The future of national development banks

Abstract

In the wake of the global financial crisis, there is growing consensus that national development banks play a valuable role in development finance, at multilateral, regional and national level. This paper looks first at the theoretical background justifying a mixed economy approach to development finance, including due to major and pervasive market failures in private financial markets, and the need to help fund new sectors and activities, as part of the process of structural transformation, essential for dynamic, sustainable and inclusive growth. The paper then describes empirically and analyses the key features of national development banks world- wide, based both on secondary sources, as well as original primary research; key features include the long-term maturity at which these banks lend, as well as the high proportion of their assets, which are dedicated to fund productive activities.The paper then analyzes in depth the main functions which national development banks perform. National development banks play at least five crucial roles in the development process: (i) counteracting the pro-cyclical behavior of private financing, by providing counter-cyclical lending; (ii) promoting innovation and structural transformation, which often implies uncertainty, which inhibits private finance, on its own, funding at sufficient scale; (iii) enhancing financial inclusion, especially-but not only in the agriculture sector; (iv) supporting infrastructure investment; and (v) supporting the provision of public goods, and particularly combatting climate change. There are other roles that NDBs could or should play. These include helping develop and deepen financial markets, promote entrepreneurship, and promote internationalization of national firms.