Multilateral Development Banks – Future Role and Funding Strategies

Multilateral Development Banks (MDBs) are financial institutions that provide financial and technical assistance to developing countries. These banks are owned and funded by multiple member countries and operate on a multilateral basis, hence the name "Multilateral." MDBs play a crucial role in supporting economic and social development initiatives in developing nations. They provide funding for various projects and programmes aimed at reducing poverty, promoting sustainable development, and improving infrastructure and public services.

 Multilateral banks played a key role in the growth of developing economies by reducing of poverty and creating robust government administrative systems. With the help of Multilateral Development Banks many developing countries were able to accelerate the economic growth of their country and reduce the poverty.

We are living in the of world digital economy.
Environment management and Climate change is one of the major issues of focus and countries all over the world are looking at reducing the pollution and implementing environmental friendly Industrial Development strategies.

 

A few areas ,where MDB’s can focus for their scope of operations include :

 Climate Change and Sustainable Development: Given the urgency of addressing climate change, MDBs can play a pivotal role in supporting sustainable development by significantly scaling up their investments in renewable energy, climate adaptation, and sustainable infrastructure projects. They can act as catalysts for mobilizing private capital towards climate solutions, promoting green technologies, and integrating climate considerations into all aspects of their operations.

 

Social Inclusion and Equality: MDBs can prioritize social inclusion and equality in their development agenda. This involves actively addressing gender disparities, promoting inclusive growth, and supporting projects that enhance access to education, healthcare, and basic services for marginalized communities. MDBs can also encourage governments and borrowers to adopt policies that promote equitable development outcomes.

 

Digital Transformation: Embracing digital technologies and leveraging them to support economic development and financial inclusion is another area for MDBs to reimagine their role. They can support projects that foster digital connectivity, expand access to digital financial services, and promote digital literacy. By partnering with technology companies and promoting innovation, MDBs can help bridge the digital divide and unlock the potential of the digital economy.

Private Sector Engagement: MDBs can enhance their collaboration with the private sector to maximize development impact. This can be achieved by fostering public-private partnerships, supporting entrepreneurship and small and medium-sized enterprises (SMEs), and providing technical assistance and financial products tailored to the needs of the private sector. MDBs can also promote responsible business practices and environmental and social safeguards in private sector investments.

 

Crisis Response and Resilience Building: MDBs can play a more proactive role in crisis response and building resilience, particularly in the face of pandemics, natural disasters, and conflicts. They can provide rapid financing mechanisms, technical expertise, and policy advice to help countries prepare for and recover from crises. MDBs can also support investments in resilient infrastructure and social safety nets to strengthen countries' ability to withstand shocks.

 

Knowledge Sharing and Capacity Building: MDBs can prioritize knowledge sharing, capacity building, and peer learning among their member countries. They can establish platforms for sharing best practices, facilitate policy dialogues, and provide technical assistance to strengthen institutional capacity and governance frameworks. By fostering knowledge exchange, MDBs can amplify the impact of their interventions and promote sustainable development practices.

 The G20 meetings of this year have focussed  on setting new priorities for multilateral Development Banks, redefining their scope of operations and explore new funding stratgies.

The Multilateral Development Banks so far were dependent on funding from leading developed  countries in the world and raising funds through bonds. Looking at the challenges before the world today, the funding by these banks are not adequate to meet the emerging fund requirements.

In this context, a working group has been created and the first draft report was presented during the G20 meeting in July 23. The final report will be submitted in the September G20 meetings to be held.

The first part of the Singh-Summers report suggested the need to increase MDBs’ annual spending by $3 trillion by 2030, including $1.8 trillion for additional climate action and $1.2 trillion for achieving other sustainable development goals (SDGs).

 

India’s Finance Minister outlined the four-fold agenda of India's G20 presidency, which includes the following objectives:

Enhancing the agility of multilateral development banks (MDBs) to tackle 21st-century challenges.

Ensuring prompt resolution of debt and debt-related matters.

Establishing a global regulatory framework for crypto assets beyond central bank jurisdiction.

Expanding digital infrastructure to meet growing demands.

US Treasury Secretary has called for reforms that make multilateral development banks "better..not just bigger" and sought certain reforms before a capital hike for these institutions. She listed out a few priorities to reform multilateral developments banks such as a framework for targeted use of concessional financing for global challenges, the option for the World Bank to lend to sub-sovereign and supra-sovereign entities such as COVAX to address global challenges, and streamlining the climate finance architecture to make sure development banks and specialised funds work together to deliver maximum impact.

US Secretary said she was pleased with the Summers-Singh report's emphasis on incorporating global public goods into the mandates of multilateral development banks and its focus on making these institutions' operating model more responsive through changes to culture, incentives, and risk appetite. She also shared the call for much more ambitious private sector engagement and efforts to make the whole system work better together. She supported  the request for swift implementation of the Capital Adequacy Framework recommendations," she added.

Commenting on the steps being undertaken by the World Bank, She said efficiency improvements and balance sheet reforms will "responsibly unlock" $50 billion in additional lending capacity over the next decade. Further, she said the multilateral development banks system could unlock $200 billion over the next decade from the measures already being implemented or under deliberation. There is potential for even more if the MDBs (multilateral development banks) undertake some of the longer-term and more complex recommendations in the G20 Capital Adequacy Framework report. This is $200 billion more in funding that we can use to advance key global priorities: spurring economic growth and reducing poverty, fighting climate change, and promoting human development," Yellen said.

Considering the vast amount required for implementing Climate management Strategies  and Health Management, There is a need to look at innovative Financing strategies. Multilateral Development Banks have got lot of strengths which can be leveraged to achieve the desired goals. Apart from Financial Capital, they also have lot of Knowledge Capital and Relationship capital across most of the countries in the world. They can play a vital role in acting as  Platforms for facilitating  Climate action Goals, Health and Digital Penetration. By working very closely  with IMF, Other Multilateral Banks, NGOs/Charitable Organisations, Governments and Private sector,  they can facilitate the implementation of Political and Economic reforms .

The Multilateral Banks have  so far were giving  Grants and Long term soft loans to the Central and State Governments of  the developing countries. The funds were given for Urban Development , Rural development, Agriculture development, Health, Education sector and Poverty Alleviation schemes. Infrastructure is one  sector where  lot of funds were deployed. They also helped the countries to achieve reforms in the Public Utilities and Public Administration.

The Subsidiaries of MDB’s focussed on Private Sector,  were helping the private sector in the form of a both loan and equity. But they were on a small scale compared to their concessional funding. This aspect, has to get a higher focus in the future strategy of MDB’s.

As mentioned in the First draft report of G20, Quantum of funds required to meet the future challenges, even if capital base is  increased and the present balance sheet is leveraged to the full extent, Multilateral Banks with the enhanced fund position  will not be able to meet the Challenges. There is a need for extensive collaboration with Private sector, NGOs , Charitable Organisation, Sovereign wealth funds, Leading companies in every country and the Leading fund managers across the world.

To adopt innovative financing strategies, MDB’s have to  create Special subsidiaries for Climate Finance, Telecom infrastructure / digital infrastructure , Health/Education. This will help to create strategic alliances with the leading Stakeholders. The MDB’s , which do not have subsidiaries for private sector development, can develop a subsidiary for funding the private sector.

The security regulatory Authority of India has mandated the leading Profit Making companies to contribute 2% of a net profit towards Corporate Social Responsibility. Similar regulation can be brought in all the countries in the world. Part of Funds collected could be given as a Grant or Equity to  Multilateral Development Banks to fund the specific Initiatives including Climate Initiatives.

The Leading Sovereign wealth funds and NGOs/Charitable Organisation  in the world have billions of dollars in their Kitty. There could be requested to give Grant/Equity towards climate Finance and poverty reduction initiatives. They can also benefit deploying the funds through MDB network , the infrastructure available with MDBs for their specified purposes.

The leading Information Technology companies in the world and Telecom companies  can be requested to provide grant and Equity towards Education and the digital infrastructure initiative.

The leading Pharma Companies and Medical Devices companies can be roped in for funding the Healthcare Initiatives.

European Bank for reconstruction development has a unique business model where they focus on funding the private sector. They work very Closely with the governments in effecting political and economic reforms. The private funding arm of multilateral Development Banks can develop business model like EBRD and help introducing political and economic reforms in the developing countries. Many of the developing countries have rich natural resources and this initiative should help to monetise the rich resources , developing countries have.

For funding the country specific initiatives, it is possible, MDB’s can raise local resources through Local Currency Bond issues. This will help to reduce the exchange risk.

Last week, African Development Bank has issued a hybrid instrument with the features of both debt and equity, first time for a Multilateral Development Bank. Similar such instruments can be used to raise resources .

Some of the Financial Instruments, MDB’s can consider include :

Green Bonds: MDBs can issue green bonds to raise funds for projects that have environmental benefits, such as renewable energy, climate adaptation, and sustainable infrastructure. Green bonds attract investors who are specifically interested in supporting environmentally friendly initiatives.

 

Social Impact Bonds: Also known as Pay-for-Success bonds, social impact bonds allow private investors to provide upfront funding for social programs. If the program achieves predefined social outcomes, the government or MDB repays the investors with a return. This model transfers the risk of program effectiveness from the government or MDB to private investors.

 

Blended Finance: Blended finance involves combining public and private sector funds to finance projects. MDBs can leverage their concessional financing with private capital to support projects that might not attract sufficient investment otherwise. This approach can help de-risk projects and make them more attractive to private investors.

 

Currency Swaps: To mitigate foreign exchange risk, MDBs can use currency swaps. For instance, if a project is denominated in the local currency of the borrowing country but funding is in a different currency, an MDB can enter into an agreement to exchange currencies at a pre-determined rate, reducing the risk of currency fluctuations.

 

Impact Investment Funds: MDBs can set up impact investment funds that focus on sustainable development projects in specific sectors or regions. These funds can attract investors interested in both financial returns and social or environmental impact.

 

Results-Based Financing: With this model, MDB funding is tied to achieving specific outcomes or milestones. Payments are made based on the successful completion of these predefined objectives. This approach ensures a focus on results and efficiency.

 

Securitization of Assets: MDBs can bundle together a portfolio of loans or other financial assets and issue securities backed by these assets. By doing so, they can access capital markets, diversify funding sources, and potentially reduce borrowing costs.

 

Development Impact Bonds: Similar to social impact bonds, development impact bonds focus on achieving specific development outcomes. Private investors provide upfront capital, and returns are based on successful achievement of development targets.

 

Crowdfunding: While not a traditional model for MDBs, crowdfunding platforms can be explored to mobilize funds for smaller-scale projects or initiatives, particularly those with a strong social or environmental appeal.

 

Fintech Solutions: Embracing financial technology can streamline operations, reduce costs, and reach new investors. MDBs can leverage fintech platforms for digital fundraising, remittances, and payment solutions.

In conclusion, the redefining the role of MDBs , Restructuring the MDBs and Seeking new funding sources should aim to align their operations with the global sustainable development goals, foster collaboration with diverse stakeholders, and adapt to emerging challenges and opportunities in the development landscape. By embracing innovation, inclusivity, and sustainability, MDBs can enhance their effectiveness and contribute significantly to global development efforts.

 

R Kannan

 

Corporate and Economic Advisor