DFIs are founded for the good and crisis times
The role of DFIs today is to get the economies out of the 'intensive care units.'
In this exclusive interview, Arshad Rab, CEO, European Organisation for Sustainable Development (EOSD), and Chair, International Council for Sustainability Standards, discusses the role of development finance institutions (DFIs), particularly during the Covid-19 pandemic. He was interviewed by Jide Akintunde, Managing Editor, Financial Nigeria – Africa’s premier development and finance journal.
Jide Akintunde (JA): You have said quite authoritatively that development finance institutions (DFIs) were born for such a time of crisis as the current economic downturn induced by the Covid-19 pandemic. How so?
Arshad Rab (AR): DFIs were created to de-risk investments in projects both in good and tough economic times, and also provide countercyclical funding during economic meltdowns. These are precisely the types of interventions needed today more than ever before in the history of DFIs.
JA: Can you elaborate on their role in mitigating the current crisis?
AR: Yes, of course. Both real and perceived risks of investing in any business project are now very high – perhaps as high as they possibly could ever be. You could even argue that no one in his or her right mind would invest in a business project today when the world is struggling to weather the unprecedented and deep economic shocks we are facing.
Notwithstanding these tough times, there are economic sectors and activities in which investments can and must take place. Let there be no doubt that a large number of prudently selected investments need to take place as early as possible during this crisis. However, suffice to say that no entrepreneur will find co-investors and lenders easily during this crisis.
This is where DFIs can come in to deploy, albeit wisely, their development financing tools. Such tools could include concessional loans, guarantees and equity co-investments for motivating, incentivizing and enabling potential project sponsors to come forward and create economic opportunities for themselves, their communities and their countries.
Let me also hasten to add that without incentives from DFIs, like those which I have just mentioned, it will be very difficult – if not impossible – to expect entrepreneurs to take risks during these trying times. Indeed, entrepreneurs with viable project proposals and the commitment to make their businesses succeed in these very challenging times are needed to reboot economies.
Please, allow me to emphasize that we are talking here about the world’s economies, which are on ventilators now and the role of DFIs today is to get the economies out of the intensive care units (ICUs).
JA: You are saying that economies are on ventilators or in ICUs. This is an extremely tough message. Is the situation really that serious?
AR: I think this is the first time the world is experiencing multiple shocks. Lockdowns, social distancing, travel restrictions, self-isolation, etc. all mean factories are closed. The global supply chains have been ruthlessly disrupted. There is no parallel of the current situation in history. So, we have a supply shock of the highest magnitude and intensity.
Furthermore, we also have a demand shock. People are not allowed to leave their homes. So, they can’t spend their money. Whenever they have an opportunity to spend, they only spend on essential items because of the prevailing uncertainty. Most consumers don’t know what will happen to their jobs and whether they will be able to survive the crisis. There is a high level of uncertainty, which is leading to a dramatic drop in consumer spending.
We have both supply and demand shocks simultaneously. There are no precedents in the world for dealing with these two shocks at the same time and at this scale. If the uncertainty is prolonged, it is only a question of time before many businesses and households would not be able to pay back their loans and settle other obligations, such as utility bills.
What next? Well, we could be heading towards liquidity shock caused by consumers, entrepreneurs and industries who would default on their debt repayments to banks, suppliers and service providers.
In short, for the first time in history, we have multiple shocks and there is no playbook for dealing with the situation of this nature. Therefore, we need to be innovative. Hence, if there was ever a time when the need for DFIs was real and urgent, that time is today.
JA: You Chair the International Council of Sustainability Standards for Financial Institutions. Are these standards as necessary today as they were prior to the current crisis?
AR: They are more necessary today than before the crisis. The standards were designed to be highly responsive and adaptable to promote institutional agility and resilience to crises.
In fact, one of the applicant financial institutions is a government-owned DFI and has just completed the implementation of the sustainability standards. As of today, the institution is crisis-resilient and crisis-ready to respond to the needs of its economy.
As part of the certification requirements, it is mandatory for applicant DFIs and commercial banks to instill innovation culture in their organization. And, as I said earlier, innovation is essential for successfully responding to the current crisis, attending to the fast-changing needs of project sponsors and delivering targeted interventions for incentivizing businesses and industries.
So, yes, the standards are necessary today partly also because they equip DFIs with the tools to effectively fulfil their dual mandate of de-risking investments and providing countercyclical financing.
JA: We are in the middle of a new crisis and there is a feeling that sustainability issues should take a backseat. Should this be the case?
AR: Quite the opposite is true, provided it is about holistic sustainability, which is the case our Sustainability Standards and Certification Initiative (SSCI) for financial institutions makes decisively.
The SSCI provides a comprehensive framework. The first step is about accomplishing institutional sustainability so that the certified institutions can demonstrate their resilience to crises. This will enable the institutions to survive and thrive in a world where high uncertainty, and frequent and large-scale disruptions are the new normal.
JA: How would you describe a “Sustainability-Certified” development finance institution?
AR: A Sustainability-Certified DFI is a financially-sound institution, which, through its strong derisking and countercyclical role, creates and upholds a sustainability-driven economy. This helps to foster an economy that is technologically-advanced, ecologically-sound, socially-inclusive, robust and resilient.
JA: Achieving the status of a Sustainability-Certified DFI can take some time. But as you said, their role is now urgent. Can the certification still help?
AR: Indeed, it can. It will not only help in the current crisis; it is also today’s business imperative to holistically embed sustainability across the board and in the institution’s DNA. This ensures that sustainability becomes the foundation of every decision and action.
But allow me to quickly go beyond this point and share a brief background as to why it is still the right time to begin with the sustainability process. We are talking these days about a recession or even a depression. The implication is that the economic downturn could be very severe and probably last for a long time.
No one is really expecting otherwise. The initial forecasts show that the economic impact would last for about 10 to 20 years. In a way, we are still experiencing the impact of the financial crisis of 2008-2009. It is said that the Global Financial Crisis that ended more than 10 years ago created the ripple effects that led to what we are experiencing today.
Let me also mention that in times of crisis, right decisions and actions are usually the first casualties. The reason is haste; and as the saying goes, “great haste makes great waste.” So, it is better to adopt a comprehensive sustainability framework before investing large amounts of money in haste. With our sustainability standards, you can eliminate, or at least minimize, waste of very scarce financial resources, which are now even much less than before the COVID-19 crisis.
With regard to the duration for certification: in normal times, the certification process is about eight to 12 months. However, these are exceptional times, requiring exceptional measures from all of us. So, if the CEO of an applicant institution is committed to building a recognized and truly sustainable DFI – or private sector bank, I believe that the process can be shortened. Solutions can be found for the applicant institution to implement holistic sustainability, while it attends to its urgent functions and duties, without disrupting its day-to-day operations.
JA: Going back to your statement about economies being on ventilators and in ICUs; is there any hope for a bright future?
AR: The economy is critically ill and getting worse day-by-day. There is no point sugarcoating it.
But it’s not all doom and gloom. Before this crisis happened, many of us were calling for a reset button for the global economy. We called for the reformation of the economic system to create one that benefits not just a few people, but the majority and possibly everyone. The advocacy was to have a more peaceful, secure and prosperous world.
Efforts were ongoing to create an economy that promotes social inclusion and does not entail the unrestrained exploitation of natural resources. The calls for creating a sustainable economy, implementing the United Nations Sustainable Development Goals (SDGs), and achieving net-zero emission of carbon dioxide (CO2) were gaining ground before the current crisis.
But nature went ahead of us to press the reset button on our behalf. It is our obligation now to come together to create a better world that is habitable and prosperous for all.
This special interview was conducted under the aupices of Intra-Africa Trade column in Financial Nigeria magazine, sponsored by Nigerian Export-Import Bank.
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