Ashly DhaniDr Keen Mhlanga
The setting up of a SADC Development Bank is a potential chance that might empower the 16 member countries to become more sustainable by utilising regional resources. If the bank’s goal is to accelerate economic growth and expansion in order to industrialise SADC, this will benefit the Southern African Development Community through fostering investments in initiatives and activities that promote socioeconomic growth.
The SADC area has a large infrastructure deficit, with estimates indicating that it requires approximately $100 billion per year to fund infrastructure development. This disparity is most noticeable in transportation (roads, railways, ports), energy (electrical generation, transmission, and distribution) and water and sanitation. For example, in 2021, the African Development Bank projected that only around 35 percent of the people in SADC countries had access to power, emphasising the need for substantial energy development.
The SADC area faces a severe road infrastructure deficit, with many nations struggling to maintain and extend their road networks. In the case of in Tanzania, only around 30 percent of the road network is paved, which limits connection and market access. The railway infrastructure in the SADC area is frequently antiquated and in need of repair and expansion. Zambia’s railway network is just about 2,000 km long, insufficient to support the country’s expanding economy and trade. Many SADC countries experience port congestion and inefficiency, which impedes regional and international trade. Mozambique’s Port of Maputo has undergone extensive modifications, although significant expenditures are still required to adequately meet the country’s trading needs.
The SADC region has a low electrification rate, with just approximately 35 percent of the population having access to power by 2021. The Democratic Republic of the Congo (DRC) has one of the region’s lowest electrification rates, estimated to be around 19 percent. The region’s electrical transmission and distribution networks are frequently antiquated and inefficient, resulting in high levels of power outages and losses. In South Africa, Eskom, the state-owned utility, has battled with aged infrastructure and maintenance issues, leading in regular load shedding. The region has enormous potential for renewable energy, such as solar and hydropower, but the essential investments have been few. Namibia, for example, has set a target of 70 percent renewable energy output by 2030, but it would require significant investment to establish its renewable energy infrastructure.
Many SADC countries encounter difficulties in ensuring consistent access to clean water. In Malawi, only around 60 percent of the population has access to better water sources, with rural areas especially underserved. The region also suffers from poor sanitation facilities. In Lesotho, only around 28 percent of the population has access to modern sanitation facilities, raising public health and environmental issues.
The need for SADC Development Bank
To address these infrastructure financing gaps, SADC countries have been exploring various strategies, such as increasing public investment in infrastructure development through national budgets and development plans, leveraging public-private partnerships (PPPs) to mobilise private sector financing and expertise, access to multilateral development banks and regional finance institutions, including the African Development Bank and the SADC Development Finance Resource Centre. Exploring innovative financing structures, such as infrastructure bonds and blended finance solutions and enhancing regional collaboration and integration to facilitate cross-border infrastructure projects.
Tailored Financial Solutions
The Bank will offer funding choices that are suited to the needs and objectives of the member countries, typically with better terms and conditions than traditional international lenders. The SADC Development Bank will implement the framework of setting a consistent low interest rate for all participating nations. In an integrated market like the SADC, cross-country spreads on identical financial assets are frequently narrow. Inflationary discrepancies between countries or regions can develop as a result of demand and supply shocks in their respective economies. Rising interest rates and weakening currency rates are attracting capital back to developed nations while locking lending doors to developing ones. The situation forces emerging countries to borrow at higher interest rates, exacerbating the world’s already enormous debt. According to Brookings, the average interest rate on external borrowing is three times higher in developing nations than in developed nations. According to the think tank’s analysis, in recent years, rich countries have borrowed at interest rates of around 1 percent, while least developed countries have borrowed at rates ranging from 5 to 8 percent. As a result of this mismatch, developing countries spend a much higher percentage of their domestic earnings on interest payments.
Common country risk
SADC Countries have nearly the same country risk and their operations are inter connected. Affected by the same climate, business ethics and structural frameworks, economic, social and political situations. The SADC Development Bank will have to establish appropriate systems and controls to manage risks in regional operations. Country risk in Southern Africa may not necessarily imply higher aggregate risk compared to national loans. The community will always benefit from competing with other regions due to the low combined country risk.
Better access to financing
The SADC Bank will be a key source of finance for its member nations, allowing them to access funds that would not have been available elsewhere. This will allow governments, corporations, and communities to fund important infrastructure projects, promote private sector growth and invest in programmes that drive economic development.
Promotion of trade and investment
The SADC’s trade finance programmes, risk-mitigation instruments and initiatives to integrate policies and regulations will all contribute to ease the flow of commodities, services and capital across the SADC area.
This will facilitate the expansion of intra-regional commerce and allow member nations to attract more foreign direct investment, thereby increasing their economic competitiveness.
Knowledge sharing and excellent practices
The bank will share knowledge, experience and best practices with member countries. Through a variety of capacity-building projects, policy advising services and knowledge-sharing platforms, the bank will develop institutional and technical skills in national and local governments, as well as the private sector. It will encourage the sharing of knowledge, best practices and technical skills among member nations, allowing them to learn from one another and develop their institutional and policymaking capacities.
Advancement of sustainable development
The bank will prioritise environmental sustainability and its assistance for initiatives in renewable energy, energy efficiency and environmental protection will assist member countries in addressing pressing climate change concerns and transitioning to more sustainable development models. It is also important to learn from other success stories in the domain of regional development banks; this essay will look at the three similar tactics that can be adopted.
Islamic Development Bank
Since its inception in 1975, the Islamic Development Bank (IDB) has played an important role in promoting economic and social development among its member nations. As a multilateral development finance institution, the IDB has played an important role in channelling crucial resources and expertise to support a wide range of projects and initiatives aimed at improving people’s lives throughout the Muslim world. Its mission is to promote the economic development and social progress of member nations and Muslim populations in non-member countries by providing finance and encouraging international trade, particularly in capital goods. The Islamic Development Bank supports its member countries through a range of financial instruments, all of which are established according to Shari’a standards. These financial instruments include Murabahah (Cost-Plus Financing): This is one of the IDB’s most popular financing options, in which the bank buys a certain commodity or item and resells it to the client at a predetermined profit margin. Ijarah (Leasing): The IDB serves as a lessor, purchasing an asset and leasing it to a customer for a certain amount of time, with the option for the client to acquire the asset at the conclusion of the lease term.
Musharakah (Equity Participation): The IDB enters into a profit-and-loss-sharing agreement with the client, investing together in a project or endeavour. Mudarabah (Trust Financing): The IDB distributes funds to a client (known as the mudarib), who subsequently administers the investment and shares profits based on a predetermined ratio. Qardhul Hasan (Benevolent Loans): The IDB offers interest-free loans to borrowers, who simply have to repay the principal.
The Islamic Development Bank’s capital base has grown dramatically, from $15 billion to $150 billion, giving the bank more resources to achieve its development goals. The IDB has been at the forefront of providing emergency relief and rehabilitation assistance to member nations hit by natural disasters, conflicts and other humanitarian emergencies. Following the devastating 2010 floods in Pakistan, the bank organised approximately $500 million in humanitarian aid and supported the rehabilitation of essential infrastructure, assisting affected communities in their recovery and rebuilding efforts.
Black Sea Trade and Development Bank
The Black Sea Trade and Development Bank (BSTDB) is a multinational development bank dedicated to promoting economic growth and collaboration among its member countries.
Established in 1999, the bank has played a key role in promoting economic growth, commerce, and investment in the Black Sea region. The BSTDB, a multilateral financial institution owned by the governments of 11 member states, has been a driving factor behind several development projects, investment initiatives and trade facilitation programmes.
The bank offered a €100 million loan to help the modernisation and expansion of Romania’s Port of Constanta, one of the Black Sea’s largest ports.
The project sought to increase the port’s cargo handling capacity, improve its environmental performance and solidify its position as a regional logistics hub.
The BSTDB has actively promoted the development of the private sector in its member countries, particularly SMEs. One significant programme is the bank’s “SME Competitiveness Support Programme,” which offers funding and technical assistance to SMEs in the region looking to increase productivity, innovate and grow their operations. Since 2016, the initiative has provided over €200 million in financing to SMEs throughout the Black Sea region.
In 2021, the BSTDB signed a €100 million trade finance deal with the European Investment Bank to boost its trade financing capacity and support regional trade flow. The BSTDB gave a €50 million loan to the Georgian Energy Development Fund to help the country expand its renewable energy potential.
The Caribbean Development Bank (CDB)
The Caribbean Development Bank was created in 1970 by an agreement between 16 regional and non-regional member countries. The majority of the founding members signed the agreement, and the bank formally launched operations in January 1970, with its headquarters in Barbados.
The Caribbean Development Bank’s lending and non-lending operations are cantered on major sectors that are vital to the long-term development of its member countries. The areas include infrastructure development, social sector development, agriculture and rural development, private sector development, disaster risk reduction, climate change adaptation, and regional integration and cooperation.
In 2021, the CDB awarded a $57 million loan to Grenada to fund the country’s Disaster Vulnerability Reduction Project, which aims to increase key infrastructure resilience as well as early warning and disaster response systems.
The CDB started its Private Sector Financing Programme in 2020, which offers a variety of financial instruments like as loans, equity investments, and guarantees to support private sector projects and initiatives throughout the Caribbean. The bank has also created the Caribbean Entrepreneurship and Innovation Programme, which provides technical assistance and capacity-building support to help entrepreneurs and SMEs obtain credit, improve their competitiveness, and scale up their operations.
The Caribbean Development Bank helped to establish the Caribbean Centre for Renewable Energy and Energy Efficiency (CCREEE), a regional institution dedicated to accelerating the implementation of renewable energy and energy efficiency technology throughout the Caribbean.
In conclusion, the establishment of the SADC Development Bank can evolve as an important institution for promoting regional collaboration and economic progress in the SADC area.
It must continuously deliver on the stated mandate by providing funding, technical assistance, and consulting services to promote essential infrastructure projects, private sector development, trade facilitation, and sustainable development programs in its member nations.
Dr Keen Mhlanga is an Investment Advisor with high skills in Finance. He is the Executive Chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.
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