The role of specialist advisory services within a development bank
Thesis (MDF)--Stellenbosch University, 2015.
ENGLISH ABSTRACT: It is accepted that financial sector development contributes to economic growth, equality and poverty alleviation. Economic development in many developing economies is constrained by the failure of financial markets to provide appropriate financial services products to enable these economies to address structural transformation and enable sustainable economic growth. Development Finance Institutions (DFIs) have emerged as an effective institutional vehicle to provide financial services to support the development and financing needs of market segments, particularly in developing economies, which the commercial financial sector is unable or unwilling to serve. DFIs provide financing to markets with a perceived high investment risk by developing appropriately structured innovative financing solutions and risk mitigation instruments needed to address the infrastructure and development financing gaps within these economies. DFIs are able to address commercial financial market failure by providing financing to support long-term private sector investment in infrastructure, financing products that service high-risk market sectors that lack collateral and financing to support public sector efforts to provide adequate social and economic infrastructure in countries with a high-risk investment rating. Specialist advisory skills are a critical resource that DFIs deploy to identify, package and finance sustainable and bankable solutions to support transformative growth. For DFIs to operate optimally they need to implement an integrated loan approval process that enables effective investment decision-making. By deploying specialist advisory services at each stage of the investment value chain, DFIs comply with international best practice standards, package development finance solutions to meet potential clients’ needs and ensure financial sustainability. An extensive literature review on DFI practice revealed that the predominant literature on DFIs focuses on the mandate and governance relationships within these institutions. This research assignment addressed the gap in available DFI literature. The research assignment aimed to build on the available literature on DFI investment decision-making and to contribute to the body of knowledge of the DFI investment value chain. The research assignment focused on DFI operations and investment decision-making procedures and considered how DFIs deploy specialist advisory services to enhance the application of an integrated loan approval process, mitigate investment risk and enable the optimal allocation of scarce resources to enhance sustainable development. The assignment identified the various institutional approaches and methodologies DFIs adopt to utilise specialist advisory services and identified the challenges, opportunities and limitations within the process. Chapter 1 introduces the key themes addressed in the research assignment. Chapter 2 provides a literature review of DFI practice and application of best practice considerations in investment decision-making. Chapter 3 details the research methodology deployed to conclude the research assignment. Chapter 4 addresses the research findings emanating from a case study analysis of the specialist advisory services deployed by the Development Bank of Southern Africa (DBSA), the European Investment Bank (EIB) and the Land Bank of South Africa. The assignment concludes with findings and recommendations. The research assignment found that limited investigation has been conducted on the operational execution of specialist advisory services within the investment value chain. Specialist advisory services provide DFIs with a key resource to assist in assessing potential loan applications in ensuring that clients meet mandate criteria to qualify for DFI loan applications, assist in assessing whether clients meet investment standards, and ensure that financially sustainable transactions are supported. To enhance DFI practice, further research is required to unpack the various investment modules applied within the investment value chain.