Prudential Standards, Guidelines and Rating System for SADC DFIs 2013 Results

Transcription

1 Prudential Standards, Guidelines and Rating System for SADC DFIs 2013 Results Dr Herrick Mpuku Programmes Manager Development Finance Resource Centre Chief Executive Officers Forum Gaborone, Botswana 5 th December 2013

2 1.0 Introduction The purpose of this paper is as follows: To present the results of self-assessments of the DFIs, and their implications; To draw lessons from the foregoing results; To make suggestions on the way forward with PSGRS in the SADC DFI Network. 22/01/2014 2

3 2.0 Expectations of the DFIs In fulfilling their mandates, the DFIs are expected to strive to attain the following in their operations: Must achieve financial sustainability, and reduce dependency on government; Must be able to raise funds in the open market, as well as to raise development funds form international development institutions; Must deliver on their development mandates by contributing to the economic and social goals of the country (employment, growth, equity, etc.). In order to achieve the seemingly conflicting goals and balance the varied interests, the DFI must develop, establish and adhere to performance norms and standards which conform to best practice in corporate governance, financial management and core operations for the industry. 22/01/2014 3

4 3.0 Addressing the Challenges southern african For the foregoing reasons, it is important to define the standards that make for the sound governance and management of the DFI, and assure its longevity, while fulfilling the its purpose and raison d etre of bringing about socio-economic development in the country; This provides guidance to the Board and Management of the DFI, and helps define the appropriate relationship between the government and the institution, as well as that between the Board and management, and best practice in financial and operational management for a financial institution; It also provides a policy framework for the development, supervision and regulation of the institutions by governments, as indicated in Tanzania (Government Gazette of March 2012). 22/01/2014 4

5 4.0 PSGRS as a Tool The PSGRS Tool is a self-assessment tool to allow the DFIs to assess their compliance in the three areas of governance, financial, and operations in relation to defined norms of best practice. It aims to respond to such questions: Is the oversight over the affairs of the organisation able to ensure that it pursues its mandate, and is run in the best interest of its survival and longevity; What is the quality and diversity of its financial assets? How efficiently is the DFI using its assets and how profitable is it? What are the sources of long term funding and how liquid is the organisation? How does the DFI conduct its core operations; Does it have adequate risk management policies? Does it have an adequate system of approvals, disbursement as well as supervision and collection of loans? Are these systems efficient? In complying with the relevant standards under each category, the DFI can avoid some of the challenges of the past as enumerated earlier, and improve its overall performance in realising its mandate while ensuring financial sustainability. 22/01/2014 5

6 5.0 Outline of PSGRS standards The standards in each category are outlined below, and are divided between Governance and Management, Financial and Operational Standards, with explanatory points under each. 22/01/2014 6

7 5.1 Governance and Management Standards Sufficient Independence from Government (No. of government officials on board, chairmanship of board by government officials) Management Independence and Incentives (appointments of CEOs, delineation of board and executive functions, etc.,) Operating in Accord with Reasonable Commercial Principles (Comparability of remuneration with private and public sectors and performance management of senior management, etc.,) Accounting and Auditing (Conformance with international accounting standards, regularity and timeliness of audit, etc.) Management Information Systems and Procedures (timeliness of annual budget preparation, monthly reporting, cost accounting, etc.,) Corporate Citizen Governance Standards (Performance agreement with owner and strategy to fulfill mandate) 22/01/2014 7

8 5.2 Financial Prudential Standards Capital Adequacy (capital v risk-weighted assets, etc.,) Profitability and Efficiency (administration costs v value of assets, profit percentage of increase in risk-weighted assets, etc.,) Asset Quality (incidence of non-performing loans, provisions of bad debts, etc.,) Asset Diversity and Safety (Does the DFI have an Asset Liability (ALM) Committee, policy on maximum single financial exposure risk to one credit risk, percentage of total assets denominated in foreign exchange, etc.,) Liquidity (monthly cash forecasts? adequacy liquid resources on hand the projected liquid resources for 3-12 months, debt-service coverage policies, etc.,). Funding (availability and dependability of long-term resources to the DFI) 22/01/2014

9 5.3 Operational Standards southern african Risk Management Policies (market pricing, asset and liability management, foreign exchange practices, etc.,) Lending Policies (frequency of loan repayments, duration of loans, availability of guarantees, etc.,) Loan Approvals and Disbursement Policies and Procedures (Duration of loan appraisal processes, debt service coverage, etc.,); Supervision and Collection Policies (frequency of supervision, detailed monitoring reports, collection procedures, sanctions for late payments, etc.); Operations Strategy Policies (Diversification policies, policies on deposit taking); 22/01/2014 9

10 6.0 PSGRS Assessment Process southern african The PSGRS has 100 questions altogether covering the three areas of governance, finance and operations, each of which is broken down into subsets of norms and standards of compliance. The three areas are weighted to reflect importance to sound DFI governance and management of 40%, 40% and 20% respectively; Each of the questions has three possible responses reflecting the level of compliance, i.e., Full Compliance, Partial Compliance, or Non- Compliance, each of which carries a numerical score of 2, 1 and 0 respectively; The scores for all the questions are aggregated at the level of each standard, and then the overall score as per table 1. 22/01/

11 7.0 Results of 2013 Assessment 17 DFIs have submitted their self-assessments, which represents 60% of SADC DFI Network membership; Of the submissions received some have either been verified by external auditors (65%), or signed off by the Board (59%); 29% of the institutions are deposit taking; 47% are regulated by the Central bank The results are presented in the following order: Overall Responses and main features (Table 1); Ranking by DFI using overall weighted score (and components) (Table 2) Ranking by category of standards using overall rating across DFIs (Table 3); 22/01/

12 Table 1. Responses and Main Features SUMMARY RATINGS SCORE SHEET (Based on 17/31 DFIs) RESPONSES YES % NO % Deposit Collection Central Bank Regulation Certification by the Board Certification by External Auditor Total number of responses /01/

13 Table 2. Ranking of DFIs by Weighted Overall Score and Components N o DFI Weighted Overall Score (%) WEIGHTED RATINGS Governance Standards (%) Financial Prudential Standards (%) Operational Standards (%) Certification by the board (%) Certification by Auditor (%) 01 SWAZIBANK N Y 02 IDC SA Y N 03 FINCORP Y Y 04 DBN Y Y 05 CEDA N N 06 BDC N N 07 AGRIBANK -ZIMBABWE Y Y 08 B Y Y 09 B N Y 10 B N N 11 B Y Y 12 B Y Y 13 B Y Y 14 C N N 15 C N N 16 C Y Y 17 C Y Y OVERALL SCORE /01/

14 Table 3. Ranking of Standards by Overall Rating across DFIs RANK No. of DFIs AADFI AFRICA RESULTS Averages Sectors/Areas Scores SADC DFI Percentage % Averages - (Best 2013 First) Subtotal: Governance Standards Subtotal: Financial Prudential Standards Subtotal: Operational Standards Average Total Total List in order of highest percentage Relatively Strong Compliance 1 Accounting and Auditing Operating in Accord with Commercial Principles Management Independence and Incentives Supervision and Collection Policies Management Information Systems & 5 Procedures Capital Adequacy /01/

15 Moderate Compliance 7 Corporate Citizen Governance Standards Asset Quality Asset Diversity and Safety Liquidity Loan Appraisal Policy & Procedures Profitability and Efficiency Weak Compliance 13 Lending Policies Sufficient Independence from 14 Government Risk Management Practices Operations Strategy Policies Funding Availability /01/

16 8.0 Observations from Results Some of the issues and problem areas highlighted from the scores include: There is significantly good performance on management autonomy and incentives; Autonomy of Boards from government control is relatively weak- on account of dominance of government representatives on Boards, and selection processes in others; Resource mobilisation in DFIs remains significantly weak, as they lack clear sources of long-term funding; DFIs continue facing challenges in their core areas of loan appraisal, credit policies, risk management activities, with moderate compliance Incidence of non-performing assets still high; Liquidity is reasonable but may present some risk. 22/01/

17 8.0 Observations from Results SADC DFI Network members compare favourably with the general membership of AADFI: 17 of the 50 DFIs assessed by AADFI are from SADC Relatively weak on Financial and Operational Standards, but comparable on Governance; Of particular concern in relation to AADFI, are the risk management, loan management and appraisal procedures and lending policies; 7 (35%) of the top 20 DFIs are from members of the SADC DFI network. This may suggest possible action plans in some areas on the part of the DFI and the DFRC at the regional level. 22/01/

18 Top Table rated 4: institutions 2013 Rating Merit Table (SADC DFIs Highlighted Results Ratin Green) (Source: AADFI Consultant s Report 2013) g African Export and Import Bank 94% East African Development Bank 93% Credit Agricole du Maroc 93% Odu a Investment Company, Ltd. 92% Banque Nationale pour le Devéloppement Economique 91% Eximguaranty Co (GH) Limited 91% Banque Rwandaise de Développement 89% Swazibank 89% Industrial Development Corporation 88% National Investment Bank 87% Swaziland Development Finance Corporation 87% Development Bank of Namibia [2] 86% AA A+

19 Citizen Entrepreneurial Development Agency 84% PTA Bank 84% Nigerian Export-Import Bank 83% ECOWAS Bank (EBID) 82% Botswana Development Corporation [3] 81% Agricultural Development Bank [4] 80% Banque de I Habitat de Cote d Ivoire 80% Banque de Développement des Etats de I Afrique Centrale 80% A

20 9.0 Implications for the DFRC and DFIs Possible training interventions in the future, based on the results of this assessment, and ongoing work of the DFRC suggests the following: Post-Investment Monitoring and Debt Management: to improve debt collection and credit policies; Corporate Governance: to improve and consolidate corporate governance practices and policies; Risk Management: to improve risk management policies and systems; Investment Appraisal: to enhance appraisal policies and systems; Resource Mobilisation: to improve access to long term sources of funding and liquidity Suggests interventions in the form of training, attachments within and outside the Network. The trainings may be region-wide or institution-specific, depending on the 22/01/2014 level and depth of need. 20

21 9.0 Implications for the DFRC and DFIs (Cont d) May also imply interventions in the form of technical assistance and expert missions: Regional Technical Assistance Facility to support institutional development, restructuring and development of new institutions, through support of the DBSA, AfDB, ACBF in Tanzania, Zambia, Zimbabwe, etc; Diagnostic study by JICA to establish needs and possible interventions by JICA and Japanese DFIs for infrastructure institutions, etc. 22/01/

22 9.0 Implications for the DFRC and DFIs (cont d) The DFRC needs to continue working with SADC structures to develop the regional development financing arrangements, in part to work with the DFIs; Regional Development Fund: to enhance availability of funds for infrastructure and for DFIs; Project Preparation and Development Fund PPDF: to improve project preparation and appraisal processes; DFRC should continue to hold discussion Forums on the risk management, infrastructure development and project preparation, private sector participation, and interact with supervisory and policy authorities; DFRC should carry out regular scans on the current status of the DFI environment in the SADC region from the institutional and policy perspective. 22/01/

23 10.0 Value of PSGRS While the PSGRS has contributed to the DFIs and the DFRC identifying strengths and weaknesses, and opportunities for capacity building at the institutional and regional levels, it is important to recognise the other added value of the use of the PSGRS tool: providing donors/ financiers with a useful set of standards and yardsticks by which to assess DFIs and their suitability as financial intermediaries worthy of funding and/or technical assistance support. improving the reputation of DFIs, and providing them with a tool for dialogue with government, owners and regulators; providing regulators the means of developing and modifying existing regulatory requirements; providing DFIs with useful guidance on rules and benchmarks to compare with other DFIs in the region. introducing a self-regulated early warning system for DFIs to assist them in initiating credible remedial measures, where necessary; 22/01/

24 11.0 Recent Developments southern african Since the end of 2012, the following developments have taken place: A decision has been made to undertake this exercise annually through technical processes, and to report to the biennial meeting of the SADC DFI Network meeting through the DFRC. The CEOs approved the report at their meeting in Walvis Bay Namibia; SADC DFRC has entered an agreement with the AADFI Secretariat concerning the forwarding of certified Self-Assessment Reports from DFIs to AADFI in accordance with the prescribed deadline of AADFI for their processing. The results were incorporated into the AADFI Peer Review of 2013 in Mombasa, Kenya; SADC DFRC should play a more active advocacy role to facilitate adoption of necessary reforms in State-owned DFIs and the member states. 22/01/

25 THANK YOU 22/01/