Financial sector development - Sida

project basically functioned as a system to distribute subsidies involving little or no real
local resource mobilisation.
Such a negative outcome is in fact the general pattern for many comparable SIDA
programmes in the 1980s, for instance the Sweden Zambia Industrial Co-operation
programme. An evaluation found this project unsuccessful partly due to the fact that the
project was largely implemented during the peak of a chaotic macro-economic situation in
Zambia when firms were faced with an extremely unfavourable economic environment.
Agriculture and rural development is the sector where SIDA had the most projects with a
financial component. In the 1990s, a new generation of rural programmes appeared with
a more focused and demanding financial component. Examples are the revolving credit
funds linked to several forestry development programmes and village banks. These latter
programmes should be assessed against the background of a macroeconomic
environment in the 1990s which is more conducive to the development of financial
systems as compared to the heavily distorted macro-economic environment prevailing in
most recipient countries in the 1980s.
The importance of the macroeconomic environment was emphasised in a Nordic working
group memorandum on rural finance prepared in 1993. In the memorandum, it was
stated that unfavourable macro-economic and sector policies, reliance on easily
accessible government and donor funds rather than savings deposits, subsidised lending
interest rates, etc have resulted in poor performance and collapse of many formal rural
financial institutions.” Of particular concern was that few credit programmes and few
formal financial institutions have proven to be relevant for poor people and especially for
women.
5.2 Financial sector projects: provision of credits or equity
Since the mid 1970 SIDA has cooperated with some government-owned development
banks, providing them with both credits and rather extensive technical assistance. The
main thrust of this support was the provision of credits to priority investments, rather than
the development of the financial system as such. The general and consistent picture
which emerges from evaluations of these programmes is negative. Operating in
economies with heavily distorted prices both in the product and capital markets, these
public investment banks were primarily used to provide inefficient state companies with
loans that were rarely repaid. Many of these state companies had, in fact, no potential to
become self-sustained.
The oldest of these projects, dating back to 1967, is the support to the East African
Development Bank (EADB). SIDA provided development credits to a total amount of
MSEK 190 to EADB. Although the EADB always served the Swedish development credits
on time, various evaluations over the years pointed to that the institution suffered from
serious problems. For a long time, the EADB suffered from insufficient solidity and
liquidity, lack of own and external capital, a loan portfolio in acute need of rehabilitation,
as well as management problems. However, in an assessment in 1994, SwedeCorp
found that subsequent efforts to rehabilitate the EADB’s loan portfolio had been
successful. Recently, the EADB has successfully raised its first loan in the capital market.
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