In the last issue, we stressed that, when banks lend to public sector borrowers, they generally require a full sovereign guarantee or the equivalent from the borrowing member state. Also in extending credits to sovereign entities, banks are exposed to country risk, which include potential losses arising from a country’s inability or unwillingness to service its obligations to banks. In this respect banks manage country credit risk through financial policies and lending strategies, including individual country exposure limits and overall creditworthiness assessments. These include the assessment of a target country’s macroeconomic performance as well as its socio-political conditions and future growth prospects.
With regards to the Non- Sovereign Guaranteed Loans (NSGLs), banks only lend, with limited exceptions, to a public sector enterprise if a sovereign country will guarantee the loan. However, banks shift towards the NSGL programmes due to relatively little borrowing on the part of its Middle Income Countries (MICs). As a result, the MICs have also changed their approach to borrowing to adapt to changing needs and preferences by putting in place prudent borrowing policies and proactive debt management strategies. So, some MICs now rarely guarantee the borrowings of state-owned enterprises, which is a bold step in managing sovereign debts.
All these management qualities are characterise of the African Development Bank. And the benefits of these managerial steps by this bank and their results include the following:
Tight debt control will sensitise borrowers that taking debt is not like having a free launch. As a result it will be established that loans must be repaid in full.
When clients fully digest/appreciate the full value of the services offer by banks and the use of debt in an economy, the economies will start tilting from cash economy towards debt economy, which is the corner stone of most developed economies.
With debt economy, economic emancipation will be wide spread, for instance, students will have access to grants in the form of debt, and thus quality education. And with good education, the sky is the limit for development.
Entrepreneurs will emerge and small businesses will grow since they have unhindered access to debt to fund their projects. Through these, jobs will be created and employments will increase.
The use of cash for transaction purposes will substantially be reduced in the physical markets, since most transactions will be replaced by electronic payments, as is common in a typical debt economy. This of course will be facilitated by good electronic infrastructure, mostly set up by banks.
Finally, inflation will be reduced substantially because printing money will not be done just because there is a limited amount of cash in the market. It will be done based on some prudent macro-economic policies.