Romania’s new development bank

Romania’s new development bank
EximBank is in the process of transforming into Romania’s new development bank.
By Clare Nuttall in Bucharest April 28, 2016

EximBank Romania, a small state-owned bank focused on export support, is in the process of transforming itself into the Southeast European country’s new development bank.

Without such a bank for 17 years, creating one is seen by many as a way to help Romania take a more focused approach to economic development and, crucially, make the most of the EU funds that it is currently missing out on. However, the small size of EximBank is likely to limit its impact.

The Romanian government decided in 2015 that EximBank would take on the role of a development bank. The previous autumn, Romania’s then minister for EU funds, Eugen Todorovici said that either EximBank or CEC Bank – a larger state-owned bank focused on the agricultural sector – would become a development bank, whose role would be to support local companies and help the state provide co-financing for projects financed through EU funds.

According to EximBank’s executive president, Traian Halalai, the new role “is practically an extension of EximBank’s [existing] mandate”, though the bank will diversify its activities somewhat.

Currently, things are still at the preparation stage, as the authorities need to decide what products and services will be offered by the bank, as well as updating and amending legislation. The Ministry of Finance has proposed a July deadline to finalise the preparations.

EximBank started work in 1992, initially as an export promotion agency, but has since branched out into providing financing, guarantees and insurance products. “Over the years, our objectives gradually enlarged,” Halalai tells bne IntelliNews, adding that the bank has a “unique model on the Romanian market, which combines the features of a commercial bank while operating under the state banner”.

Supporting exporters is still an important part of the bank’s role. “[Romania’s] export structure has consistently improved over the last few years, but we are still selling abroad raw materials that don’t need a lot of processing and have low added value,” Halalai says. “In my opinion it is important to optimise this structure by including more manufactured products with added value, high-tech products, software and so on.”

The bank also supports companies involved in EU-funded projects, providing co-financing and pre-financing facilities, as well as guaranteeing credit lines with other commercial banks.

Romania has struggled to properly utilise its allocation of EU funds. Despite a last-minute push that could bring the absorption rate for the 2007-2013 programme period up to 74%, Bucharest will still lose out on over €4bn of the €19bn earmarked. Supporting the absorption process will continue to be one of the bank’s main focus areas, says Halalci. “Taking into account the mandate extension [into] development bank activities, we are confident that we will have a significant impact in this area.”

Excellent Exim

EximBank reported good financial results both during and after the 2008 global crisis. The financial performance and the high solvency rate of the bank were among the main arguments in favour of EximBank’s selection as Romania’s new development bank, Halalai says.

While most Romanian banks retrenched during the crisis, EximBank embarked upon a “vast modernisation process”. This involved increasing efficiency, diversifying and raising the quality of products and services such as treasury, trade finance, factoring and cash management.

At the same time, EximBank expanded geographically, adding nine agencies to bring the total to 20. The damage the recent crisis did to other banks helped EximBank to snap up good people from within the sector. “I won’t deny that we were able to benefit from the financial market conditions that allowed us to hire people from other banks,” says Halalai.

Going forward, in addition to continuing to increasing lending and expanding its client base, EximBank will also look at supporting Romanian investment projects abroad. Within the country, it plans to support priority projects to stimulate industrial development, support the absorption of EU funds and help small businesses to grow.

As it prepares to take on its new role as a development bank, EximBank has carried out a thorough analysis of other development banks in the EU, particularly those in fellow Emerging European countries such as Croatia, Hungary and Poland. “We focused on BGK [Bank Gospodarstwa Krajowego], the development bank in Poland, which has the operational model that is closest to ours,” says Halalai. “The BGK model is very adaptable to EximBank’s organisational architecture, which would allow it to be rapidly implemented without development costs.”

BRD redux

Conversion of an existing bank into a development bank rather than starting from scratch is an approach recommended in a 2014 working paper published by the Global Economic Governance Initiative (GEGI). EximBank already has “many early signals for future success in development banking in terms of risk assessment experience, a clearly defined mission statement, and previously demonstrated profitability,” writes the report’s author Bryan Patenaude. “Such pre-existing proof of performance and demonstrated success is rarely available when setting up a national development bank.”

Patenaude told bne IntelliNews that although the paper was prepared independently, it was viewed by EximBank and Romanian government officials.

Romania used to have a development bank, Banca Romana pentru Dezvoltare (BRD), but the bank was privatised in 1999. Now part of Societe Generale group, it operates on a purely commercial basis.

17 years since the sale of BRD, not having a development bank could be one of the reasons for the lack of focus when it comes to development planning in Romania, which over time could limit the country’s long-term growth prospects. “Romania’s development over the last decade has been quite chaotic and the government has lacked a proper development strategy,” Radu Craciun, chief economist at Banca Comerciala Romana (BCR), said in a recent interview with bne IntelliNews. This has resulted in a country “spotted with pockets of wealth and extreme policy,” he added.

Romania has also struggled to use EU funds effectively. According to the GEGI paper, since Romania joined the EU it has “consistently fallen short of its development objectives”, despite efforts to “mimic the successful absorption models” of other countries in the region. Patenaude argues that the current model of fund management is “both inefficient and unsustainable”.

Depending on EximBank’s performance as a development bank, CEC could also be converted to a second development bank in future, a two-pronged approach advocated by Patenaude. This could have a bigger impact since CEC is Romania’s fifth largest bank with a market share of around 7%.