Government is in talks with development finance institutions (DFIs), such as the Development Bank and the Industrial Development Corporation, that are likely to result in them taking on riskier investments than ever before.

This forms part of a risk-sharing agreement, which government agreed to reach with financiers, to make it easier for parties to the Financial Sector Charter to finance development projects, such as low-cost housing, small business and development-oriented infrastructure.

The core charter group, including banks and black business, is expected to finalise these new risk-sharing agreements by July. As the DFIs were created by government mainly to fund projects not financed by the private sector, the role of DFIs will need to be redefined.

Elias Masilela, chief director of the treasury's macroeconomic policy unit, confirmed talks were taking place around the future role of the DFIs, but said government was "not ready" to comment. There has been tension during these talks, with some DFIs resisting calls to take on a huge amount of risk in funding "uncommercial" projects. They have warned this could drive up bad loans and make them unsustainable.

Banking Council senior GM Cas Coovadia confirmed the future role of the DFIs was a key element of the discussions. "Within the context of the talks around the charter between government and the other stakeholders, it is necessary to re-examine the mandates of the DFIs." But as the charter is obliging banks to "stretch" out of their existing risk models, these DFIs will also need to stretch further.

The Association of Black Securities and Investment Professionals, which represents black business on the core charter group, believes there must be some overlap between the DFIs and the private sector to enable DFIs to remain sustainable.

Development Bank of Southern African (DBSA) CEO Mandla Gantsho confirmed that talks were taking place with the treasury. "Our minister (Trevor Manuel) has been clear that they are looking for proposals (that would see us) going beyond our statutory mandates and we are currently working on certain proposals to present."

Gantsho said these talks were likely to result in DFIs such as the DBSA taking on riskier investments than in the past. But DFIs recognised their role was to "act as a catalyst for development" in areas not typically covered by private sector financial institutions.

The DBSA was running models to see what extra degree of risk it could take and what extra capital may be needed as a cushion to keep loan defaults and write-offs to a minimum.

Xola Sithole, the CEO of Khula Enterprise Finance, a DFI focusing on providing finance to small business, conceded these moves were likely to mean more risk, but said: "Ultimately the involvement of more corporates in SME finance will mean less risk overall for all of us."

Business Day 26 April 2004