In the early 1980s, within the wider structural adjustment and
liberalisation framework, financial sector reform were initiated to allow
greater facility of market forces in the pricing and allocation of financial
resources. The sector has been increasingly liberalised since then with
subsequent on-going reform addressing the legislative and regulatory
frameworks. The on-going reforms have sought to improve resource
flows for productive investment. Nevertheless, there are persistent
fractures and imperfections in the credit market.
Development banking seeks to define and resolve the
imperfections in credit markets and to address concerns regarding
social equity by targeting loan and other support resources to priority
sectors that seek to use underemployed resources for capital
accumulation and growth.
This document is concerned with how development banks might
be reformed to be part of the wider agenda of development of the
financial sector.
The paper argues that the key reforms needed must emerge from
the introduction of derivative instruments into the financial markets
that define, price and market, and hence spread, the significant credit
risk attached primarily to provision of credit as either working capital
or finance for fixed capacity building to create capital or to absorb it
into production of consumer goods and services. Reforms of
development banking are proposed that focus on their role as
counterparty in derivative contracts, with emphasis on the introduction
of a variety of securitization devices involving redeployment of the
public sector resources to which they have access.