Question

critically analyze and discuss the 2 issues of product development financial institutions

critically analyse the role of the accountant. What are the implications of these issues for the accounting professions (including society and community)

Answer 1

National and international development finance institutions (DFIs) are specialised banks set up to support economic development. They do so primarily in developing countries, but also in advanced ones to address specific market failures in certain regions or sectors of the economy. They are usually majority-owned by one or several governments, but sometimes private sector operators participate as well. In many respects, DFIs follow the same rules and use the same instruments (loans, credit lines, equity investments, guarantees) as commercial banks. The difference lies in their mandate or mission, which focus on softer objectives such as economic development, poverty alleviation, economic integration, promotion of market economy, job creation, fighting climate change, gender equality etc. They usually take more risk and adopt a longer term perspective on project return than regular commercial banks. Moreover, their shareholders do not require a specific return on equity, which relieves DFIs of the pressure linked to economic performance and profitability. Because of these differences, DFIs face specific challenges not encountered by commercial banks.

1. Measuring the fulfilment of their mandate.

Unlike commercial banks, which objectives can be simply expressed and measured in monetary terms like profitability and shareholder value, DFIs have political mandates, with often soft or qualitative objectives by nature difficult to measure. Assessing their relative success or failure in accomplishing their mandate is therefore difficult. It is nevertheless essential if one wants to select the most effective strategy, thus maximising the impact of tax payer's money. This requires:

- a precise formulation of the mission and the definition of KPIs matching that mission;

- the effective and factual assessment of the DFI against these KPIs by independent economists or accountants;

- the implementation of a system across the DFI that effectively ranks projects against mission benchmarks, so that those projects achieving the highest score can be prioritised and those failing the test can be abandoned.

2. Formulating an actionable strategy.

DFIs are expected to operate at the forefront of societal and economic change. They act as scouts and pioneers, setting an example in fields as diverse as sustainable development, gender equality, corporate governance, environmental responsibility. Like any organisation, they need a strategy to guide them towards meeting their objectives. This may be made more difficult at DFIs given certain soft aspects of their mandate and the nature of their governance, often complex and prone to political interference. To be effective, the strategy has to be:

- realistic, and therefore resulting from an internal process of not only top-down but bottom-up elaboration, taking into consideration the experience and feedback from the operational teams;

- clear and measurable, with targets defined by sector, geography, product ...

- consulted with shareholders, other stakeholders (NGOs ...), approved at the highest level (Board of Directors, AGM ...), communicated to staff and publicized externally.

3.Striking a balance between supporting the private and the public sectors.

As public institutions, it is tempting for DFIs to focus their activity on large infrastructure or public projects. This may achieve high impact on the economic conditions of the country concerned and improve the lives of many, while creating much sought-after visibility. At the same time, through the promotion of private and entrepreneurial initiative, DFIs can achieve grass-root development and contribute to the emergence of market‐oriented economies. An efficient infrastructure will help the private sector strive, but conversely a strong private sector will justify investments made in infrastructure. The case for DFIs getting involved in private sector development is therefore clear when market failures entail that the private sector cannot receive the level of financial support it needs. This support can take several forms: (i) corporate lending (ii) equity investment (iii) technical assistance. DFIs themselves may benefit from maintaining a significant private sector activity, since it tends to instil discipline in investment decision making and keep a healthy contact with the real economy. Balancing private sector and public sector activities requires:

- a clear strategic intent from the shareholders, which may be reflected in the statutes of the DFI with certain ratios to be met between public/private investment;

- separate teams with different sets of objectives, since the project cycles and approaches can be very different;

- employees with corporate banking experience, and equity investment experience in the case where equity investing is an objective of the DFI.