State- Owned Development Finance Institutions

1. State- Owned Development Finance Institutions Jacob Yaron- Consultant jyaron@verizon.net

2. The Reasons for renewed interest in SDFIs stems from: The intent to reduce the role of state owned banks in the financial sector Evaluation that SDFIs’ performance fell below original expectations in most cases Acknowledgement that over- reliance on traditional financial ratios is deficient The disappointment from the naïve expectations that for profit FIs would substitute SDFIs The recent research findings that in a few SDFIs the social gains exceeded the cost of subsidies

3. Assessment criteria Two primary assessment criteria Were introduced in recent years Outreach to target clientele Self-sustainability ( subsidy independence) Many key performance indicators have been derived from these two primary assessment criteria

4. The Subsidy Dependence Index (SDI) • Is a composite index • Measures the ratio of the (annual) subsidies against the: • a) value of the Average annual outstanding loan portfolio (OLP) and • b) against the interest income of the SDFI concerned. • The outcome of (b) indicates the % increase in the yield obtained on the OLP that is required to nullify the subsidy dependence- a sensitivity analysis

5. The Output Index (OI) • A hybrid, arbitrary index • Should reflect the priorities of the authorities • It encourages the authorities to clarify objectives and better define the target clientele • The priorities (as reflected by weights of the OI) may change over time

6. A full cost- benefit analysis of SDFI is rarely carried out • The use of these two indices could provide a far better picture than obtained from the common practice of over-reliance on traditional financial ratios such as ROA and ROE • When the SDFI is subsidized-and most are, the ROA and ROE if not adjusted to reflect such subsidies are meaningless or even misleading. • Often such financial ratios constitute the residual value of the subsidies received by the SDFI

7. Indonesia: BRI -unit Desa • Was established in 1983 replacing the poorly performed subsidized, directed credit to rice growers-BIMAS program • Is a profit center in a state owned bank • Is considered the flagship of the rural microfinance industry in the world • Introduced and continued to apply the “best practices” in microfinance

8. Main characteristics BUD Vs. Bimas

9. Continued

10. BUD outreach and self-sustainability

11. BUD’s self-sustainability

12. BUD’s financial performance

13. Summary and Conclusions • SDFIs are likely to continue to function in the future though reflecting a reduced share of financial sector operations compared to 15-30 years ago • Measurement of their cost-effectiveness by using the SDI and the OI could contribute substantially to improving the SDFIs’ performance and to sound allocation of scarce resources • Adequate measurement of their costs and assessment of the social desirability of their “products” should be supported by both opponents and supporters of the mere existence of SDFIs