Over the past few decades Pakistan has signed numerous high profile agreements pledging economic co-operation and established multiple bilateral Development Finance Institutions (DFIs). There are at least seven such bilateral DFIs in Pakistan, all of whom carry the name "Pak" along with the name of a friendly country.
In spirit, each and every one of these bilateral DFIs was established to promote economic ties between Pakistan and a friendly country, and assist in the development of Pakistan's economy. However, today most bilateral DFIs have become quasi-scheduled banks and strongly focus on competing for institutional deposits and other financial transactions with mainstream scheduled banks instead of developing bilateral trade and financial ties between Pakistan and their respective sponsor countries.
There are exceptions to the above of course, and one can certainly name bilateral DFIs, which are cognisant of their purpose of existence, and have been successful in attracting foreign direct investment to Pakistan. No one can deny that a few bilateral DFIs were indeed responsible for significant foreign inflows, but the fact remains that in the majority of DFIs the mood is clearly to operate in close similarity to a scheduled bank.
This emulation of scheduled banks negates the very purpose for which bilateral DFIs were created, after all if they are to function as quasi-scheduled banks without a clear focus on promoting bilateral economic linkages then there is no plausible reason for their existence.
In truth, bilateral DFIs are quite handicapped in their competition with scheduled banks as they lack the branch network of scheduled banks and do not raise funds from the public at large. Thus, bilateral DFIs are forced to compete for costlier institutional money and sometimes end up lending to riskier borrowers, while scheduled banks with low cost deposits are able to extend cheaper funds to less riskier borrowers.
It would be unfair to blame the executive management or senior leadership of bilateral DFIs for this evolution into quasi-scheduled banks, on the contrary the problem originates with the regulatory structure that is applicable to bilateral DFIs. The fact that bilateral DFIs are regulated by the State Bank of Pakistan and governed under the Banking Ordinance of Pakistan, 1962 is precisely what forces bilateral DFIs to emulate scheduled banks and defeats the very purpose of their establishment.
It is high time that our economic and financial intelligentsia, as well as the Ministry of Finance, consider the possible reorganisation of the existing bilateral DFIs and equip their management with a more favourable and appropriate regulatory structure. Such a reorganisation should seek to align Pakistan's bilateral DFIs in similarity to a more befitting role model namely, the Asian Development Bank (ADB).
Although, the ADB carries the word "Bank" as part of its name, it is essentially a supranational committed to the development needs of member countries as documented in the "Agreement Establishing the Asian Development Bank". The ADB has a well documented "Strategy 2020" and has a core focus on five specialisations, (i) infrastructure; (ii) environment, including climate change; (iii) regional co-operation and integration; (iv) financial sector development; and (v) education. As such, the ADB not only invests in eligible and approved projects, via both equity and debt, but further also provides technical assistance, grants and advisory to help develop project proposals and feasibilities.
The task of reorganising Pakistan's seven established bilateral DFIs is lengthy and certainly challenging, and shall require a comprehensive regulatory review and realignment, along with the development of strong advisory and project/feasibility development capabilities within bilateral DFIs. Perhaps an easier start can be the commencement of private equity investments by Pakistan's bilateral DFIs into a focused private equity fund. As a first step, Pakistan's bilateral DFIs can either jointly or singly, form a Fund Management Company (FMC) under the Private Equity and Venture Capital Fund Regulations, 2008 issued by the Securities and Exchange Commission of Pakistan (SECP).
The FMC can structure, launch and manage a focused private equity fund in a transparent and professional manner, and raise funds from bilateral as well as multilateral DFIs. The proposed private equity fund must have a clear investment mandate and objective, one which explicitly includes and requires that investments must have bilateral trade synergies with a focus on identified sectors.
This may well attract investment interest from multilateral agencies like the International Finance Company (IFC), Islamic Development Bank (IDB), Asian Development Bank and friendly Sovereign Wealth Funds (SWFs). Almost all of Pakistan's bilateral DFIs have links to large SWFs, and multilateral agencies have clear programs of investing in approved private equity funds.
Additionally, the Pakistan Development Forum (PDF) and Friends of Democratic Pakistan (FoDP) both have strong representations from countries and multilateral agencies that actively invest in private equity funds. It is pertinent to mention that multilateral agencies, including the IFC and ADB, have invested in funds managed by a Pakistani private sector financial group and there is no reason to doubt that the prospect of investing in a transparently run and focused private equity fund will find support amongst supportive international friends and multilateral agencies.
Private equity funds have played a leading role in the development of our neighbouring economic giants, namely China and India, and have found willing investors in national as well as international DFIs. President Zardari had called upon bilateral DFIs to come forward with a strategy to assist in the reconstruction and development of Pakistan's infrastructure back in 2010, and the way forward may well lie in the launch of a private equity fund by our bilateral DFIs.
(The writer is a director of an advisory firm focusing on frontier and emerging markets)