Development Finance institutions (DFIs) play a vital role in addressing market failures and delivering public policy objectives. They drive sustainable investment, fund infrastructure projects and fill financing gaps overlooked by the private sector. But what if the regulations that govern DFIs prevent them from funding clients they are supposed to serve? And how might the regulatory environment for DFIs be enhanced to help them better fulfil their development mandate?
These are some of the key questions explored during a session hosted by the ICR Facility for DFI leaders from the 44 members of the Southern African Development Community Development Finance Resource Centre (SADC DFRC) during its CEO Forum on 26 and 27 June.
SADC-DFRC is the anchor institution that is working with DFIs and their mother ministries to harmonise this through research-based policy advocacy work.
A patchwork of frameworks
For the past five years, the ICR Facility has provided technical assistance, conducted research and promoted knowledge exchange to support DFIs across African, Caribbean and Pacific (ACP) countries. To inform discussions at the CEO Forum, it developed a policy brief which found that DFIs in the SADC region operate under different national regulatory frameworks, each of which can have beneficial and detrimental effects on their operations, access to capital and capacity to finance underserved sectors. These differences were discussed during the ICR Facility’s session at the CEO Forum.
Some DFIs in the SADC region are regulated like commercial banks, which can restrict their development impact by limiting flexibility or discouraging lending to riskier sectors. Others are subject to direct oversight by their ministry of finance, which ensures alignment with national priorities but can subject them to political interference and create difficulties in raising commercial capital. Another DFI under direct supervision from its ministry of finance receives government funding but is prohibited from taking deposits, so it must source additional funds from the market, where capital typically comes at a higher cost.
In seeking the right balance between financial oversight and developmental ambition, it is essential to recognise that regulatory frameworks not only define what the DFIs must do, but what they can do and how much space they have to innovate, take calculated risks and serve marginalised sectors. The goal is to establish proportionate, DFI-specific rules that maintain stability while allowing for flexibility and innovation to fulfill their development mandate.
A case for closer regional alignment
The differences between national regulatory frameworks also have ramifications for the wider SADC region. Their heterogeneity inhibits cross border investment and collaboration, limits co-financing opportunities and restricts access to regional pools of capital or funding from multilateral development banks, which often require a baseline level of regulatory coherence.
There are other compelling arguments for closer regulatory alignment between DFIs, says Zweli Sapula, the CEO of SADC DFRC, which seeks to foster economic cooperation and trade, coordinate policies and facilitate the free movement of goods, services and people.
Harmonising regulations would support DFIs in small markets such as Botswana and Malawi which need to access to regional markets to drive development. As Sapula explains: “You cannot grow and be sustainable, and affect economic development in your own country, if you only think about what’s inside your borders.” But the benefits also apply to DFIs in more populous countries. Sapula notes that the former Development Bank of South Africa changed its name a few years ago to the Development Bank of Southern Africa, to reflect its regional orientation, and that it allocates close to a third of its capital to projects outside of South Africa in the SADC region.
Moreover, says Sapula, harmonisation would support SADC’s regional development priorities such as the development of cross-border “development corridors”. These corridors, such as the North–South Corridor stretching from South Africa’s Durban Port through Zambia and into the Democratic Republic of the Congo, are intended to facilitate trade, promote economic cooperation and enhance regional value chains.
Additionally, harmonisation would help SADC prepare for the full implementation of the African Continental Free Trade Area (AfCFTA), which will facilitate free trade and investment across the continent. “This is a way of the region gearing itself up so that when the AfCTA eventually becomes a [reality], we are not starting from scratch, but we are already half-way there,” says Sapula.
Public–private dialogue: the engine of alignment
A central tool in the effort to enhance DFI regulations is public–private dialogue (PPD) involving DFIs, regulators and policymakers. “Many of us are trying to solve the same problems in isolation,” noted one DFI representative who welcomed a regional public–private dialogue forum to co-develop regulatory guidance. “These kinds of engagements can help us clarify what the playing field looks like and empower us when we engage with governments to advocate for what’s needed,” adds Sapula.
To that end, the SADC-DFRC partnered with the ICR Facility to conduct a three-day training ahead of the CEO Forum, with one session focused on strengthening DFI participation in PPD. Sapula is optimistic about the prospects for the dialogue. As he sees it, “There’s political will, there’s a foundation in place and there’s a clear demand from the DFIs.”
Support from the ICR Facility
Providing support for DFIs and ministries of finance to engage in structured policy dialogue on regulatory reform and access to finance has been an ongoing focus of the tailored technical assistance provided by the ICR Facility.
Besides working with such stakeholders in individual ACP countries, the ICR Facility supports DFIs across ACP regions to exchange ideas through its DFI Exchange Group, which it convenes on a quarterly basis to discuss specific topics via peer exchange.
Additionally, the ICR Facility provides training to individual DFIs, notably through its online Business Environment Reform to Support Women’s Economic Empowerment course, as well through the business environment reform tools that are included in the ICR Facility’s Investment Climate Reform Toolbox.
And as the above illustrates, the ICR Facility also supports regional bodies such as SADC DFRC, enabling it to engage with multiple DFIs, advocate for the needs of entire regions and mobilise partners around key themes.
Find out more: Support to Development Finance Institutions
The publication of this ICR Story was led by GIZ. These were produced with the financial support of the European Union (EU), the Organisation of African, Caribbean and Pacific States (OACPS) under the 11th European Development Fund (EDF), the German Federal Ministry for Economic Cooperation and Development (BMZ) and the British Council.
The ICR Facility is implemented GIZ, the British Council, Expertise France, and SNV. The contents of the publication are the sole responsibility of GIZ and do not necessarily reflect the views of the EU, OACPS, BMZ or the
other implementing partners.
