Financial sector development - Sida

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9.2 Credits and guarantees Increased efficiency and flexibility were two of the main motives behind the creation of (the new) Sida. As to the transfer of financial resources this implies increased use of the credit and guarantee instruments in development cooperation. On the basis of a compa-rative analysis of various forms of transfer of financial resources, the Concessionary Credit Review suggests that a) grants should not be provided to commercially oriented projects, b) credits to such projects should as far as possible be provided on market terms and c) conditional loans (in which the interest and repayment terms are linked to the financial performance of the beneficiary institution) are suitable alternatives to direct equity investments and d) guarantees to such institutions may be used as an alternative to equity investments and credits. The survey on Swedish aid in the financial sector (Chapter 5) provides support to the recommendations just mentioned and confirms the importance of the ”discipline” motive in favour of credits and the need to avoid markets distortions when designing financial assistance for commercially oriented financial sector projects. In view of the stagnating official development finance resources the recycling of money flows from amortisations and interests related to financial sector credit operations will furthermore become even more important in the future. This review therefore supports the recommendations put forward by the Concessionary Credit Review when it comes to increased use of credits and guarantees in development cooperation. Box 9. Pungwe-Mutare Water Developement Project - a case of synergy creation in the local capital market In 1995 MSEK 100 were allocated by Sweden as a grant (concessionary credit funds) to the government of Zimbabwe for the construction of a water development project in the city of Mutare. The total cost of the project (transport of water by gravity 70 km from the river Pungwe to the city) amounts to about MSEK 800. The Swedish contracting firm SKANSKA won the bid for the implementation of the project . About 35 per cent of the grant is used for credit enhancement purposes. MSEK 35 are channelled through a Water Development Trust, which in turn provides a subordinated loan to the city of Mutare, enabling the city to raise about MZWD 400 in municipal bonds in the local capital market to cover costs incurred in local currency. This is the first time that a Zimbabwean municipality could issue bonds in the local market. Thanks to the enhancement of the bond issue created by the subordinated loan investors in the local capital market, e.g. pension funds and insurance companies, were able to make investments in a financial instrument with a fixed rate of interest and with a considerably longer maturity than is normal (16 versus 5-8 years) in Zimbabwe. The concessionary credit for the import of goods and services from Sweden and the additional grant for local finance enhancement have therefore - apart from improving the supply of household water for the inhabitants of Mutare - contributed towards the broadening and the deepening of the local capital market in Zimbabwe. 9.3 Microfinance A large majority of the population in developing countries has so far obtained few benefits from formal financial institutions (normally defined as finance actors that are governed and controlled by financial legislation and central bank supervision and control). In many Sub-Saharan Africa countries, less than 5 per cent of the population is served by formal or semi-formal (non-indigenous and non-traditional) institutions. At the same time, there is a growing awareness about the importance of the fact that the rural poor, the urban 56
poor, micro-enterprises and others who operate outside of the formal sector have access to financial services (not only credits but also savings deposits and payment services). Recent studies on poverty reduction have highlighted the need to ensure better access of the poor to essential factors of production such as land and credits. Private sector assessment studies show that micro-enterprises are a major source of income and employment in a number of Sweden’s recipient countries and that the possibilities for these enterprises to improve the productivity and to expand is linked to the question of financial services. Microenterprise development is especially important for women, who often find themselves without access to jobs in the formal sector due to lack of training and/or competing demands of household duties. Most international donor agencies have a poor track record when its comes to microfinance. Assistance has often been provided in the form of project-centred interventions paying little attention to the need to develop sustainable financial intermediaries geared to mobilise local funds and to satisfy the demands of the end users. Furthermore financial assistance has often been provided on very soft terms, which in turn has made it difficult to establish norms for good repayment behaviour and has led to support of noneconomic project activities. Structural adjustment including the liberalisation of the financial sector in developing countries has improved the possibilities for donors to support more sustainable and market oriented institutions in the field of microfinance. At the same time there is now an improved knowledge about the characteristics of such institutions which have succeeded in achieving operational efficiency (defined as covering with client revenues all administrative costs and loan losses) as well as financial self sufficiency (defined as operational efficiency and capability of mobilising finance on market terms). Examples of the latter type of institutions are found in Asia and Latin America. They have frequently adopted the model, which the Grameen Bank in Bangladesh has established. In recent years a number of new initiatives have been taken by the donor community to step up microfinance assistance. One example is the World Bank-initiated CGAP (Consultancy Group to Assist the Poorest) and another is the IDB-initiated MICRO 2001 Program. A third is UNDP´s MicroStart Program. A Plan of Action was endorsed recently by a Microcredit Summit, which calls for a comprehensive approach towards eradication of poverty where microcredits will play a pivotal role. In line with the Action Plan from the Microcredit Summit, Sida should prepare and submit an action plan on microfinance by 28 February 1998. 9.4 Investments in equity It has been conceived to be a disadvantage that Sida is not in a position to take up equity positions in commercial operations, be they venture capital companies, leasing companies, commercial banks or any other kind of financial institution. Equity is defined as owner capital in a formal sense - quasi-equity and unsecured loans may carry almost the same risk as equity, but in a formal sense they do not entitle the investor to participate at shareholders meetings to elect the Board of Directors and to exercise other rights of a shareholder. This section discusses some of the advantages and disadvantages for a donor agency to provide equity capital. 57
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Page 4 and 5:
TABLE OF CONTENTS EXECUTIVE SUMMARY
Page 6 and 7:
10.4 Goals and points of departure
Page 8 and 9: EXECUTIVE SUMMARY Evidence from the
Page 10 and 11: The proposed Sida policy on Financi
Page 12 and 13: 1. BACKGROUND 1.1 Mandate and terms
Page 14 and 15: eduction. To this end, Sida has dev
Page 16 and 17: along with growth. This approach hi
Page 18 and 19: thus encouraging savings. On the ot
Page 20 and 21: Informal financial systems are comm
Page 22 and 23: I General projects and sector progr
Page 24 and 25: SIDA gave a total of MSEK 250 over
Page 26 and 27: Box 2. Restructuring of a state-own
Page 28 and 29: Box 4. Reform of legal framework fo
Page 30 and 31: 6.2 Increased demand for capital fr
Page 32 and 33: In the 1970s and 1980s a substantia
Page 34 and 35: A first lesson is that subsidies, e
Page 36 and 37: Governments have used the banking s
Page 38 and 39: Several investment funds focusing o
Page 40 and 41: countries in Sub-Saharan Africa. Th
Page 42 and 43: Table 4. Financial depth (Broad mon
Page 44 and 45: formal and informal markets is not
Page 46 and 47: competitors in the microfinance sec
Page 48 and 49: A survey report (Appendix 5) analys
Page 50: (and other program countries) are v
Page 53 and 54: Commercial Law in Gothenburg, the S
Page 55 and 56: Box 8. Advanced training in capital
Page 57: • the poor state of the financial
Page 61 and 62: • Equity investments involve a su
Page 63 and 64: • If the purpose of the contribut
Page 65 and 66: • to make risky investments pract
Page 67 and 68: 10.5 The comparative advantages of
Page 69 and 70: work to prepare financial sector st
Page 71 and 72: a substantial part of Sida’s pove
Page 73 and 74: GLOSSARY OF FINANCIAL TERMS Below a
Page 75 and 76: Indirect instruments: In connection
Page 78: 7;)(-7, -28)62%8-32%0 ():)0341)28 '
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