Banks (NDBs) in addressing market failures to provide long-term capital to finance the investments needed to implement industrial policies.
Industrial policies often use tariffs and fiscal subsidies to make investments more attractive. However, long-term investments need long-term capital, which is often provided by government-sponsored financial services. According to Juhasz et al. (2023), 69% of industrial policy actions by high-income countries involve financial state loans, trade finance, loan guarantees, or equity investments. This share is 61% for middle-income countries and 48% for low-income countries, through their dataset has limited coverage of low- and middle-income countries
National Development Banks (NDBs) are key actors in the provision of finance for economic transformation often contributing to policy formulation given their industry expertise. NDBs are financial institutions with a policy mandate, typically owned or controlled by the government. Lending is their core activity, but they provide a variety of financial services (e.g. guarantees, equity investments) as well as advisory services. Examples include KDB in Korea, Brazilian BNDEs or KFW in Germany.
Contrary to the believe that NDBs are mostly active in countries with underdeveloped financial markets, recent data shows that NDBs are mostly present in high and upper middle-income countries and are prevalent in all continents. During the 1980s and 1990s, poor performance and fiscal constraints led to privatization and institutional reforms. In recent years, NDBs have experienced a revival due to their countercyclical role and their role in financing Sustainable Development Goals (SDGs). SDGs such as quality jobs and climate transition are common industrial policy objectives. Following the global financial crisis, the EU issued guidelines for EU countries to set up NDBs in case they did not have one and several new NDBs have been created in Europe and elsewhere.
Underlaying Rationale
NDBs are well placed to address market failures such as asymmetric information, externalities, and coordination failures. They have higher risk tolerance and can provide long-term capital at favorable rates thanks to government backing and donor funding. However, NDBs can face political interference and capacity constraints that may hinder their effectiveness.
There is no empirical cross-country evidence on NDB performance. Some studies on the effects of individual NDB activities show positive impacts on firm sales, exports, and employment, but not on productivity. For instance, guarantees provided by the Korean Development Bank on foreign loans to firms investing in heavy industries and metal sector during the 1970s increased firm sales as much as 30 years after the credit stopped (Choi and Levchenko 2021). Loans also supported export and employment growth in beneficiary firms, doubling real output in targeted industries. However, evidence on the impact of Brazil BNDES investment loans during 2009-2015 is mixed. Listed large firms receiving the loans did not increase investment but used those loans to replace private credit (Lazzarini et al 2015). Exports and employment grew, particularly for credit constrained firms (De Negri et al. (2011), Machado et al (2011) ) but productivity did not increase (Souza and Ottaviano (2007), De Negri et al (2011), Souza and Ottaviano (2014)).
In the presence of coordination failures, non-subsidized co- lending and guarantees and equity investments by an anchor investor/coordinator agent are the first best solution. For other market failures there are alternative measures to government-sponsored investments and NDBs, but they are not always feasible or effective for all types of investments
- Pigouvian taxes (creating an additional cost borne by individuals not directly involved in the transaction, e.g. carbon taxes) and investment subsidies can be more efficient in case of externalities but have high budgetary costs and may not be politically feasible. Furthermore, investment subsidies may create a culture of subsidy that subdues credit demand reducing investment.
- Reforms in credit information systems and collateral reforms can address information asymmetries, particularly for SMEs. However, the UK and France created SME NDBs in the mid 2010’s despite well-developed financial infrastructure and the US continues to provide government loans and guarantees through the Small Business Administration (SBA).
- When NDBs are not efficiently run, it may be better to use interest loan subsidies and public guarantee funds. These interventions outsource credit decisions to private financial institutions and mobilize private capital. However, this requires a well-developed financial system with institutions funding long-term projects and high-risk investors.
Lessons Learnt from Efficient NDBs
Successful NDBs focus on addressing market gaps and crowding in private finance to ensure additionally. Subsidized loans are appropriately funded not to compromise solvency, well targeted and at a scale that does not distort credit markets. Effective development banks are well managed (through corporate governance and risk management), and incentives are aligned throughout the institution (through remuneration policies, supervision, and impact evaluation). Lending through financial intermediaries for on-lending or providing guarantees can be an effective way to improve NDB performance in countries with poor governance culture.
Conclusion
Government loans and guarantees are widely used industrial policy tools to increase investment in new industries/activities. NDBs play a key role in implementing industrial policy, addressing market failures to provide the necessary long-term capital. By learning from successful NDBs and considering alternative measures, we can enhance their effectiveness and ensure they contribute positively to economic transformation.
Join the Conversation
Interesting read! Thanks for sharing these learned lessons. I work at 1%Club, a crowdfunding platform for projects/businesses with social or environmental impact and we've just organised a two-day bootcamp on crowdfunding in Nairobi. The important thing we learned from previous bootcamps is to include M-pesa as a payment method on our platform. And the first results of that decision are really hopeful.... I would be happy to exchange our first results & learned lessons.
Read more Read lessInteresting read! Thanks for sharing these learned lessons. I work at 1%Club, a crowdfunding platform for projects/businesses with social or environmental impact and we've just organised a two-day bootcamp on crowdfunding in Nairobi. The important thing we learned from previous bootcamps is to include M-pesa as a payment method on our platform. And the first results of that decision are really hopeful.... I would be happy to exchange our first results & learned lessons.
Read more Read lessInteresting read! Thanks for sharing these learned lessons. I work at 1%Club, a crowdfunding platform for projects/businesses with social or environmental impact and we've just organised a two-day bootcamp on crowdfunding in Nairobi. The important thing we learned from previous bootcamps is to include M-pesa as a payment method on our platform. And the first results of that decision are really hopeful.... I would be happy to exchange our first results & learned lessons.
Read more Read lessHello, We want to initiate CF in Iran. We can not use foreign CFPs like Kickstarter or others because of impossibility of bank transfers. What is M-pesa payment method?
Interesting read! Thanks for sharing these learned lessons. I work at 1%Club, a crowdfunding platform for projects/businesses with social or environmental impact and we've just organised a two-day bootcamp on crowdfunding in Nairobi. The important thing we learned from previous bootcamps is to include M-pesa as a payment method on our platform. And the first results of that decision are really hopeful.... I would be happy to exchange our first results & learned lessons.
Read more Read lessHello Sam Raymond, Thank you for this article on Crowdfunding. One of the key success of the financing is indeed the quality of the relationship between the entrepreneur and investors. For this, it is necessary to transmit not only intelligible strategy but also emotion for full adherence to this entrepreneurial adventure But I wonder about some of the issues mentioned, including the selection of the... right platform Indeed, should African countries not acquire its own platforms to their users? The platforms would then in line with needs of project holders and local African law: African platforms for African by Africans. Regarding the selection of the most likely to succeed with this method of financing projects, again I wonder. Is not it a problem formalization of transparency of the strategy indicated by KenyaCIC? Indeed, the key to business success is a feasible attractive and sustainable business model. Communicating the strategy can be considered an art that is not necessarily that of the entrepreneur experiencing operational problems. Finally, today data concerning crowdfunding on Africa are not representative because too low in my respectful opinion. The only solution is to build African platforms, building laws allowing maximum project funding, also build software for SMEs to simplify the monitoring of shareholders allowing access to risk capital for SMEs. (for Infodev) Crowdfunding is new way. It allows entrepreneur to fund their projects while they did not have the collateral required for a bank loan, or have lower financing costs.
Read more Read lessIts a great idea! I have personally been able to fund raise capital and put up major investments that will position Kenya in the world map of one of the greatest Angro-Environmental green enterprises in Africa while sharing equity with the crowd of local farmers acting as my funders; I would like to share my experience with Kenya Climate Innovation Centre and probably they can borrow a leaf from my... success story!
Read more Read lessHi Sam, IFAD FFR has recently launched a Virtual Forum on Remittances and Development (www.remittancesgateway.org). There is currently an online discussion on Diaspora investment and we would be delighted if you, or a representative from infoDev, were able to join, sharing your experiences and insights - especially relating to crowdfunding. The Virtual Forum is informal and free to participate in.... Please register and start posting. The aim is to become an online community platform where new ideas and fresh perspectives from around the world can be shared and discussed and new partnerships and networks formed. Your support would be greatly appreciated. Let me know if you have any questions. Also please spread the word and invite others to participate and/or feel free to start your own topics of conversation. Look forward to seeing you on there ....
Read more Read lessExcellent Article. This is a great article on crowdfunding issues to be dealt with even if the conclusions are not agreed with or contentious. One area that requires careful treatment is that of the legal and regulatory structure. Crowdfunding exists in large part because of overreach by existing regulatory structures which, in many if not all countries, have gone beyond protecting stability of the... financial system. The result is lack of capital for SMEs in particular. That Kickstarter list of 10 countries required for project originators is headed down a high regulatory pathway that may not suit the typical developing country and do little for actual capital raising for SMEs that's not already done and largely failed. By the way, Australia (one of Kickstarter's approved project originators) is currently reviewing their regulatory requirements for crowdfunding because its not working effectively and their new PM who understands capital markets wants more activity from entrepreneurs. Agree with Isabelle above that adaptation to African country circumstances is important, rather than just importing an off-the-shelf platform that may have worked elsewhere. Questions for Sam and company: 1. Do you need an existing regulated securities exchange for crowdfunding to run off? I dont mean to duplicate but work alongside as a light regulatory structure. I dont think you do but interested in other views and why. 2. Can a crowdfunding regulatory structure become the catalyst for change and innovation in the general regulatory climate for banking and finance and capital flows? 3. Role of remittance regulation in crowdfunding. With an effective and efficient, secure and fast remittance transfer system is this the basic building platform for a light regulatory crowdfunding market to work in a developing country that does not have all the traditional building blocks.
Read more Read lessHello Sam Raymond, Thank you for this article on Crowdfunding. One of the key success of the financing is indeed the quality of the relationship between the entrepreneur and investors. For this, it is necessary to transmit not only intelligible strategy but also emotion for full adherence to this entrepreneurial adventure But I wonder about some of the issues mentioned, including the selection of the... right platform Indeed, should African countries not acquire its own platforms to their users? The platforms would then in line with needs of project holders and local African law: African platforms for African by Africans. Regarding the selection of the most likely to succeed with this method of financing projects, again I wonder. Is not it a problem formalization of transparency of the strategy indicated by KenyaCIC? Indeed, the key to business success is a feasible attractive and sustainable business model. Communicating the strategy can be considered an art that is not necessarily that of the entrepreneur experiencing operational problems. Finally, today data concerning crowdfunding on Africa are not representative because too low in my respectful opinion. The only solution is to build African platforms, building laws allowing maximum project funding, also build software for SMEs to simplify the monitoring of shareholders allowing access to risk capital for SMEs. (for Infodev) Crowdfunding is new way. It allows entrepreneur to fund their projects while they did not have the collateral required for a bank loan, or have lower financing costs.
Read more Read lessIts a great idea! I have personally been able to fund raise capital and put up major investments that will position Kenya in the world map of one of the greatest Angro-Environmental green enterprises in Africa while sharing equity with the crowd of local farmers acting as my funders; I would like to share my experience with Kenya Climate Innovation Centre and probably they can borrow a leaf from my... success story!
Read more Read lessHi Sam, IFAD FFR has recently launched a Virtual Forum on Remittances and Development (www.remittancesgateway.org). There is currently an online discussion on Diaspora investment and we would be delighted if you, or a representative from infoDev, were able to join, sharing your experiences and insights - especially relating to crowdfunding. The Virtual Forum is informal and free to participate in.... Please register and start posting. The aim is to become an online community platform where new ideas and fresh perspectives from around the world can be shared and discussed and new partnerships and networks formed. Your support would be greatly appreciated. Let me know if you have any questions. Also please spread the word and invite others to participate and/or feel free to start your own topics of conversation. Look forward to seeing you on there ....
Read more Read lessExcellent Article. This is a great article on crowdfunding issues to be dealt with even if the conclusions are not agreed with or contentious. One area that requires careful treatment is that of the legal and regulatory structure. Crowdfunding exists in large part because of overreach by existing regulatory structures which, in many if not all countries, have gone beyond protecting stability of the... financial system. The result is lack of capital for SMEs in particular. That Kickstarter list of 10 countries required for project originators is headed down a high regulatory pathway that may not suit the typical developing country and do little for actual capital raising for SMEs that's not already done and largely failed. By the way, Australia (one of Kickstarter's approved project originators) is currently reviewing their regulatory requirements for crowdfunding because its not working effectively and their new PM who understands capital markets wants more activity from entrepreneurs. Agree with Isabelle above that adaptation to African country circumstances is important, rather than just importing an off-the-shelf platform that may have worked elsewhere. Questions for Sam and company: 1. Do you need an existing regulated securities exchange for crowdfunding to run off? I dont mean to duplicate but work alongside as a light regulatory structure. I dont think you do but interested in other views and why. 2. Can a crowdfunding regulatory structure become the catalyst for change and innovation in the general regulatory climate for banking and finance and capital flows? 3. Role of remittance regulation in crowdfunding. With an effective and efficient, secure and fast remittance transfer system is this the basic building platform for a light regulatory crowdfunding market to work in a developing country that does not have all the traditional building blocks.
Read more Read lessHello Sam Raymond, Thank you for this article on Crowdfunding. One of the key success of the financing is indeed the quality of the relationship between the entrepreneur and investors. For this, it is necessary to transmit not only intelligible strategy but also emotion for full adherence to this entrepreneurial adventure But I wonder about some of the issues mentioned, including the selection of the... right platform Indeed, should African countries not acquire its own platforms to their users? The platforms would then in line with needs of project holders and local African law: African platforms for African by Africans. Regarding the selection of the most likely to succeed with this method of financing projects, again I wonder. Is not it a problem formalization of transparency of the strategy indicated by KenyaCIC? Indeed, the key to business success is a feasible attractive and sustainable business model. Communicating the strategy can be considered an art that is not necessarily that of the entrepreneur experiencing operational problems. Finally, today data concerning crowdfunding on Africa are not representative because too low in my respectful opinion. The only solution is to build African platforms, building laws allowing maximum project funding, also build software for SMEs to simplify the monitoring of shareholders allowing access to risk capital for SMEs. (for Infodev) Crowdfunding is new way. It allows entrepreneur to fund their projects while they did not have the collateral required for a bank loan, or have lower financing costs.
Read more Read lessIts a great idea! I have personally been able to fund raise capital and put up major investments that will position Kenya in the world map of one of the greatest Angro-Environmental green enterprises in Africa while sharing equity with the crowd of local farmers acting as my funders; I would like to share my experience with Kenya Climate Innovation Centre and probably they can borrow a leaf from my... success story!
Read more Read lessHi Sam, IFAD FFR has recently launched a Virtual Forum on Remittances and Development (www.remittancesgateway.org). There is currently an online discussion on Diaspora investment and we would be delighted if you, or a representative from infoDev, were able to join, sharing your experiences and insights - especially relating to crowdfunding. The Virtual Forum is informal and free to participate in.... Please register and start posting. The aim is to become an online community platform where new ideas and fresh perspectives from around the world can be shared and discussed and new partnerships and networks formed. Your support would be greatly appreciated. Let me know if you have any questions. Also please spread the word and invite others to participate and/or feel free to start your own topics of conversation. Look forward to seeing you on there ....
Read more Read lessExcellent Article. This is a great article on crowdfunding issues to be dealt with even if the conclusions are not agreed with or contentious. One area that requires careful treatment is that of the legal and regulatory structure. Crowdfunding exists in large part because of overreach by existing regulatory structures which, in many if not all countries, have gone beyond protecting stability of the... financial system. The result is lack of capital for SMEs in particular. That Kickstarter list of 10 countries required for project originators is headed down a high regulatory pathway that may not suit the typical developing country and do little for actual capital raising for SMEs that's not already done and largely failed. By the way, Australia (one of Kickstarter's approved project originators) is currently reviewing their regulatory requirements for crowdfunding because its not working effectively and their new PM who understands capital markets wants more activity from entrepreneurs. Agree with Isabelle above that adaptation to African country circumstances is important, rather than just importing an off-the-shelf platform that may have worked elsewhere. Questions for Sam and company: 1. Do you need an existing regulated securities exchange for crowdfunding to run off? I dont mean to duplicate but work alongside as a light regulatory structure. I dont think you do but interested in other views and why. 2. Can a crowdfunding regulatory structure become the catalyst for change and innovation in the general regulatory climate for banking and finance and capital flows? 3. Role of remittance regulation in crowdfunding. With an effective and efficient, secure and fast remittance transfer system is this the basic building platform for a light regulatory crowdfunding market to work in a developing country that does not have all the traditional building blocks.
Read more Read lessHello Sam Raymond, Thank you for this article on Crowdfunding. One of the key success of the financing is indeed the quality of the relationship between the entrepreneur and investors. For this, it is necessary to transmit not only intelligible strategy but also emotion for full adherence to this entrepreneurial adventure But I wonder about some of the issues mentioned, including the selection of the... right platform Indeed, should African countries not acquire its own platforms to their users? The platforms would then in line with needs of project holders and local African law: African platforms for African by Africans. Regarding the selection of the most likely to succeed with this method of financing projects, again I wonder. Is not it a problem formalization of transparency of the strategy indicated by KenyaCIC? Indeed, the key to business success is a feasible attractive and sustainable business model. Communicating the strategy can be considered an art that is not necessarily that of the entrepreneur experiencing operational problems. Finally, today data concerning crowdfunding on Africa are not representative because too low in my respectful opinion. The only solution is to build African platforms, building laws allowing maximum project funding, also build software for SMEs to simplify the monitoring of shareholders allowing access to risk capital for SMEs. (for Infodev) Crowdfunding is new way. It allows entrepreneur to fund their projects while they did not have the collateral required for a bank loan, or have lower financing costs.
Read more Read lessIts a great idea! I have personally been able to fund raise capital and put up major investments that will position Kenya in the world map of one of the greatest Angro-Environmental green enterprises in Africa while sharing equity with the crowd of local farmers acting as my funders; I would like to share my experience with Kenya Climate Innovation Centre and probably they can borrow a leaf from my... success story!
Read more Read lessHi Sam, IFAD FFR has recently launched a Virtual Forum on Remittances and Development (www.remittancesgateway.org). There is currently an online discussion on Diaspora investment and we would be delighted if you, or a representative from infoDev, were able to join, sharing your experiences and insights - especially relating to crowdfunding. The Virtual Forum is informal and free to participate in.... Please register and start posting. The aim is to become an online community platform where new ideas and fresh perspectives from around the world can be shared and discussed and new partnerships and networks formed. Your support would be greatly appreciated. Let me know if you have any questions. Also please spread the word and invite others to participate and/or feel free to start your own topics of conversation. Look forward to seeing you on there ....
Read more Read lessExcellent Article. This is a great article on crowdfunding issues to be dealt with even if the conclusions are not agreed with or contentious. One area that requires careful treatment is that of the legal and regulatory structure. Crowdfunding exists in large part because of overreach by existing regulatory structures which, in many if not all countries, have gone beyond protecting stability of the... financial system. The result is lack of capital for SMEs in particular. That Kickstarter list of 10 countries required for project originators is headed down a high regulatory pathway that may not suit the typical developing country and do little for actual capital raising for SMEs that's not already done and largely failed. By the way, Australia (one of Kickstarter's approved project originators) is currently reviewing their regulatory requirements for crowdfunding because its not working effectively and their new PM who understands capital markets wants more activity from entrepreneurs. Agree with Isabelle above that adaptation to African country circumstances is important, rather than just importing an off-the-shelf platform that may have worked elsewhere. Questions for Sam and company: 1. Do you need an existing regulated securities exchange for crowdfunding to run off? I dont mean to duplicate but work alongside as a light regulatory structure. I dont think you do but interested in other views and why. 2. Can a crowdfunding regulatory structure become the catalyst for change and innovation in the general regulatory climate for banking and finance and capital flows? 3. Role of remittance regulation in crowdfunding. With an effective and efficient, secure and fast remittance transfer system is this the basic building platform for a light regulatory crowdfunding market to work in a developing country that does not have all the traditional building blocks.
Read more Read less