Capitalising Multilateral Development Banks Helps Increase Development Financing. The New EDB Report Analyses Seven Options

30 October 2024

Almaty, 30 October 2024 – The Eurasian Development Bank (EDB) has published a report on Capital in Multilateral Development Banks. Raising Capital and Enhancing MDBs Capital Structure for the Benefit of Member States, overviewing options to boost the capital of regional and sub-regional multilateral development banks (MDBs).

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 play a pivotal role in advancing the international development agenda. In 2024, G20 countries, in collaboration with numerous MDBs – including the EDB, the World Bank, the Islamic Development Bank and many others – developed a multi-year G20 roadmap for MDB reforms to make MDBs better, bigger and more effective.

This paper contributes to the ongoing discussion and investigates ways to enhance the financing capacity of MDBs through increased shareholder capital.

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 (World Bank, African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, CAF, European Bank of Reconstruction and Development, European Investment Bank, Inter-American Development Bank, Islamic Development Bank, New Development Bank), 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.

There are two key issues here:

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

2.    Global MDBs can coordinate and collaborate with regional and sub-regional MDBs to support them in incorporating innovations that boost their lending capacity.

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. Furthermore, different capital increase strategies can also result in positive effects, including improvements in credit rating, corporate governance and an enhanced international status.

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

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(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.

Evgeny Vinokurov, EDB Vice President and Chief Economist, emphasises the critical importance of paid-in capital for MDBs: “MDBs have historically served as a bridge between the public and private sectors, helping both sides and making it easier to meet developing countries’ financial needs. Given the different sources of funding available to MDBs, such as bonds, deposits and retained earnings, paid-in capital remains the critical factor for increasing MDB investment. We need to look at ways of raising capital for MDBs. Our research assesses a range of strategies for increasing capital volumes, including both conventional and non-conventional options. Challenging times call for novel solutions.”

The full report with comprehensive presentations and supplementary materials is available here.

The findings of this research have been published in a joint T20 policy brief in partnership with FONPLATA Development Bank.

Additional Information:

The Eurasian Development Bank (EDB) is a multilateral development bank investing in Eurasia. For more than 18 years, the Bank has worked to strengthen and expand economic ties and foster comprehensive development in its member countries. The EDB's charter capital totals US $7 billion. Its portfolio consists principally of projects with an integration effect in transport infrastructure, digital systems, green energy, agriculture, manufacturing and mechanical engineering. The Bank adheres to the UN Sustainable Development Goals and ESG principles in its operations.

The EDB Media Centre:
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pressa@eabr.org
http://www.eabr.org/

 

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