Financial sector development - Sida

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9.4.1 Advantages Apart from the mentioned general factors which talk in favour of financial assistance by donors there are specific advantages when it comes to equity investments: • Equity investments are made according to a legally well regulated procedure. Share subscriptions or acquisitions do not necessitate complicated ad hoc agreements. • Equity investments may be used to facilitate for domestic investors to eventually become owners, either because the donor sees himself as providing a bridging investment or that he can initially act as a mentor to other owners. This may become the effect of the confidence created. • Equity investments make it possible for the investor to exercise influence by participating in the deliberations of the recipient institution’s Board of Directors. Equity investments thereby provide the possibility for the donor to direct the institution towards areas of priority to the donor. • Equity investments can enhance competence building through the investor’s active participation in the meetings of the Board of Directors. • The Board representatives can also make direct contributions to the business development of the institution, e g through monitoring the drafting of strategic business plans. • Ownership and Board representation provide the investor with an insight into the company, which may be valuable in order to reach some of the above mentioned objectives. This insight can also be important for monitoring and control purposes. In this way, it is possible to control how the donor contribution is used and to follow up that the institution is working towards agreed goals. • A further positive effect of equity investments may be that the active participation in the governance of these institutions will result in a greater understanding of the prerequisites and conditions in the host country regarding the functioning of the capital market. This ”transactional experience” may in turn provide ideas for technical assistance projects aiming at improved overall conditions for capital market development in the host country. In addition valuable and strategic contacts may be established with persons with an in depth knowledge of the sector. • Finally, a major advantage with equity ownership as opposed to financial contributions on a grant basis is that the recipient is under the obligation to endeavour to ensure a return on the capital. 9.4.2 Disadvantages and risks However, providing donor funds through equity investments may also entail important risks and disadvantages: • First, an obvious risk with equity investments is that the supported institution can go bankrupt and that the invested capital is lost. 58
• Equity investments involve a substantial commitment to the company. It may, for example, become necessary to make additional capital investments, should the company expand or experience solidity or liquidity problems. • As referred to in the previous section, an active owner and board member may acquire substantial influence in the company. Conversely, this influence may lead to a responsibility for the company which goes far beyond the financial responsibility. • Equity ownership necessitates a high degree of flexibility and a capability to make quick decisions. The question is whether a donor agency can meet these requirements. • The responsibility for the company’s business also implies making and defending unpopular decisions which might be discussed publicly. This could lead to negative publicity for the donor and also to other kinds of pressure or bad will. • If the management of the recipient institution is weak, there is a risk that the donor will have to assume management responsibilities, which would be unfortunate from the donor’s perspective. In order to relinquish this responsibility, the donor may have to undertake the time-consuming task to build a competent management that could resume responsibility for the company. • It becomes increasingly difficult to be a neutral actor on the market the more active the donor is or the larger portion of the company the donor owns. The donor should generally be interested in the development of the capital market as a whole and not only in the development of particular companies. Conflicts can therefore arise within different projects or in relation to other companies in the market. From the perspective of other companies, the donor’s credibility can be damaged if he is both owner and a contributor to the development of the sector as a whole. This may create conflicts in relation to other development projects and in relation to other market actors. 9.4.3 How to organise ownership It has implicitly been assumed above that equity investments would be made in a donor agency`s/Sida’s name. It would however, for different reasons, be preferable not to make equity investments in Sida’s name. First the Swedish Government has established Swedfund International as its principal instrument for equity investments in developing countries (albeit the main role of Swedfund is not to undertake financial sector operations but to take equity positions in joint venture companies with Swedish partners). Second it has to be possible for Sida to run different projects within a country’s capital market. Equity investments could, as was previously mentioned, lead to conflicts of interest and create difficulties as the donor no longer is or is at least not perceived as a neutral actor. Third Sida as a Swedish Government agency should refrain from taking a direct ownership role in investment companies according to general Government guidelines. The principal way to enable Sida to take part in the development of equity markets at a project level would be to continue the present arrangement with Swedfund. It implies that Sida backs Swedfund up with conditional loans in order to refinance some of Swedfund’s equity investments in the financial sector. Needless to say such investments are made 59
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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 and 58: • the poor state of the financial
Page 59: poor, micro-enterprises and others
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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Financial sector development - Sida

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