Using Development-Oriented Equity Investment as a Tool for Restructuring Transition Banking Sectors
Over the past 10 years the three Baltic republics have undertaken significant restructuring of their banking sectors, supported by the World Bank through three projects: the Financial Institutions Development Project in Estonia, the Enterprise and...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/11/1643369/using-development-oriented-equity-investment-tool-restructuring-transition-banking-sectors http://hdl.handle.net/10986/19438 |
| Summary: | Over the past 10 years the three Baltic
republics have undertaken significant restructuring of their
banking sectors, supported by the World Bank through three
projects: the Financial Institutions Development Project in
Estonia, the Enterprise and Financial Sector Restructuring
Project in Latvia, and the Enterprise and Financial Sector
Project in Lithuania. These projects included a credit line,
channeled through local commercial banks, to provide
long-term funding and complementary technical assistance to
private enterprises. In parallel, the government of Sweden
injected equity into the commercial banks from Swedfund
Financial Markets (SFM). The projects and the accompanying
Swedfund equity were aimed at promoting sound banking
systems in the three Baltic countries-by strengthening the
equity in the banks and thereby expanding medium- and
long-term financing. Meigas examines the role of SFM-which
provides development-oriented equity investment (DEI) to
Baltic banks-in the context of the World Bank programs. She
examines the arguments for deploying DEI as a development
vehicle by gauging its impact in the three Baltic countries
on banking skills and services, on capitalization, and on
shareholder structure and board membership. She draws out
the role of technical assistance and compares its impact
with that of DEI, and explores the possibilities offered by
DEI for imposing sound corporate governance. The author also
describes the necessary ingredients for successful DEI. The
author's analysis shows that the Baltic projects were
valuable initiatives that could in principle be replicated
in other transition or developing economies whose banking
sector faces serious restructuring challenges. A
development-oriented equity investment, like that made by
SFM, can address the important deficiencies in a banking
sector that is still in a rudimentary state, lacking both
capital and banking skills. SFM's most effective tool
was the imposition of sound corporate governance on the
institutions that received the equity injection. This
approach provided a powerful supplement to the banking
supervisory functions. Rather than relying on the external
enforcement power of state supervision, SFM targeted
internal processes to change business practices. As a
result, the DEI led to improvements in the corporate culture
and broader risk management and thus in the quality of
banking services-not only meeting the institutional
development objectives but also ensuring an adequate return
on the invested capital. The potential of good corporate
governance for easing the work of banking supervisors has
been stressed by the Basle Committee on Banking Supervision.
This potential is particularly valuable in countries still
developing the supervisory function, and DEI, the author
argues, is well suited for the task of improving corporate governance. |
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