11 November 2020

The allocation of resources of National Development Banks: does it fit development goals?

Public financial institutions and National Development Banks (NDBs) in particular are well suited to fill financing gaps in un- or under- served markets. By virtue of their developmental mandate, and local expertise, NDBs are able to operate and invest in the most vulnerable regions where the risk is often too great for a majority of private actors. This study intends to reflect on NDBs mandates in this context by shedding light on the significant role they can play to address scarcity of financing in vulnerable areas within developing countries. Using firm-level data for 127 countries over 2006-2018, we find that on average, there is no significant difference in terms of productivity levels between firms accessing private versus public finance. NDBs tend to provide more finance in less developed localities relative to private commercial banks. Our results show therefore that public banks support more firms in less developed localities, without necessarily selecting less productive firms. Instead, they seem to be able to manage more risks related to the local context that fall outside of the direct control of the firm but that might affect their future portfolio performance. Evidence also supports the emerging consensus that public banks play a countercyclical role by strengthening their credit offer during bad times.

This Research Paper is published in the framework of the International Research Initiative on Public Development Banks working groups and released for the occasion of the 14th AFD International Research Conference on Development

It is part of the pilot research program “Realizing the Potential of Public Development Banks for Achieving Sustainable Development Goals”. This program was launched, along with the International Research Initiative on Public Development Banks (PDBs), by the Institute of New Structural Economics (INSE) at Peking University, and sponsored by the Agence française de développement (AFD), Ford Foundation and International Development Finance Club (IDFC).

Have a look on the key findings for a quick overview of the research results

See the video pitch