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Kleiterp: Local banks should fill the finance gap

This month's issue of The Banker features Nanno Kleiterp's Viewpoint on the way the current economic environment is affecting emerging markets: “Development finance institutions can help companies in emerging markets overcome the short-term crisis created by global banking groups' lack of credit, but local banks must pick up the gauntlet in the long term.”

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There can be no avoiding the fact that for all markets and companies - FMO included - 2009 will be a challenging year given the unprecedented events in credit markets and economies throughout 2008.Emerging markets have suffered as Western commercial banks and other investors have pulled back into more familiar terrain in Organisation for Economic Co-operation and Development areas over the past year or so, leaving a range of businesses in developing countries facing a significant financing gap. This tends to happen repeatedly in crises and demonstrates yet again that many international commercial banks are unreliable sources of investment capital over the long-term because of their risk-averse natures when operating in emerging markets.

For the development finance institution (DFI) community, the main short-term effect of the financial turmoil is undoubtedly the rising demand for development finance in emerging markets, particularly from companies that urgently require refinancing.

Collective mission
The adverse economic circumstances faced by companies across the globe endorse FMO's belief that DFIs must all work harder with clients and partners to achieve their collective mission: mobilising additional investment capital that will optimise sustainable development in emerging markets.

My main message for DFIs, though, is that they should be paying much more attention to their role in supporting and encouraging local banks to back the local companies that can achieve all this. The traditional easy option for domestic banks is to invest in the government bonds regularly issued to finance budget deficits. Local banks should be helped to resist the temptations of 'armchair banking' and instead pointed toward investing in local companies. This would have a series of highly beneficial effects. Taking the local banking sector to a higher level over the long run, relatively unaided by Western commercial parties, would help to keep local economies alive on a stronger and more sustainable basis.

Medium-sized enterprises
Providing additional credit to small to medium-sized enterprises (SMEs) should be the focus of this developmental push. Whereas large businesses tend to have much greater access to formal, bank-based credit and capital markets, access to financial services for SMEs is now more constrained than ever as the financing gap widens. Yet SMEs have regularly been proven to play a major role across the world in job creation, innovation and fostering economic growth. The World Bank estimates that SMEs contribute an average of 51.5% of GDP in high-income countries, whereas the figure is just 15.6% in low-income countries. This percentage should act as a spur to local providers of the micro-loans that are generally the main avenue to SME credit and to the DFIs that have the ability to on-lend via the local banks. It should also spur DFIs to educate local banks as to how they might better fill the financing gap.

Of course, it is also important that FMO and other DFIs stand by their existing clients and continue using their high credit ratings to take risks that commercial financiers are no longer willing to. Besides providing long-term financing, also in local currencies, the target must be to further support our clients in emerging markets by offering value-added services such as asset liability and risk management, environmental and social training as well as technical assistance.

Resilient to shocks
One positive that should be emphasised is that FMO's past experiences with several financial crises in emerging markets have often shown that client companies based in these markets are quite resilient to shocks, and able to rebound from financial downturns with a strong focus on the future. Another positive is that although the effects of the financial crisis are already being felt in emerging markets, there is good reason to be optimistic. According to IMF estimates, emerging markets will continue to grow at an average of 2% in 2009, whereas their more advanced market peers are facing an estimated negative growth of more than 3%.

With continuing DFI support in these tough times, major inroads into the growing financing gap can be made - and all of our global clients can be helped to improve and grow their businesses in a way that assists corporates, SMEs and microfinance institutions now and in the foreseeable future. This can only be achieved, though, if DFIs and local banks take their responsibility and make a real effort to bridge the gap, which will require leaving behind comfort zones and spurring sustainable development in emerging markets with recurring investments.

About FMO
The Netherlands Development Finance Company (FMO) is the international development bank of the Netherlands. FMO invests risk capital in companies and financial institutions in developing countries. With an investment portfolio of € 4.2 billion, FMO is one of the largest bilateral private sector development banks worldwide. Thanks in part to its relationship with the Dutch government, FMO is able to take risks which commercial financiers are not - or not yet - prepared to take. FMO's mission: to create flourishing enterprises, which can serve as engines of sustainable growth in their countries.
 
Press contact
Patrick Harms
Communications Officer a.i. (PR)
M: +31  642 054 041
E: phm@fmo.nl