While broadly in support of the government’s planned Development Bank, commentator Christopher Ram and politician Terrence Campbell have raised serious concerns about the architecture for the institution and have warned about political influence and absence of financial safeguards.
The proposed Guyana Development Bank Bill seeks to establish a state-owned lending institution with an initial capital of $40 billion. However, both Ram and Campbell, in response to questions from Kiskadee Watch, argue that the bill, as drafted, contains significant weaknesses that should be addressed before the institution begins operations.
The Bill was tabled on June 5th in the National Assembly by Senior Minister within the Office of the President with Responsibility for Finance Dr Ashni Singh.
Ram described the bank’s exemption from the Financial Institutions Act as one of its most troubling features, while Campbell expressed concern that excessive authority has been assigned to the Finance Minister.
“I support the re-establishment of a Development Bank,” Campbell, the leader of the A Partnership for National Unity (APNU) parliamentary team, said.
“It will fill a financing gap by providing loans with or without collateral. This has been a major stumbling block for young entrepreneurs. Loans with or without interest will also help to stimulate growth in entrepreneurship”, he said.
While endorsing the concept, Campbell, who once operated a number of fastfood franchises here, said he was concerned that the Finance Minister would appoint the entire Board of Directors.
“I am concerned about this as it will likely lead to politicisation of the bank. The Opposition should also have been represented on the Board,” he said.
Ram expressed similar concerns.
“It is fundamental,” he said when asked about the importance of insulating a development bank from political influence.
“A development bank should allocate capital based on economic merit and developmental impact, not political considerations. Once lending becomes politicised, a development bank ceases to be a bank and risks becoming a slush fund”, he said.
Ram, a chartered accountant and attorney, argued that a $40 billion institution required a greater degree of independence than is currently contemplated by the bill.
According to him, representation from the banking, business, accounting, manufacturing, agriculture and risk-management sectors would improve governance and public confidence while helping to safeguard public funds.
Both men also questioned whether the legislation contains sufficient protections against political interference in lending decisions.
“No. Too much control resides in the Minister,” Campbell told Kiskadee Watch
Criticism
Ram argued that the combination of ministerial appointments, exemption from regulatory oversight and broad board powers create “grave risks.”
“The drafters only had to look at Guyana’s own history of GAIBANK which was so egregious that it had to be dissolved,” he said.
A major area of concern for Ram is the bill’s exempting of the Development Bank from oversight under the Financial Institutions Act.
He noted that the legislation governing financial institutions contains extensive provisions dealing with governance, inspections, supervisory intervention, risk management, loan-loss provisioning and related-party transactions.
“The exemption means that none of the prudential safeguards contained in the Financial Institutions Act apply,” Ram said.
“So here we have it – inherently greater risks and less governance. That makes no sense.”
While acknowledging that development banks are often created through special legislation, Ram argued that successful international models generally replace ordinary banking regulation with equally rigorous safeguards.
“This Bill does not,” he said emphatically.
He added that the proposed legislation removes existing protections without creating equivalent safeguards.
Among the provisions he expected to see but which are absent, Ram listed Bank of Guyana oversight, restrictions on related-party lending, collateral requirements, treatment of loan losses, co-financing rules, independent board appointments, director indemnification and stronger governance provisions.
“The initial capital of this bank is comparable with that of many of our existing financial institutions,” he noted.
Reasonable
On the question of lending limits, Campbell said the proposed $3 million ceiling established under Section 24 of the bill represented a reasonable starting point.
“$3 million is a good start. This can be reevaluated as we progress,” he said.
He suggested that small manufacturing operations, trading enterprises and small-scale agricultural ventures would be among the businesses most likely to benefit from financing at that level.
Campbell also pointed out that future increases to the lending ceiling would require amendments to the legislation.
“Section 24(1) sets the loan ceiling at $3 million. Any increase would have to occur via an amendment to the Act. This would be debated in Parliament,” he said.
Ram, however, questioned whether a lending institution restricted to loans of that size could genuinely be described as a development bank.
“Perhaps the most fundamental question is whether this is truly a development bank,” he said.
With a loan ceiling of only $3 million, he argued, the institution appears closer to a small business lending agency than a traditional development finance institution.
He noted that lending organisations such as the Institute of Private Enterprise Development (IPED) provide substantially larger loans without describing themselves as development banks.
Ram also said the legislation fails to clearly identify the developmental challenge the institution is intended to address.
“Parliament should first determine what problem the institution is intended to solve before committing $40 billion of public funds to it,” he said.
Both men stressed the need for strong safeguards to protect taxpayers.
Ram warned that because the proposed bank cannot accept deposits and appears likely to rely heavily on taxpayer funding and loan repayments, losses would ultimately be borne by the Treasury.
“If losses are substantial, the burden will ultimately fall on the Treasury,” he said.
Asked whether taxpayers could eventually be required to recapitalise the institution, he responded: “Undoubtedly.”
“Inevitable losses will impair the Bank’s capital which taxpayers will be asked to replenish.”
Campbell similarly emphasised the importance of strong lending standards and recovery mechanisms.
“Credit underwriting and recovery mechanisms would have to be of the highest standard,” he said.
He also argued that Guyana should learn from the experiences of previous state-owned lending institutions.
“Inadequate oversight led to failures,” he posited.
Despite their criticisms, both men said a properly structured development bank could play an important role in economic development.
Diversify
Ram argued that such an institution could help diversify the economy beyond oil and gas by supporting sectors such as agriculture, agro-processing, manufacturing, exports, tourism, technology and renewable energy.
Campbell outlined several changes he believes should be made before the legislation is finalised, including limiting loans to Guyanese citizens, placing the institution under Bank of Guyana oversight, providing for opposition representation on the board, specifying qualifications for the Chief Executive Officer and strengthening governance provisions relating to contracts and board procedures.
“Legislation should specify the required skillset of the CEO. CEO should not individually sign contracts. Clearly define Board quorums,” he said.
Ram’s broader concern is that the legislation appears to have been drafted to meet a legislative timetable rather than emerging from a process of extensive consultation with commercial banks, small businesses, development finance specialists and other stakeholders.
“There is no evidence of such engagement,” he said.
The first announcement of the bank was made by President Irfaan Ali in July last year at the launch of the People’s Progressive Party/Civic campaign rally in Kitty. Ali had said at the time that, to stimulate economic growth and support small businesses, the bank would be established to offer “zero-interest-rate” financing specifically for small and medium-sized enterprises.
Ram also expressed concerns about the manner in which Ali had described the institution, according to a report issued by the Department of Public Information (DPI).
Ram said that President Ali’s latest description of the Guyana Development Bank on the DPI website raises questions that extend beyond the legislation currently before Parliament.
“The institution he describes is not merely a lender but a complex support network of credit officers, facilitators, financial analysts, technical officers, sector specialists and mentors. Yet many of these operational features do not appear to be explicitly embedded in the law that Parliament is being asked to approve”, Ram said.
He said that the President has also indicated that bank officers will help entrepreneurs develop ideas, prepare applications and structure projects.
“While technical assistance is a recognised feature of development finance, it is legitimate to ask how the bank will preserve independent credit assessment if the same institution is involved in both preparing and evaluating proposals. Sound governance generally requires a clear separation between advisory and approval functions”, Ram asserted.
The organisational chart published by the President raises additional concerns, he said.
“It appears to blur the distinction between oversight and management by positioning operational functions in a manner that could undermine the authority of the Chief Executive Officer and compromise the Board’s independence. A board is expected to supervise management, not become part of the management structure itself.
“Finally, there is a need for clarity on costs. If the bank is to employ and maintain a nationwide network of specialists, mentors, facilitators, and credit officers, what portion of the announced $40 billion allocation is intended for administration and start-up expenses, and what portion will actually be available for lending? This is a very dangerous basis on which to begin a new initiative.
“The President’s intervention, over and above the doubts and questions I raised before, raises the additional and fundamental question about the quality of planning and analysis of the work that has been done, potentially rendering a good idea into a bad and costly one”.
Discussion