Why Development Banks Matter

This blog post was written by Jorge Arbache and Juan Carlos Elorza

The COVID-19 pandemic has forced governments around the world to resume direct countercyclical intervention aimed at preventing, overcoming or minimizing the effects of economic downturn caused by confinement measures.

Among other actions, all Latin American countries have taken steps to transfer funds to the financial system, businesses and individuals with the aim of sustaining economic activity, protecting jobs and, of course, household income.

To this end, development banks (DBs) are key players in the implementation of policies and measures. Created in Latin America as executors of the countercyclical role of states, they have over time become an effective cornerstone for productive and social development. Their strategic action extends beyond the crisis and makes them an important instrument for economic and social recovery.

However, effective countercyclical policies require sufficient financial resources, complemented by different forms of contingent credit and the expansion of rapid borrowing capacity in international markets. This is where multilateral banking comes in. In this sense, CAF can boost their capacity to act in strategies to mitigate the impact of the crisis and promote reactivation of production. In addition to financial resources, we can integrate good practices for effective crisis management and offer alternatives in decision-making on the best use of funds, as well as technical assistance and know-how in various areas of economic revival and economic policy in general.

The potential of DBs is based on the capacity and experience to generate positive external factors in financial sectors with financing constraints, in particular MSMEs, as they promote and facilitate funds in longer terms than those offered by commercial banking under normal conditions; they contribute to expansion of financial services to all population and business segments; and help mobilize funds of third-party investors (public and private) by sharing financing or risks in lines and projects.

DBs also finance sectors and activities whose social return rates, in addition to economic yields, underpin their actions as public fund managers. They provide financial and non-financial services for companies, both in excluded and in strategic sectors and promote business and technology development through financial instruments tailored to the profile of customers and intermediaries they often use.

It should be noted that DBs have been natural partners of CAF and they have developed a close relationship through various modes of operations, such as lines of credit, loans, equity investments and technical assistance. We have a business relationship with 17 of the region’s leading development banks in 11 member countries. Operations total credit approvals in the amount of USD 1.84 billion and a total exposure of approximately USD 1 billion.

Our goal is to further expand this relationship, articulated with technical assistance funds for the exchange of experiences and institutional strengthening of these banks, product design or adaptation, documenting best practices, among other activities.

The experience and knowledge of DBs in the needs of production activities in each of the countries where they operate, puts them in a privileged position to be partners and to catalyze the supply of CAF funds to the private sector and stimulate the demand for financing for economic recovery during deconfinement, with multiple benefits in terms of effectiveness in impact, relevance, operational efficiency and financial risk.

Generally speaking, a partnership with national DBs during the crisis and the economic revival phase will have desirable impacts in line with our mission, at least in the following ways:

• We will expand the capacity and scope of financing programs and strategies of CAF and national or subnational DBs by placing funds with liquidity, guarantees and leverage to attract investment.
• We will be able to allocate funds and efforts for a more effective focus on vulnerable sectors and sectors critical to production recovery, thanks to the vocation and experience of DBs in this area (rural and urban microfinance, MSMEs, productive infrastructure, health care, investments in energy transformation, tourism, investments in digital transformation, aid to subnational governments, business innovation, among others).
• We will develop activities to promote new credit management and analysis standards, in line with advances in financial digitalization and large database management.
• We will design and implement innovative instruments and products to attract private capital, in addition to credit guarantees: capital market instruments, parallel private equity funds and bond markets.
• We will reinforce CAF’s and national strategies to close the MSME funding gap.
• We will effectively boost the technological financial MSME (fintech) system, as a strategy to increase financial inclusion rates.
• We will solve public-private coordination problems for financing of public assets and other activities with high social returns.

As can be seen, there is a great opportunity to capitalize on the expertise of CAF teams to enhance the relationship with the region’s DBs and bolster a work agenda that generates economies of scale, accelerates inter-bank learning and tailoring financial and non-financial offerings to address the economic recovery challenges of the countries of the region.

More importantly, while the current situation puts tremendous pressure on DBs to address short-term emergencies, CAF’s complementary action will be a platform to maintain these institutions’ commitment to sustainable, sustained and inclusive development in the medium and long term.

So in the end, why do development banks matter? Because they are the perfect partners for CAF to develop a comprehensive financial program to provide timely, relevant and effective support to emergency measures of member countries and thereby mitigate the effects of the crisis and help reactivate and energize the economies of the region.