Financial systems and development

Box 4.4
The Botswana Development Corporation
The Botswana Development Corporation (BDC) was been equally strong (except for a small loss in 1985, due
established in April 1970. It is owned by the govern- mainly to Air Botswana, which has since been divested
ment of Botswana, although three foreign agencies, in- into a separate parastatal). In recent years the BDC's
cluding the International Finance Corporation, own rate of return has averaged 5 percent on net worth.
nonvoting preference shares. The BDC is not a typical The BDC has been criticized for not divesting and for
development finance institution. It has tried to identify crowding out the private sector. As a result of its recent
and establish new projects through wholly owned or initiatives, however, the Sechaba Investment Trust and fl
joint-venture subsidiaries, the latter with foreign par- Stock Brokers Botswana Ltd. have been formed as the
ticipation. The BDC has investments in about sixty first of their kind in Botswana. The Sechaba Investcompanies
in many sectors, including commercial ment Trust will enable the BDC to start privatizing
farming, tourism, commerce, industry, property devel- some of its profitable companies and give citizens an
opment, financial services, and transportation. Most of opportunity to invest in private corporations.
its loans are to its subsidiaries and affiliates. It has also The BDC has developed into a mature development
tried to help local entrepreneurs through its involve- finance corporation. It is financially strong, has sound
Tment in Tswelelo, a development bank for small procedures, and has played a key role in the developenterprises.
ment of Botswana's financial system. The BDC owes its
The BDC's portfolio is sound. Less than 1 percent of achievements to a strong and growing economy, a conthe
total loan portfolio is in arrears, and only a few of servative investment and lending strategy, indepenthe
companies in which it has equity holdings are dent management, and a highly qualified staff.
showing losses. The BDC's financial performance has
damaged financial systems. Many directed credits edly; many DFIs are insolvent, and some have had
have become nonperforming loans. The ability to to be closed. In a sample of eighteen industrial
borrow at cheap rates encouraged less productive DFIs worldwide, on average nearly 50 percent of
investment. Those who borrowed for projects with their loans (by value) were in arrears, and accumulow
financial returns could not repay their loans. lated arrears were equivalent to 17 percent of the
In other cases borrowers willingly defaulted be- portfolio value. For three of these institutions,
cause they believed creditors would not take court loans accounting for between 70 and 90 percent of
action against those considered to be in priority the portfolio value were in arrears. The situation
sectors. The distorted allocation of resources and may be worse than the numbers show, because the
the erosion of financial discipline have left interme- rescheduling of overdue loans and growing loan
diaries unprofitable and, in many cases, insolvent. portfolios reduce arrears ratios. Industrial DFIs
Extensive refinance schemes at low interest rates have continued to depend on governments and
have reduced the need for intermediaries to mobi- foreign official creditors for funding because poor
lize resources on their own, leading to a lower performance left them unable to pay market rates
level of financial intermediation. Moreover, by en- of interest, because the term structure of interest
couraging firms to borrow from banks, directed rates often forbade the higher rates necessary to
credit programs have impeded the development of mobilize longer-term resources, and because marcapital
markets. kets for longer-term domestic instruments were
The adverse impact of directed credit on financial poorly developed.
institutions is clearest in the case of development The economic shocks of the 1980s added to the
finance institutions. Industrial DFIs were generally arrears of many industrial DFIs, but the roots of
deemed a success in their early years. Some of the problem usually lay deeper. Most industrial
them have been conservative lenders and have DFIs specialized in medium- and long-term lendmanaged
to avoid excessive political interference; ing for investment. Such lending was vulnerable
especially in countries with sound trade, fiscal, to business cycle fluctuations and provided insuffiand
monetary policies, they have continued to per- cient diversification of risk. Because most indusform
reasonably well (see Box 4.4). But for most trial DFIs did not provide working capital finance,
the assessment is now far less positive. Portfolios take deposits, or provide other current services,
and financial performance have deteriorated mark- and because they invested in equities to only a
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