The financial sustainability of South Africa's National Development Finance Institutions

ENGLISH ABSTRACT: Development Finance Institutions (DFIs) in South Africa can enhance their role as prime vehicles for the Government to achieve the social objectives of meeting the millennium goals. This can be achieved by ensuring that higher ratios of resources available to the DFIs are applied to development lending and that such DFls stay financially sustainable. DFls have served as conduits for channelling credit to priority sectors, often at concession terms, and have directed their strategies towards achieving social and economic goals that are believed to be neglected by market forces. The absence of structured monitoring and evaluation mechanisms for both impact assessment and the application of resources make it impossible to ensure that these DFIs exist to achieve the mandates for which they were created. The perception of market failure, however, justifies the allocations of scarce public resources to DFIs. DFIs are expected to be catalysts in financial intermediation, extending long-term credit and contributing to economic development through the removal of bottlenecks associated with credit shortage within communities of the Historically Disadvantaged Individuals (HDI). The application of scarce resources, however, calls for a financially sustainable DFI sector so that there may be a sustained provision of credit to the targeted sectors, in order to achieve optimum use and allocation of state resources. The government, through the ASGISA initiative, recognises the role the DFIs can play in halving poverty and unemployment by 2014, due to the labour intensive nature of the targeted priority sectors, such as agriculture. The performance of most of these DFIs, in terms of mandate achievement and financial sustainability, has not been well balanced, as evidenced by the past and present prevalence of the use of govemment guarantees including recapitalisation and future anticipated requests for such facilities. This study was initiated in response to the anticipated growth in the number of DFIs likely to seek either government guarantees or recapitalisation or both. At present, no mechanism is in place for the National Treasury (NT) to detect financial distress of any DFI long before it occurs, so that intervention measures can be put in place.