A Development Bank

President Irfaan Ali and VP Bharrat Jagdeo have announced plans for the Government to launch a Development Bank capitalised to $200 million and designed to encourage the growth of small and medium-sized enterprises (SMEs). The Development Bank is not intended to replace the commercial banks, which the Government is working to modernise but to complement them in facilitating small entrepreneurs who may be unable to secure financing from them. While the full details have not been released, assisted by India which has tremendous success in this area, the Bank is expected to be catered for in the next Budget and be operationalised before the end of next year.
Back in the 70s, the then Government had launched GNCB as a public bank, competing with the several commercial banks then operating, and GAIBANK as a development bank, securing its funds from grants and loans from the international community. By the 80s, the Government effectively assumed control over the entire banking industry through varying levels of nationalisation of the private banks. The experience might be an object lesson for our policymakers in the present iteration.
The rationale offered for the massive Government intervention then, as now, was market failure. GNCB as a public bank was responding to the unmet need for a more distributed and accessible banking system while GAIBANK was intended to fill the endemic financing gap for targeted entrepreneurial activities left unattended by the commercial banks.
Unfortunately, the system quickly degenerated into a classic, rightly-criticised, “repressed” financial system that actually resulted in low investment and thus low growth. This situation was exacerbated by several negative features: cronyism, rent-seeking and corruption by bureaucrats, misallocation of funds in misconceived schemes, etc. By the 80s, we had plunged into negative “growth”.
The IMF’s Structural Adjustment Program (SAP) of 1989 bequeathed our present financial system: banks and other financial institutions totally privatised and “liberalised”. It was putatively subject only to market forces with Government reduced to a “non- distorting” regulatory role. GAIBANK was dissolved and GNCB privatised. So, we have three decades’ experience with the liberalised financial system. What have we learnt?
The developed world has now accepted what China and the other “emerged” and emerging economies have shown: participation of Government is vital in the financial sector. Otherwise, the social function of overall national development – which necessitated the invention (and the ongoing maintenance) of the banking system in the first place – will inevitably be eroded and vitiated by the workings of unmediated human greed. A system driven only by the profit motive cannot do otherwise. We have been spared the worst excesses of the financial depravity experienced up north – through our relative “underdevelopment in financial instruments”. On the other hand, the expected banking efficiency or the financial intermediation necessary to foster growth of our economy as noted above is still a work in progress.
Our privatised banks have maintained and even extended the dispersion of branches into the countryside, but these have been deployed to more efficiently trawl for deposits rather than for disbursing more loans. In this former task, they have been singularly successful, but in their reluctance to service the domestic entrepreneurial potential necessary for our development, they have piled up huge “surpluses”. Theoretically, in the financial liberalisation model, the private banks were supposed to have competed with each other to lend the funds secured from deposits leading to the lowest possible rate of interest and still make a profit over the rate offered to attract deposits. If the claim was valid, it certainly never reached Guyana.
In our considered judgement, we threw out the baby with the bathwater when we closed down our development and public banks. The raison d’être for those institutions is even more evident – and necessary – today, if we want to achieve the double-digit growth rates necessary for a quantum leap in living standards. The present Government is attempting to fill this gap in financing.
Of course, we have to rectify the downside risks inherent in government ownership, which in our case, having tried the model, are more easily-identified.