SCALING UP FINANCE FOR THE SUSTAINABLE DEVELOPMENT GOALS: Experimenting with Models of Multilateral Development Banking
The world currently faces the critical challenge of scaling up development finance, an indispensable requirement for the realization of the SDGs.
Multilateral development banks (MDBs) can serve as effective institutional mechanisms to help finance the SDGs.
This possibility is due to their clear mandate to support development-oriented programmes, inhouse expertise and track record on identification, development, risk assessment and management of complex projects, and balance sheet structure matching long-term liabilities with long-term assets. A limiting factor, however, has been MDBs’ conservative loan approach and narrow capital base, which constrain their ability to scale up lending significantly.
Since the prospect of significant capital expansion is not on the agenda of developed country governments in the near future, development banks have been exploring alternative ways to enhance their lending capacity.
This paper discusses some of the new modalities MDBs have been adopting or considering for adoption to relax their lending constraints.
The paper explores, in particular, the Asian Infrastructure Investment Bank (AIIB) model for scaling up as a new experiment that may provide significant sums of development finance, as well as inject new ideas for operational improvements in other banks.
It focuses on AIIB’s articles of agreement and argues that such articles give the bank a potential institutional mechanism to become an important intermediary in channelling sizeable amounts of official (but also private) resources to development-oriented projects around the world.
Indeed, the odds are that the AIIB institutional setup may place the Bank ahead of its peers in terms of scale of loans. Although this may entice (or create competitive pressures for) other development banks to follow a similar path, the fact is that the AIIB model is not the only way forward to scale up finance for development. Other multilateral financial institutions can forge alternative paths towards scaling up that are aligned to their rules, culture and modus operandi.
Following this introduction, section 2 briefly reviews the Addis Ababa Action Agenda and argues that MDBs have a business model that make them very appropriate instruments to leverage resources to development objectives.
Section 3 presents recent proposals on how to reroute, through MDBs, resources managed by institutional investors towards development finance, but it also highlights possible downside risks.
Given the lending constraints MDBs currently face, Section 4 provides an examination of loan-to-equity gearing ratios of multilateral and national development banks. This section shows that gearing ratios vary considerably among development banks, due in part to the fact that each bank faces specific structural, institutional and cyclical factors shaping their lending practices; but the observed variation also suggests a possibility for institutional experimentation in the level of a bank’s loan operations for a given amount of equity capital.
Section 5 then links provisions for special funds in the AIIB articles of agreement, with the creation of China-backed investment funds, to suggest that the special funds mechanism could be an institutional experiment to scale up a form of development finance with greater focus on long-term, non-concessional flows.
Finally, section 6 concludes and asks the question: What does the AIIB model mean for the world? It suggests as a possible answer that the AIIB institutional set-up can be seen as an innovative way forward to scale up financing for the SDGs.