Multilateral Development Banks

About MDBs

Multilateral development banks (MDBs) are supranational financial institutions that support developing countries to help them achieve various goals. While the support is primarily financial, many MDBs have accumulated a good deal of experience, which allows them to propose non-financial services too, such as policy advice, capacity building,technical assistance and training. MDBs are a key element in the multilateral development system.

This wide-ranging remit, as well as the fact that MDBs are able to pursue public policy goals at minimal fiscal cost to member governments, explains the success of these institutions over the past 80 years, as well as their growing number: today, there are more than 20 MDBs around the world. Although their members, clients and goals may differ, MDBs share common characteristics, play similar roles, and conform broadly to the same institutional model.

In the past decade, MDBs have been facing several challenges, both from within (legacy MDBs competing for relevance with other, newer MDBs) and outside their system (new needs and goals, such as contributing to the fight against climate change). Several countries, non-governmental organisations and think tanks have called for these banks to change in order to adapt to this new environment. Important discussions have been taking place among stakeholders.While discussions are ongoing, several MDBs are committed to reform.

As their name suggests, MDBs are supranational financial institutions set up by sovereign states. They support countries in need (nowadays, mostly developing countries), to help them reach goals that have been evolving over the years, depending on the institution itself. While their support is primarily financial, the experience they have accumulated over the years allows MDBs to propose valuable complementary services, as well. These include policy advice, capacity building, technical assistance and training, networking with public institutions in other countries, and legal protection against the possible misuse of funds.

This wide-ranging remit, as well as the fact that MDBs are able to pursue public policy goals at minimal fiscal cost to member governments 1 explains the success of these institutions in the past 80 years and their increase in number. Today, there are more than 20 MDBs around the world. They vary in terms of operating period: the ‘legacy’ MDBs have been around for decades, while newer ones, such as the Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB), have been operating for a few years. MDBs also vary in the scale of operations, as well as in the number and geographical composition of their members: some, such as the World Bank, include many countries from all over the globe; others, far fewer. Lastly, they vary in terms of their goals: while some have as a main goal investment in infrastructure, others include poverty reduction or climate change among their primary goals. At the same time, despite those differences, most MDBs share common characteristics, play similar roles, and conform broadly to the same institutional model – so much so that researchers talk about a system of MDBs.

Creation, operation & governance of MDBs

In most cases, sovereign states own MDBs exclusively, and in a few cases, they share ownership with other MDBs, governmental development agencies, and – very rarely – commercial banks. When countries create an MDB, they issue a specified number of shares. When a new country becomes a member, it signs and ratifies the MDB’s founding international treaty, and purchases shares of capital, which typically determines its voting rights.2 The highest authority for an MDB is a board of governors, or governing council – usually ministers of finance or central bank governors, who typically meet annually and have the powers to take decisions. However, they delegate operational activities (e.g. approving individual projects or budgeting matters) to the board of directors appointed by the board of governors. Unlike governors, directors are employed by the MDB, and they take care of operational matters.

Because shareholder capital is limited, MDBs obtain more resources to lend for development projects by borrowing money from external sources. Large MDBs mostly issue bonds on capital markets, while smaller MDBs raise funds from a mix of bond issues and loans or credit lines from commercial banks, other development finance institutions, or export credit agencies. With the initial capital and the borrowed capital, MDBs can propose loans to countries.

Developing countries must repay the loans obtained from MDBs on top of interests. Thanks to the MDBs’ ownership by sovereign states with higher creditworthiness, the interest rates of loans granted by MDBs are lower than the rates paid otherwise; they are slightly above the interest rate MDBs face on their own borrowings. The mark-up allows MDBs to cover their administrative costs, and any additional income the MDB may extract is reported as retained earnings (which act like additional share capital) or is distributed to shareholders.

An MDB may need additional own capital for a number of reasons. For instance, borrowing developing countries either urbanise and industrialise, or need counter-cyclical lending to offset a crisis (such as recently in the case of COVID-19). The MDB may also take on new tasks mandated by shareholders. To increase their limit, MDBs have two options: they can choose to increase the capital paid by their shareholders, or they can accumulate reserves each year out of net income.

Their capital structure, made up of capital provided by sponsoring member countries and borrowings from capital markets, has allowed MDBs to become substantial contributors to development. Researcher Chris Humphrey notes that with a total capital of about US$50 billion over their entire history, the five legacy MDBs have lent US$1.5 trillion dollars for development projects as of end-2020. The MDB model also works as a channelling mechanism for private financing into development projects. Private investors – typically institutional investors (such as pension funds) or smaller funds – are themselves bound in their investments by risk criteria, and as a result would shun investing in a developing-country project. They would also tend to shun investments in human capital or infrastructure, because those investments are unlikely to translate immediately and directly into a financial profit. By proposing them a low-risk, highly rated bond instead, MDBs allow the money to be channelled to those socially important projects.

Overview of the various MDBs

‘Legacy’ MDBs

The World Bank, the AfDB, the ADB, the IDB, and the European Bank for Reconstruction and Development (EBRD) have dominated international development cooperation for decades. They have helped shape the global development agenda, channelled hundreds of billions of financing for development projects, and helped coordinate the major bilateral donors’ activities. Their staff are spread across multiple developing countries and have amassed much experience and knowledge on development. Moreover, they benefit from high credit ratings and broad access to finance.

However, over recent decades, their operational effectiveness and international legitimacy have diminished, earning them the title ‘legacy MDBS’. This is largely due to the change in economic power arrangements and relations taking place in the last 20 years and to the increasing number of external financing options for developing countries. It is also a result of the long processing time for project approval (compared with the private sector, or bilateral sources such as China), owing, among other reasons, to their many layers of bureaucracy. Yet another reason is that these MDBs mandate the use of ‘safeguard’ policies, which in many cases supersede borrower country laws and regulations, to avoid or mitigate negative project impacts on the environment and vulnerable social groups. This contributes to them being perceived as outside authorities imposing their views as regards environmental protection, development, and project design on borrowers, despite repeated MDB pronouncements on promoting ‘country ownership’.

European MDBs

The first European MDB is the EBRD, created in 1991. Its mandate is unique among MDBs, in that it explicitly aimed to support the transition of centrally planned countries to market economies, and to apply this purpose to countries committed to multi-party democracy and political pluralism (political system change). Since then, its membership has grown to 71 countries on five continents – including India and China. The EBDR comprises the EU Member States, the EU itself, and the European Investment Bank (EIB) – which, according to its founding Treaty, hold a majority of its total capital stock (currently at 54.4 %). The EBRD and the World Bank are the only MDBs in which all EU Member States are shareholders, and the EBRD is the only multilateral development bank with an EU-held majority.

While the legacy MDBs were modelled on the World Bank, the EBRD has a distinct political and economic mandate, with a provision to lend 60 % of its loans to private-sector operations. Its five aims are to:

mobilise capital to promote private and entrepreneurial activities;
foster productive investment;
provide technical project assistance;
stimulate capital markets;
support viable projects.

The second European MDBis the EIB. Established in 1958 as a European financing body for industrial policy and integration, it is currently one of the largestMDBs in terms of total assets and liabilities, and operates in more than 150 countries worldwide. The EIB is also the majority shareholder and operator of the European Investment Fund (EIF), which was established in 1994 to support the development of small and medium-sized enterprises by improving their access to finance. The EIB and EIF became the EIB Group in 2000. In 2022, the group set up EIB Global as its new development branch, for its operations outside the EU. EIB Global’s activities focus on climate action, digital, energy, infrastructure, inclusive finance for small businesses, job creation, education, and health.

The EIB’s priorities have been increasing and evolving over the years. The most recently approved eight strategic priorities reflect the varying nature of the challenges the EIB aims to tackle:

investing in climate change adaptation, mitigation and the energy transition;
accelerating technological innovation and digitalisation, to support re-industrialisation in those sectors that are key for the EU’s strategic autonomy and economic security;
stepping up investment in security and defence, to contribute in the efforts of the European industry and to reinforce Europe’s protection and deterrence;
contributing to a modern cohesion policy, by supporting the EU’s affected sectors and territories, especially those that are heavily dependent on carbon-intensive activities;
developing innovative financing for agriculture and the bioeconomy, to support the agricultural sector in the context of climate change adaptation;
gearing up investment in social infrastructure (e.g. health, education and skills);
pioneering the capital markets union;
focusing activities outside the EU on the Global Gateway strategy, Ukraine and the enlargement process.

Asian Infrastructure InvestmentBank and New Development Bank

Founded by China and a group of mainly emerging market and developing countries representing a substantial share of the world population and economy, the two banks are well capitalised10 and have strong bond ratings (AAA for the AIIB and AA+ for the NDB). They are following similar institutional patterns to those found in legacy MDBs, and therefore face similar tensions and trade-offs. At the same time, the presence of China –a borrower nation with a growing role as global creditor over the past 20 years– gives specific characteristics to these two banks.Moreover, the banks differ from the legacy MDBs in that both prioritise infrastructure finance (including energy and transport facilities) to support economic growth, and neither focuses explicitly on poverty reduction as such. Staff numbers are kept low,12 which contributes to accelerating process approval, but has potential trade-offs in quality control. Another difference regards environmental and social matters, in which the two MDBs give more importance to national sovereignty.

‘Borrower-led’ MDBs

Apart from the MDBs mentioned above, there are another 20 or so operating around the world that do not fit in the preceding categories. In most of them, borrower member countries (i.e. lower- and middle-income developing countries) control a majority of regular votes, as well as all special majority votes on key issues (e.g. admitting new members, changing the capital structure). Humphrey refers to them as ‘borrower-led’ MDBs. While these MDBs have the same basic organisational model as the legacy MDBs, their internal governance dynamics are not uniform. Owing their size13 and member countries’ ratings, these MDBs cannot raise resources in the international capital markets with the same ease as the previous ones. They therefore seek funding from commercial banks, as well as export banks and aid agencies from wealthier countries. They typically borrow through short-term loans, which diminishes their ability to extend long-term loans.

Additionally, they tend to lend at higher rates than the legacy MDBs, making them less attractive to client countries. They thus tend to lend to private-sector companies and for profitable projects, e.g. in industry, commerce and infrastructure, or trade finance. Decision-making is smoother than that of legacy MDBs, which allows them to offset the lending of smaller amounts at higher costs. Similarly to the AIIB and NDB, they usually refrain from imposing environmental or social safeguards, and instead follow national legislation on the matter. Lastly, because of their smaller scale and presence, borrower-led MDBs have relatively little knowledge and expertise to go along with their financing. Several of them are therefore trying to ramp up their knowledge and technical support services as a way of strengthening their competitive offer to recipients.

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