How Leaders at Development Banks Fight Bias and Drive Innovation

On this episode of The Long View, Arunma Oteh, former treasurer of the World Bank, who also served in various leadership roles in the African Development Bank, breaks down the role of development banks in capital markets, how Nigeria was impacted in the global financial crisis, and Oteh’s work as director general of the Nigeria Securities and Exchange Commission in 2010 that earned the nickname “Nigeria’s Iron Lady” from the BBC.

Here are a few highlights from Oteh’s conversation with Morningstar’s Dan Lefkovitz.

Dan Lefkovitz: You’ve worked at development banks, the African Development Bank, as well as the World Bank in various capacities. Maybe you can give us a little bit of a sense of what these development banks do and what sorts of roles you held for them.

Arunma Oteh: The African Development Bank is exactly the World Bank that is focused on Africa, in terms of the countries that it does business in, where it lends to. It’s owned by all African countries and over 20 non-African countries. Nigeria is the largest shareholder. The US is the second-largest shareholder. Japan, Germany, Egypt, and a number of other countries are in the top 10 shareholders. It’s a mix of African countries and non-African countries. And I said the model is the same in terms of having this cooperative institution that is triple A rated because it is a cooperative institution that has both countries that are highly rated, and also, it’s the lender of last resort, essentially. I had a variety of roles at the African Development Bank. I started as a lending officer for projects in West and North Africa. I covered Egypt, Sudan, Ghana, Nigeria, and Sierra Leone. So, many countries in North and West Africa.

I did that when I joined the African Development Bank first, and I think after a year, I moved to the treasury. And the treasury in Development Banks is slightly different from the treasury in Commercial Banks. The Treasury has both sides of the balance sheet. You are in corporate finance, raising money for the business, so issuing bonds in international markets. And there’s the other side of the balance sheet where you’re managing money for the institution and managing money until that money is then provided to fund projects, the projects that that particular institution invests in. I spent some of my career working in corporate finance, and that entailed several areas. One of them was raising money around the world. I raised money in the US. I raised money in Europe. I raised money in Japan. And raising money means that you’re basically explaining to institutional investors why you’re a highly rated institution.

And you know people have biases. So people are thinking, “OK, this organization focuses on Africa. So, how come it is an AAA rated institution?” So, explaining the basis for the strength of the organization, which is, first of all, the shareholding, as I pointed out. Secondly, the quality of its policies and its practices, which I kind of explained as to the fact that most of its borrowers will never owe it. And if they have difficulty paying back, it’s a temporary difficulty versus what happens with commercial banks. It’s a cooperative institution. There is another aspect that I haven’t talked about. So the way that the capital of development banks is structured is that there is a part that is paid in, and there is a part that is called the callable capital. And the callable capital is basically a commitment that each shareholder, so each country, makes that in the unlikely event that there is a call on capital, that particular country will pay to the extent of the proportion of its shareholding. In many cases, it could be that for every dollar paid in, there’s $12 of callable capital. And that callable capital is only available to pay bondholders. That is partly one of the reasons why the development banks are AAA rated. Because none of these organizations have gotten to a point where they’ve gone bankrupt.

But even at that stage, every country, to the extent of the callable capital that they have committed to, will commit to making sure that they will pay bondholders in the unlikely event of a bankruptcy. It’s a very unique business model. And that’s one of the things that also showcases the strengths of the organization. One area that I worked in was really raising funds globally. The other area that I worked in was managing the capital from the shareholders. Because it was a cycle of every 10 years when I was at the African Development Bank, there was a request to replenish the capital of the African Development Bank. And I worked on that. The other bit that I should say is that these organizations are structured in a way where they’re a group of institutions. So, there is the African Development Bank group, and there’s the African Development Bank, which borrows predominantly from the capital markets. And then there is the African Development Fund, which is funded primarily by donations from the more wealthy shareholders. And those donations are used for social projects in the poorer countries.

I then worked in the trading room. I covered, I managed a dollar book, I managed the euro book. In fact, I was in the trading room at the time that you still had Spanish peseta, Deutsche mark, French francs, and I managed some of those books. So as I said, the difference between a commercial bank treasury and a development bank treasury is that you’ve got the liability side, which I described earlier, and then the asset side, which is a trading room function. In most commercial banks, it’s just the trading room function that is called the treasury. The development banks also leverage the sophistication of their treasuries to provide products to their clients that are developed by a treasury. That’s another area. They’re also the bank to the bank. So, the back office—the payments and settlement of transactions—is also handled in treasury. So, I was a corporate finance officer. I was a trader, investment manager, and then I ran the trading room.

And after running the trading room, I competed to be treasurer. I became the treasurer of the African Development Bank. I can talk a little bit about the World Bank because it’s a much bigger organization. And so the [World Bank] treasury is obviously much bigger than the African Development Bank. But when I was treasurer, we raised $50 billion from around the world. And we had a derivatives portfolio of about $500 billion. We used derivatives for risk management. The World Bank is a dollar-reporting entity. And so we would issue around the world in Japanese yen, in Singapore dollars, in Brazilian real, and we will always convert it so that the obligation will be in dollars. We managed about $100 billion for the World Bank Group and $70 billion for the World Bank.

As I said, these entities are groups of institutions. The World Bank has five institutions. It’s got the World Bank, which is the International Bank for Reconstruction and Development. It’s got the IFC, which is the private-sector arm—quasi-independent, has its own ratings. It has the Multilateral Investment Guarantee Agency, which is the insurance arm. It has a settlement arm. And it has the equivalent of the African Development Fund, the International Development Association, which basically supports poorer countries.

And when I was treasurer, we decided, as a way to expand the funding sources after almost 60 years, that the International Development Association would also issue in the capital markets. And not having had debts in almost 60 years, it also got a rating of AAA and still maintains that rating. What‘s unique about the World Bank Treasury is that it provides investment management services to central banks around the world. In my time, we were managing money for 65 central banks and other official institutions.

We also provided debt management and risk management services to around 130 clients, ministries of finance, and debt management offices. Unlike the African Development Bank, it’s got an arm that supports the rest of the World Bank in developing products that it uses for its own lending and financial-services operations. I just wanted to add that perspective. And by the way, I always share this bit when I talk about the World Bank. In my time, the annual settlement and payment cash flow was $7.3 trillion. So in its role as the bank of the bank, pretty significant in the financial system of the world. A lot of the innovations that are very, very important to society have come out of development banks. The first formal swap was done between IBM and the World Bank. The first green bond was issued by development banks. In my time, we did the first pandemic bond, we did the first blockchain bond, and we did the first SDR transaction. One of the things that I also hope—and I hope that my next book will be talking about development banks—is really that people better understand the value of these organizations to society. So, thank you for giving me a bit more time to kind of add that perspective as to the value of the development banks and particularly the World Bank.