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IMPROVING FINANCIAL RESOURCE MOBILIZATION TO MOVE THE POVERTY REDUCTION AGENDA FORWARD

Ms EVELYN N. OPUTUMANAGING DIRECTOR

BANK OF INDUSTRY (BOI) LIMITED, NIGERIA

PRESENTATION AT THEHEARING OF THE BUSINESS SECTOR ON FINANCING FOR

DEVELOPMENT, UNITED NATIONS18th JUNE 2008.

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INTRODUCTION

My brief comments will refer to the two chapters of the Monterrey Consensus dealing with financial resource mobilization, one with domestic and the other, international sources. The relevance of the two chapters derive from an understanding that the Monterrey Consensus is the financial impetus of the Millennium Development Goals

Permit me to start by sharing my experience on

financing for development; I will then review the main challenges in mobilising financial resources and finally offer possible remedial suggestions.

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BANK OF INDUSTRY BANK OF INDUSTRY  

The Bank of Industry, Nigeria’s leading DFI, is now a significant contributor to Nigeria’s economic and social development since emerging from the reconstruction of its precursor institution, the Nigerian Industrial Development Bank (NIDB).

The transition from NIDB to BOI, a testimonial of the resourcefulness of home grown development effort, the kind which international capital and development partners could support much more

The mandate of the bank is primarily to finance and catalyze industrial development. Underlying the implementation of this mandate is a vision to finance growth that puts people first and empower the weaker segments in our society to gain access to productive assets and opportunities and move the poverty reduction agenda forward.

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PARADIGM SHIFTPARADIGM SHIFT

Our effort toward equity and empowerment through lending and capacity building for sustainable inclusive development has since 2005 underpinned a paradigm shift in the bank’s strategic direction, orientation and mode of operation.

Central to the Bank’s paradigm shift are:

Structured industrialization of the country through the stimulation and development of MSMEs which are widely recognised as the engine of economic growth, with higher developmental impact and multiplier effect per unit of investment and consequently;

BOI’s commitment of 85% of its resources to MSMEs geared toward the attainment of the objectives of NEEDS, NEPAD and the IDGs..

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BY END Q1 2008 BOI HAS RECORDED IMPORTANT GAINS:

290% expansion in investments/loans between

January 2006 and March 2008

83% lending to SMEs.

289% increase in number of loans to 342 from 88

279% increase in direct/indirect jobs expected to be generated by

BOI assisted companies (530,000 jobs)

Portfolio at risk dropped from 65% to 10.7% (Industry average in

Nigeria is 22%)

GAINS OF PARADIGM SHIFTGAINS OF PARADIGM SHIFT

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  Dec. 2007 Dec. 2005 (audited) (audited) % Increase N N Gross Earnings 6.46bn 1.38bn 368% Operating Expenses 2.56bn 1.27bn 102%

Profit Before Tax 2.23bn 0.105bn 2,024%

GAINS OF PARADIGM SHIFT CONT’DGAINS OF PARADIGM SHIFT CONT’D

FINANCIAL HIGHLIGHTSFINANCIAL HIGHLIGHTS

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GAINS OF PARADIGM SHIFT CONT’DGAINS OF PARADIGM SHIFT CONT’DINCREASED PRODUCTIVITY INCREASED PRODUCTIVITY & EFFICIENCY & EFFICIENCY

Dec. 2007 Dec. 2005

Operating Expenses/ 65% 92% Gross Income

Profit Before Tax/ 35% 8% Gross Income

Very importantly, our financial and operational performance confirms that enterprise profitability and development could be complementary. Through home grown reforms, we have built a strong, dynamic and flexible DFI responsive to the needs of our people. There are replicas of such success stories around the developing world.

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WHY PARADIGM SHIFT?WHY PARADIGM SHIFT?

Focused the coverage of our operations on micro, small and medium sized borrowers to :

Support a sustainable inclusive development process, financing people-based growth with emphasis on creating employment, income and opportunities for the weaker segments in our society (gender loans, microfinance, cooperative)

Promote a strategy flexible and adapted to the needs of our people in meeting IDGs, facilitating national development and improving living conditions and the quality of life

Expand the formal private sector, bringing to bear, the efficiencies and institutional capacity of formal sector operations on our large informal sector which contributes significantly to GDP.

Challenges are legion but surmountable. The bottom line is that we seek, in concert with our development partners to provide a coherent response to the challenges of sustained and equitable development and eradicating poverty in our country.

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MAIN CHALLENGESMAIN CHALLENGES

TO INCREASE EFFECTIVENESS THROUGH WIDER COVERAGE, WE PLAN TO:

Invest up to N250 billion (about US$2.2 billion) over a 5-year plan period, growing

lending by N50 billion per annum over the next 5 years. Current capital under N20

billion.

Continue to commit 85% of the Bank’s resources to MSMEs to convert our

comparative advantages in the utilisation of local resources into competitive ones

Commit the balance of 15% to larger enterprises which would be leveraged with

foreign national Development Finance Institutions and International Finance

Institutions to mobilise further N40 billion into the domestic economy. Target

partners include, but are not limited to, the EXIMBANKS of the USA, India, Thailand

and Korea, the Islamic Development Bank and IDC of South Africa.

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• KEY CHALLENGES TO REALIZING THESE GOALS REMAIN MOBILIZING

FINANCIAL RESOURCES IN BOTH THE DOMESTIC AND INTERNATIONAL

MARKETS. Domestic market improving but lacks financial resources. Why?

Structural fiscal rigidities that hamper optimum collection of internal public financial resources

Debatable impact of direct foreign investment e.g. private capital flows that repatriate profit not

counting as finance for development even if they bring indirect benefits, Also the adverse

impact of tax holidays and other fiscal incentives to attract direct foreign investments on

domestic resource mobilization

Private savings and investment level growing but not significant to make a dent on resource gap

in financing inclusive social and economic development

Inadequate capacity of domestic financial institutions to cover the broad waterfront of finance

for development and capacity building

Lack of well developed capital market – Non-bank financial institutions slow to provide

alternative sources of capital

Despite groundwork laid with reform, financial institutions and financial markets

still have to develop capacity to respond to increasing need for finance for development

MAIN CHALLENGES (contd)MAIN CHALLENGES (contd)

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MAIN CHALLENGES (contd)MAIN CHALLENGES (contd)

The main challenges in mobilizing international financial resources for inclusive

development include:

Slow pace of growth of international development assistance especially Official

Development Assistance (ODA).

Implementation of 0.7% of GNP contribution (about US$250 billion) by G8 as ODA does not

appear to be on course. Reality is that ODA figures for development finance are indeed falling,

propped only by debt relief and rising emergency aid. Yet ODA has tremendous potential to

catalyze mobilization of financial resources by leveraging larger amounts of domestic and

foreign capital.

Conditionality and other policy preconditions impair availability of limited mobilized

resources. They serve more to impose political conditions on development assistance.

Lack of financial institutions primarily responsible for mobilizing and coordinating

development resources and with capacity to introduce new services and products that

unlock development aid.

Limited or no engagement with sub-regional and national DFIs instead inclined toward

non-financial government agencies with vaguely defined poverty reduction

programmes

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Recommendations (contd)Recommendations (contd)

The main objective of the chapters of the Monterrey Consensus dealing with the

mobilization and effective use of financial resources is to achieve national

economic conditions needed to fulfill internationally agreed development goals as

a first step to ensuring that the 21st Century is the century of development for all.

Given that each country is ultimately responsible for its own development, we

recommend the following for better domestic resource mobilization:

Step up fiscal reforms that will substantially improve the tax base, tax

collection and other internal financial resources.

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Recommendations (contd)Recommendations (contd)

Recipient countries in Africa should create investment environments that are

in themselves attractive to business by continuing progress on government

reforms that have removed many obstacles to investment

Strengthen domestic development financial institutions and improve financial

sector regulation as microfinance institutions assume greater role in financing

for inclusive sustainable growth

Better management of resource endowment to increase investments in income

and employment creating activities.

Expand public-private partnerships especially in infrastructure projects which

require substantial financial resources

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RecommendationsRecommendations

For greater international financial resource mobilization, there is need to:

International financial system should identify and support national development finance

institutions that have demonstrated sound management and a capacity to mobilize

resource. Bilateral, multilateral and regional development institutions could offer such

support through investments, loans and/or matching grants that increase the opportunities

for individuals

Establish a framework for achieving investment effectiveness of Foreign direct investment

and private capital flows to ensure long term net positive contribution to finance for

development. Such a framework must at the minimum have a commitment to a pro-poor

agenda and to create jobs through inter-linkages with the domestic economy

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RECOMMENDATIONS (CONT’D)RECOMMENDATIONS (CONT’D)

International investors and ODA should take a long term perspective in developing country DFIs that fund MSMEs. International investments in local DFIs provide a stamp of approval raising the profile of lending to DFIs which in itself helps to diversify the DFIs’ funding base in international and domestic markets. In addition, international investors bring in a global knowledge of best practices and innovation as part of the package.

Build development partnerships that increase the volume of ODA while reducing both the suffocating influence of donors’ foreign and economic policies and the high costs of development assistance administration and technical assistance.

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CONCLUSIONCONCLUSION

The great challenge of the Monterrey Consensus is to address the constraints that limit

financial and technical cooperation that can help people to improve their lives. There is a

need to build financially robust domestic and international institutions as vehicles that

mobilize and channel finance for development. This long term strategic agenda is ambitious.

It is achievable however when the domestic and international environments work together

to create enabling conditions to increase the capacity of developing countries to absorb and

take advantage of global financial resources.

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Thank you