In the last article, we were introduced to the differences between mainstream banks and the microfinance institutions (MFIs). We also looked at the reason why interest rates are higher in the MFIs than the mainstream banks and we got an introduction to the fixed interest rates and reducing or declining interest rates.

Today we shall look at the development banks, wholesale banking institutions, their relationships and finally how you could get a facility from these big organisations.

Development Banks

A development bank is a bank that provides money for projects in poor countries or areas (Cambridge Dictionary). Development bank, national or regional financial institution designed to provide medium- and long-term capital for productive investment, often accompanied by technical assistance, in poor countries ( ).

Development banks include multibillion-dollar entities like the World Bank, but most are smaller regional and local lenders spread throughout the world. They exist to fund projects that improve the material well-being of people, particularly those living in poverty. A development bank, in short, does what most commercial banks cannot do: it funnels capital into projects of dubious profitability. To achieve these ends, most development banks—and there are perhaps hundreds in the United States alone—are geared toward grassroots economic assistance.

The above definitions categorise development bank into helping developing countries or areas and also an investment into the productive areas with the support of what we called a technical assistance. These appear to be the sort of microfinance, isn’t it? Wait a minute. While microfinance is geared towards alleviating poverty for individuals, the development banks are geared towards poverty alleviations in some countries, nations and some certain geographical areas.  They also offer services that the main commercial banks cannot offer.

Let’s look at some of the development banks around the world: –

  • the African Development Bank (AfDB)
  • the Asian Development Bank (ADB)
  • the European Investment Bank (EIB)
  • the Inter-American Development Bank (IDB)
  • the North American Development Bank (NADBank)
  • the World Bank
  • Industrial Finance Corporation of India
  • Industrial Credit and Investment Corporation of India
  • Export-Import Banks of various countries, etc.

Let us look at the objectives of the Development Banks: –

  • to promote industrial growth,
  • to develop backwards areas,
  • to create more employment opportunities,
  • to generate more exports and encourage import substitution,
  • to encourage modernisation and improvement in technology,
  • to promote more self-employment projects,
  • to revive sick units,
  • to improve the management of large industries by providing training,
  • to remove regional disparities or regional imbalance,
  • to promote science and technology in new areas by providing risk capital,
  • to improve capital market in the country.

Wholesale Banks

What is a wholesale lending or banking?

Wholesale banking is the provision of services by banks to organisations such as Mortgage Brokers, large corporate clients, mid-sized companies, real estate developers and investors, international trade finance businesses, institutional customers (such as pension funds and government entities/agencies), and services (

While some of these organisations are called private investment firms, others are also called social enterprise investors depending on the areas of their supports. The majority of these institutions are very large even with the asset sizes bigger than that of some countries. Some also have offices around the globe and others operate regional offices – e.g. Regional Office for Asia, Regional Office for Africa, etc.

The difference between Retail and Wholesale Banking.

Retail banking refers to that banking which targets individuals and the main focus of such banks is retail customer whereas wholesale banking refers to that banking which targets corporate or big customers and their main focus is providing services to corporate clients.

The majority of the mainstream banks or commercial banks in various countries are retail banking providers. There are a number of institutions around the world that provides wholesale banking.

Examples of Wholesale lending institutions

It is very difficult to provide a comprehensive list here as we could not afford that in a short write-up like this. But to give you a glimpse of what we are talking about, I have provided a few below here for your understanding.

  • Leapfrog Investment (South Africa)
  • Incofin (South America and Asia)
  • ResponsAbility Investment AG (Switzerland)
  • BlueOrchard Finance SA (Switzerland)
  • Rabobank (Netherlands)
  • FMO (Netherlands)
  • KfW Development Bank (Germany)
  • ING Group (Netherlands)

Difference between Development Banks and Wholesale Banks

There is just a fine line between development banks and wholesale lending banks. The majority of the development banks are government-led banks while the majority of the wholesale lenders are private banks. Another difference is that, while most of the development banks are regional or nationally based, the wholesale lenders are more geared towards project specifics (example, lending only to microfinance or agricultural lending) and thereby operating worldwide or limiting themselves to specific regions with specific interests.

An example of FMO, Netherlands is that it is both a development bank and wholesale lender to the private sector. It focuses on the microfinance, energy, agriculture, infrastructure and manufacturing sectors. The same could be said of KfW of Germany. This is due to the fact that these two institutions are government-led by the Netherlands and Germany respectively.

On the other hand, the World Bank focuses only on the government or country specific needs while its private arm is the International Finance Corporation (IFC), which lends to the private sector on a wholesale basis.

How to get facilities from these institutions?

There are a number of steps taken by these lenders with their potential lenders to get them approved for their facility. While an individual applying to microfinance or banking loans will go through what is called Credit Appraisal system, the system used by the larger lenders is called Due Diligence (DD).

Due diligence is an investigation or audit of a potential investment to confirm all facts, such as reviewing all financial records, plus anything else deemed material. Due diligence refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party (Investopedia).

This process examines the current business structure, capital structure, operational systems, policies and procedures in place, financial reports and projections, the board composition and plans for the future. Basically, it is more detailed work than the normal auditing work.

After this is done, the investor organisation comes up with a report and submit to their Investment Committee (IC). When all is found worthy, then the IC approves the facility. After this, an Offer Letter is sent to the investee organisation.

The legal process of getting the facility approved by the relevant government agencies is then carried out. For example, a Microfinance organisation seeking investment will need approval from the Central Bank or its regulatory body.

Investment/Funding is provided after all these processes.

Can you find out how these big financial institutions get money before lending to their clients? That is your assignment.

Provide the answers under the comments section below



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