Development Bank

The development bank is a special category of a multi-purpose banking institution that facilitates the provision of long-term credit, guidance, and support to essential or underprivileged industries, sectors, and areas, especially in developing nations. 

These multi-purpose institutions are established under the regulations of a specialized government act. These banks are established with the goal of economic development. The primary purpose of their incorporation is public service and industrial growth. They provide financial services and support to public and private sector enterprises. They offer medium—and long-term loan facilities at low interest rates.

Since development banks are formed mainly for the welfare of deprived sectors and areas, they are not intended to make profits. However, they are funded internally through bond and securities issuance and other capital market operations, like interest on loans and advances. External sources include funding from the government, grants, and borrowing from other financial institutions.

The development of financial institutions is not established only for profit-making but to fulfill socioeconomic goals. Based on the purpose they serve, the functions and roles of these banks are as follows:

• These banks provide loans and advances for the long term to fund projects that ensure the development of society and the community.
• They provide financial and managerial support to review and revive the sick industrial units.
• The development banks ensure the growth of the infrastructure sector by lending funds for the building of roads, dams, power plants, bridges, etc.
• They fund and support agricultural and rural development projects like offering loans to farmers, food farms, etc.
• These banks initiate the progress of small and medium-scale businesses by providing them with counseling, guidance, and loans.
• These institutions encourage sustainable growth by funding renewable energy, recycling plants, energy conservation, and other eco-friendly and sustainable projects.
• Such banks uplift the necessary industries and production sectors through constant support, financial resources, and technical assistance.
• They fill in the gaps in the financial sector by providing comprehensive guidance and assistance to various industries and sectors for the overall nation’s development.
• They uplift the housing sector by offering loans to builders and construction companies.
• These particular institutions encourage foreign trade by supporting domestic companies to go global.
• They ensure seamless economic operations in the backward and deprived areas.
• These banks facilitate securities underwriting by converting the loans and advances to equity and preference stocks in the borrowing firms.
• In many nations, like Japan and India, these banks run credit guarantee schemes to ensure loan provision to small enterprises.
• They even facilitate joint financing and refinancing.
• Plus, these banks contribute to the capital market growth by investing in stocks and debentures.

Moving onto the examples, let us find out the different development of financial institutions around the world and their objectives and contributions:

Example #1

The Luzon Development Bank is a development bank dedicated to fostering national progress through individual empowerment and a free-market economy in Luzon, Philippines. They prioritize quality banking services for their customers, support employee growth, ensure fair returns for stockholders, and aim for excellence in all endeavors. With a vision to lead regional development banking, they prioritize efficient, responsive service and emphasize personal and professional development for their employees while providing quality banking services to their clients for the betterment of the individuals and communities in the Philippines.

Example #2

In March 2024, the African Development Bank hosted its annual portfolio review of the Global Agriculture for Food Security Program (GAFSP) at the Sir Dawda Kairaba Jawara International Conference Center in Banjul, The Gambia, with 50 participants in attendance. The program has had a direct impact on almost 9000 Gambians through its various interventions and recently secured an additional $12 million grant for the GAFSP Gambia project. The initial grant for GAFSP amounted to $16 million, complemented by $1.37 million in counterpart funding from the government of The Gambia.

The development banks are established for particular purposes or objectives, making them significant for the beneficiaries. Let us check its importance through the following points:

• Fulfill Socioeconomic Goals: The development of financial institutions is set up to meet specific macroeconomic objectives, i.e., serving society with economic development.
• Support Small And Medium Enterprises: These banks aim to foster the growth of the backward sectors and SMEs in the under-developed and developing nations.
• Meet Long-Term Capital Requirements: They fulfill the long-term financing needs of the critical sectors for both starting new projects and running the existing ones.
• Promote Industrial Growth: Such financial institutions offer financial assistance to industries like mining, infrastructure, housing, manufacturing, and technology.
• Create More Employment Opportunities: When industries and SMEs grow and prosper, they provide more job opportunities in the nation.
• Facilitate Public Services: These banks aim to benefit society by developing means such as transport, healthcare, education, housing, and waste management.
• Diminish Poverty and Bring Prosperity: Moreover, banks like IBRD initiate the reduction of poverty and prosperity in underprivileged countries like the African Development Bank