What is a Multilateral Development Bank (MDB)?
A multilateral development bank (MDB) is a financial institution established by multiple member countries and falls under international law. The owners of multilateral development banks are a national government and other international institutions and organizations.
The purpose of MDBs is to facilitate financing and provide advisory services for developing countries. Multilateral development banks are also referred to as an international financial institution (IFI).
Understanding Multilateral Development Banks
Multilateral development banks are established to help stabilize the global financial system. They now work as financing institutions that provide stable and long-term financing for various projects within developing countries. The projects promote the growth and modernization of less wealthy countries. The projects include:
- Infrastructure projects
- Energy projects
- Environmental sustainability projects
Commercial banks provide financing services with the objective of making a profit, while MDBs provide lower-cost financing with the goal of improving economic conditions in developing countries. MDBs are unique in that they do not seek to gain substantial profits for shareholders. Instead, they set objectives and development goals to reduce economic inequality within the world.
MDBs consist of member nations from various developed countries. The member countries provide funding for MDBs in the form of donor commitments. The donations are used to fund operating costs, and they provide loans and grants to the poorer countries.
Multilateral development banks also borrow funds from the international capital markets to lend to developing countries. MDBs can borrow from international markets with secured financing since they are backed by the member governments.
Importance of MDBs
Since MDBs are not organizations associated with specific countries, they are subject to international law. They are seen as an international pillar to stabilize the global economy. As an example, MDBs provided $222 billion in financing during the 2008 Global Financial Crisis when liquidity was in dire need, and very little financing was being provided by commercial banks. It was very important in stabilizing the global economy during a time of crisis and uncertainty.
Examples of MDBs
There are many different forms of MDBs. However, they can be broken down into two main forms, the first of which are the most prominent MDBs – the Bretton Woods institutions. They are the best-known MDBs that were established after World War II to facilitate international cooperation within the global financial system. The following are well-known Bretton Woods institutions:
- World Bank
- International Monetary Fund (IMF)
- International Bank for Reconstruction and Development (IBRD)
- International Finance Corporation (IFC)
- International Development Association (IDA)
- General Agreement on Tariffs and Trade (GATT)
There are also regional MDBs that are focused on the development of specific countries and low-income nations that can borrow collectively from the MDB, such as the following (note that there are many others for various localities):
- European Investment Bank (EIB)
- Asian Development Bank (ADB)
- New Development Bank (NDB)
- Eurasian Development Bank (EDB)
- Islamic Development Bank (IsDB)
- Inter-American Development Bank (IDB)
- Asian Infrastructure Investment Bank (AIIB)
Criticisms of Multilateral Development Banks
Multilateral development banks (MDBs) used to receive criticisms for being US-focused since the United States was the major member and donor to the most prominent MDBs. However, in 2017, under the Trump Administration, proposals to cut $650 million of funding over three years that were made during the Obama administration weakened U.S. ties with MDBs. New alternative MDBs can now be found in emerging markets, including the Chinese-led Asian Infrastructure Investment Bank (AIIB) and the New Development Bank.
Critics of MDBs also argue that the organizations focus on moving capital instead of achieving results. The main criticism is that they are not nearly transparent enough, and their impacts are not always clearly noticed.
Since MDBs are not subject to the oversight of one single governing body, critics feel that they are not held to a high enough standard, and that there is the uncertainty of where the capital is being spent.
That being said, proponents of MDBs argue that aiding developing countries, no matter if the process is inefficient, is still the morally right thing to do. In addition, it helps developing countries make progress in health and education and provides new, fast-growing markets for investors and business leaders to expand.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: