Capital in Multilateral Development Banks

MDBs contribute significantly to the international development agenda. Funding for member countries and regional connectivity projects depends largely on the ability to expand lending capacity of such MDBs. This paper covers the whole ‘MDB family’ of institutions but highlights regional and sub-regional MDBs because of their specifics of raising shareholders’ capital. The study discusses seven standard and novel options for increasing capital: (1) increasing existing shareholders’ capital; (2) new regional shareholders; (3) new non-regional states; (4) attracting institutional investors; (5) larger MDBs’ participation in a smaller MDB’s capital; 6) rechanneling the SDRs to the MDBs capital; (7) issuing perpetual subordinated debt available to the public. Based on case studies, we illustrate different capital enhancement strategies of MDBs that, in addition to raising capital, could lead to positive effects, related to improvement in credit rating, corporate governance, strengthening of financial position, international status. Additionally we discuss capital optimization, which is complementary to capital expansion.

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T20 policy paper “One Size Does Not Fit All – Analyzing the Applicability of Options for Expanding Lending Capacity Across MDBs” (jointly with FONPLATA Development Bank)

Shareholders’ capital provides the “fuel” for MDBs’ lending operations. New capital allows for significant expansion of lending capacity. On average, MDBs can leverage every shareholder’s dollar into 3–4 dollars of lending.

MDBs are typically classified according to geographical criteria, with categories including global, regional and sub-regional. The MDB family can also be described using an analogy with a Football League. The largest 10 MDBs (WB, AfDB, ADB, AIIB, CAF, EBRD, EIB, IDB, IsDB, NDB), with US$ 10+ billion paid-in capital, are classified as “Premier League” institutions. They have huge resources and a wide impact on the global economy.

Regional and sub-regional MDBs from the “Championship” football segment have limited resources but possess valuable knowledge and expertise regarding local markets, producers and industries. They are more willing to assume the risks associated with the use and advancement of local currencies.

Options used by regional and sub-regional MDBs to raise capital vary considerably from those employed by global MDBs.

The capacity of regional and sub-regional MDBs to provide financial support for development initiatives is constrained by the size of their shareholders’ capital. This study presents six options for increasing the shareholders’ capital of regional and sub-regional MDBs and suggests an additional novel option for discussion.

Options for increasing shareholders’ capital of regional and sub-regional MDBs

1.        Increasing capital by current member states. This is the most straightforward way of increasing the company’s lending capacity. The outcome is a reinforced financial position while retaining control and voting power. However, MDB shareholder countries face budgetary constraints with regard to regular capital replenishments.

2.        Attracting new regional states. In addition to bolstering the MDB’s capital base and lending capacity, this option could foster robust regional ownership, diversify and mitigate the risks associated with the loan portfolio, reduce geographic concentration, reinforce the international standing of the MDB and enhance its credit rating.

3.        Attracting new non-regional states. Expanding participation to countries from other regions, which tend to be high-income economies, leads to significant capital increases. Furthermore, they facilitate an enhancement in credit ratings and access to capital markets with more favourable funding terms.

4.        Attracting institutional investors, such as commercial banks, pension funds, insurance companies, and others. In addition to capital growth, positive outcomes include enhanced governance standards and greater accountability for MDBs.

5.        Attracting large MDBs. The involvement of highly rated MDBs could prove invaluable in accelerating the capacity-building processes of smaller MDBs. This could be achieved by contributing to operational policy and administration, loan standards and financial policy.

6.        Channelling SDRs to MDBs. In 2024, the IMF approved the proposal to expand the permitted use of SDRs by authorising their use in the acquisition of hybrid capital issued by prescribed holders. This allows countries to channel their SDRs as hybrid capital contributions, thereby helping to expand the lending capacity of MDBs. This option is currently under review by the G20.

7.        Issue of perpetual subordinated debt. This is an unconventional approach to capital increase. Issuing public perpetual debt, available to both institutional investors and the public, could serve to reinforce the relationship between a development bank and the citizens of its member states. Furthermore, it could assist in increasing the capital base and reallocating the capital structure when necessary.