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. Last Updated: 07/27/2016

A Flawed Program To Develop Banking

Twenty Russian commercial banks will soon be receiving up to $11 million each to finance banking automation. Under a World Bank loan called the Financial Institutions Development Program, or FIDP, around $240 million has been allocated by the World Bank, the European Bank for Reconstruction and Development and several other organizations solely for the technical development of Russian banking. This is more than all of the 2,000-plus Russian commercial banks in this country have collectively spent on computerized banking systems in the last four years.

The importance of the FIDP goes beyond the money commercial banks can potentially receive for banking automation. The banks which are chosen are effectively identified as safe bets for future loans and are instantly bestowed with greater international recognition. A lack of Russian state institutions able to on-lend any foreign investment means that the chosen banks could quickly become a funnel through which very large amounts of money would flow.

Given the critical significance of this core group of Russian banks, it is of first importance that this money for banking automation is not wasted. Despite the highly complex structure devoted to administering these loans, waste is still possible. Under the project's timetable, Russian commercial banks are in effect being asked to buy enormously expensive computer systems and only afterwards are they required to take any expert advice.

This could be good news for a few computer suppliers, but bad news for the Russian financial system.

The Financial Institutions Development Program is obviously not just cash. It also contains mandatory technical assistance which these 20 banks are obliged to take. This technical assistance is in the form of training, education and formulating automation strategies, as well as general assistance in implementing more advanced banking services.

What is original about this scheme is that private Western commercial banks will provide the technical assistance to the Russian banks. This twinning program, called "Institutional Strengthening," represents another set of loans worth over $100 million.

The World Bank has realized that in order for twinning to be more than a worthy waste of money, Russian banks need a strong vested interest in the program's success. A major incentive is that twinning will be a precondition to participation in the FIDP as a whole. No twin -- no loan.

Moreover, banks will have an even stronger interest in staying awake in class. If the relationship works, the Western twin could become a Russian bank's gateway to the financial markets of the world. But if the relationship turns sour, it could be a catastrophic black mark against the Russian bank's international reputation.

One would think, therefore, that the steady hand of an experienced Western institution is going to be used to make sure that Russian banks do not spend the $240 million on inappropriate or useless hardware -- something many have proved quite able to do in the past. Apparently not. The timetable for the banking automation element in the FIDP project runs ahead of twinning, which means that the mandatory consulting will probably not include the selection of computer systems. The FIDP loan is scheduled to be effective before the end of this year, but no Western twin banks have yet been announced and it appears that the technical assistance program will start significantly later.

Russian banks are thus apparently not required to take any advice on what technology they buy. The World Bank appears to be saying that, providing the ordering of systems conforms to its procurement guidelines and procedures, the banks can buy what they like.

Robert Farish is the editor of Computer Business Russia

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