SDG Center for Africa

Role of National Development Banks (NDBs) for Increased Investment to Respond to COVID-19 Crisis
and Africa’s Transformation

May 2021

The mutually supportive transformational agendas of African Union (AU) Agenda 2063 and UN SDGs 2030 aim to promote inclusive growth and environment sustainability without leaving any one behind. The respective agenda flagship projects are transformational projects, which have potential to create huge opportunities for private and public investments. However, even before the COVID-19 pandemic, African countries were facing significant financing gaps to meet the investment required for achievement of the agendas. According to the 2019 Sustainable Development Center for Africa report titled Africa 2030 SDGs three-year reality check, the financing gap for SDGs is estimated in excess of USD 500 billion, more than Africa’s annual collective domestic revenue. COVID-19 is posing unprecedented challenges in mobilizing adequate financial resources for sustainable development and hence further undermining prospect for achieving SDGs in Africa. IMF Regional Economic Outlook for Sub Saharan Africa indicates that the pandemic and associated health and economic crisis has contributed to tightening of international financial conditions, drastic falling of domestic revenue and increasing spending to mitigate the negative effects of the pandemic on health and economic activities. Debt vulnerabilities have been increasing from time to time – exacerbated by COVID-19.

African countries need large scale counter-cyclical funding to support economic activities, minimize the economic decline happening due to negative effects of COVID-19 and the competing need to continue promoting sustainable development. As investment required to achieve SDGs are huge, it cannot be served solely by the public sector, commercial banks or capital markets. In Africa, financial institutions such as commercial banks, which dominate the financial market, concentrate on financing short-term projects and preference for self-liquidity financial transactions. It is therefore imperative to navigate options that help African countries to finance Africa transformation in such difficult, dynamic and complex situation.

One of the major actors that can play such a role is the National Development Banks (NDBs)[1] which are specialized financial institutions established with long-term development perspective to address market failure through providing long term financing to key strategic sectors, which have critical importance in fostering economic and social transformation of a country. In most cases, projects financed by NDBs support innovation that carry associated relatively above average risk but very large developmental gains. The Addis Ababa Action Agenda (AAAA), which is the financial framework for implementation of agenda 2030, recognizes the potential role of development banks for achieving SDGs.

The experience of financing for development in emerging countries including Brazil, the Republic of Korea, India and China substantiates the indispensable role of NDBs in sustainable development. NDBs like BNDES, KDB, IDBI and CDB[2], respectively played a major role to ignite the creation of industries to implement development strategies when these countries were experiencing industrial take-off. Some of the factors that contributed to the successful developmental role of these NDBs are a well-articulated developmental mandate, government support and diverse funding base (including debt and equity issuance, resources from other financial institutions and government transfers). In East Asia, the development banks played a paramount counter-cyclical role that enabled countries to come out during difficult economic downturns and rebuilding the economy to prosperity and long-term growth.

Where as in Africa, though there are more than 147 NDBs, they are often overlooked, and, in most cases, have constraints to effectively play such an important role. NDBs have not received adequate attention in local and regional development agenda and most of them have several constraints to be up to the task and deliver their mandate. A report by Africa Development Bank indicates that most of the NDBs in Africa have been facing various constraints related to inadequate enabling environment (including inappropriate regulation and supervision), lack of sound governance and clarity in mandate, lack of robust risk management practice, inadequate capitalization[3] and funding structure, inappropriate lending practice, weak monitoring and evaluation mechanism for impact assessment.

In Africa, there still exists the persistence of market failure, which is reflected in the critical shortage of medium and long-term finance for key development and high-risk sectors. In the context of COVID-19 crisis, African countries need large-scale recovery funding, support economic activities to minimize the economic decline and continue promoting sustainable development. Moreover, Brookings report highlights that the implementation of Africa Continental Free Trade Area (AfCFTA)[4] requires increased investment in the form of patient capital to improve infrastructural challenges and boost industrial production as well as removing non-tariff barriers.

One of the major response to meet such financing needs in the current complex regional and global context is revitalization of National Development Banks. NDBs are best positioned to harness domestic resources and build capacity to develop and deliver Agenda 2063 and SDG flagship projects by following a unique financial model of balancing profitability, fairness, equitable development and environmental sustainability. If the key challenges of NDBs is left unaddressed, it may contribute to weak investment in priority sectors and undermine transformation and sustainable development in Africa.

To contribute to this response, SDGCA launched a continent-wide program to support national and regional development banks for the achievement of the SDGs. These involve revitalizing the inherent role of the Development Banks in Africa Region and help make them fit for the purpose. The reform intends to align the major policies and strategies of NDBs with Agenda 2063 and SDGs, undertake regulatory reform in close consultation with the respective central banks, institutional capacity enhancement in key areas including strengthening governance, risk management and monitoring and evaluation framework practice.

[1] In this Article the Term National Development Bank (NDB) is used interchangeably with National Development Finance Institutions (DFIs)
[2] BNDES-Banco Nacional de Desenvolvimento Econômico e Social;KDB-Korea Development Bank; IDBI-Industrial Development Bank of India; CDB-China Development Bank
[3] The total assets to GDP ratio of selected NDBs in Africa ranges from between 0.3% to 2.8%, compared to other regions where it ranges from 15% to 17% (SDGC/A.2019.SDGs Three Year Reality check.
[4] AfCFTA was signed in Kigali Rwanda on March 21, 2018 and 54 states have signed and 36 ratified the agreement so far.