We need a lot more money

Whether it’s climate change, poverty, the cost of living crisis, or any number of other challenges we face today, there is one common thread. We need money to help prepare and respond. A lot of it. 

Credible estimates put the costs in the trillions of dollars — an order of magnitude greater than what’s currently on the table, particularly for lower income countries. 

The good news is that institutions exist that were designed to mobilise money to spur development and invest in global challenges. The bad news is that they are underused, out of date, and in need of a refresh. Those institutions are called multilateral development banks (MDBs). Collectively they hold over US$1.8 trillion in assets and could leverage hundreds of billions – up to a trillion dollars – more in new lending if they used that capital more efficiently.

This page is about how they work and how to get them to work better.  

The key numbers

A few governments have the power to unlock a trillion dollars to fight poverty and climate change

Unlocking additional funds will require doing five things to change how the MDBs work (which we explain below):

  1. Take on more risk
  2. Give more credit to callable capital
  3. Do more financial innovation
  4. Improve credit rating agency assessments of MDB financial strength
  5. Increase access to MDB data and analysis

A few countries hold the majority of the voting shares, making their support critical for implementing the reforms necessary to unlock new funds.

Here’s a live tracker of where those countries stand on the five reforms.

How do the multilateral development banks work?

They are Multilateral: That means they are owned by countries that collectively make up their shareholders. Some countries are borrowers, some are donors, some are both, but they all sign up to an international treaty that provides certainty to all involved. 

They focus on Development: The purpose is to provide finance for investments in future prosperity: that includes everything from roads and power plants to education programs and pandemic prevention. 

They are Banks: Shareholders provide capital in the form of cash and guarantees that they will step in if things go poorly. That makes the MDBs very secure investments. They issue bonds on international markets, thereby increasing the amount that is available to be on-lent to countries at a cheaper rate and on better terms than countries could access themselves. When that money is repaid, it can be lent to another borrower. This is extraordinarily efficient. Since 1944, the World Bank has taken US$19 billion of cash from shareholders and turned it into over US$800 billion of lending. 

MDBs are considered to be safe and stable for three key reasons:

  1. They have preferred creditor status, which means that MDBs are first in line amongst creditors to get repaid, even if a country defaults on a loan. Analysis for the G20 showed that governments almost always repay loans to MDBs on time.
  2. They have a “AAA” credit rating, which means they are safe investments and thus can borrow from bond markets cheaply.
  3. They have US$2 trillion in a guarantee called “callable capital.” This is not cash, but a guarantee that the world’s leading economies will step in should MDBs get into trouble. Throughout all of the financial crises since 1944, callable capital has never actually been called upon. That reassurance makes MDB bonds very safe investments and highly attractive to private investors.

How do the multilateral development banks lend?

Most have two lending facilities called “windows”:

  1. Non-concessional or hard loan windows are mostly available to middle-income countries and make profits that can be recycled into new programmes. The IBRD is the World Bank’s non-concessional window.
  2. Concessional or soft loan windows are mostly available to low-income countries and use aid to subsidise the cost of the loan. The International Development Association (IDA) is the World Bank’s concessional window.

A government will typically come to one of the banks with an application for a loan. Legal, policy, and technical experts will then advise on both the structure of the loan and the policies needed to make it work.  

How much cash do the multilateral development banks have and where does it go?

They hold over US$1.8 trillion in assets. Here’s a breakdown.

Let’s take a closer look at the World Bank:

The World Bank provided US$47 billion in 2020, accounting for over 41% of total MDB disbursements. Over 40% of that financing went toward social infrastructure, health and governance.

88% of financing was in the form of loans (US$42 billion). 62% (US$25.8 billion) of this was provided as hard loans, and 38% (US$15.8 billion) as concessional loans.

Only 14.6% of the World Bank’s hard loans went to Africa in 2020. In 2017, this share was 23.6%.

The majority of these non-concessional loans went to North African countries.

Multilateral development bank lending is failing to meet the moment

Global and cross border challenges like climate change, pandemic threats, and food insecurity pose greater risks than ever before. Credible estimates for the scale of external finance needed to invest in sustainable development and the green energy transition are in the range of US$1 trillion a year. If left untackled, today’s multiple crises will inevitably exacerbate already rising geopolitical tensions.

Traditional sources of finance are not keeping pace with those needs:

  • Government revenue has declined in many countries since the pandemic, from 20% of gross domestic product (GDP) in 2019 to 19% in 2021 in lower-middle-income countries, and from 27% to 22% in upper-middle-income countries. 
  • The cost of debt repayments has increased by 35%, leaving less money to invest in development. 
  • Rich countries are yet to meet their US$100 billion climate finance pledge made in 2009. Globally, annual adaptation financing needs are estimated to be in the hundreds of billions by 2030 and up to half a trillion by 2050. In Africa, the estimated annual cost of climate adaptation is US$50 billion by 2050. 

MDBs should be stepping in to help countries overcome these challenges. Instead, they are:  

Too slow: Many countries prefer to borrow at a higher cost on international markets or from China because it means that they can move faster with fewer conditions. IDA’s Crisis Response Window took an average of 398 days from the start of a crisis to disbursement between 2011 and 2020.

Too inflexible: They currently lend to country governments, but that fails to take account of the need for investment in cross border challenges and global public goods like reducing carbon emissions and preparing for pandemics. 

Too closed: Loans will ultimately be paid by the next generation of taxpayers in borrowing countries. Current taxpayers should have a say in determining priorities and how money is spent. Power and decision making remains largely in the hands of a small number of high-income countries. 

Too cautious: They don’t use their balance sheets effectively enough. Increasing their risk appetites, even by modest amounts, could enable them to borrow and lend significantly more. 

How should multilateral development banks lend? (Hint: A bit more risk for a lot more reward)

An expert group commissioned by the G20 attempted to answer a basic question: How can MDBs lend more without requiring new capital or triggering downgrades to their credit ratings?

The answer? 

  1. Take more risk: MDB management and governing boards are very cautious and their risk assessments are strongly influenced by the credit rating agencies’ methodologies that don’t fully account for these banks’ secret sauce (callable capital and preferred creditor status). MDBs should build better in-house assessments of risk.  
  2. Give credit to callable capital: The MDBs hold US$2 trillion in the form of callable capital – guarantees that shareholders will step in if the banks have trouble servicing their debt. This represents 90% of their resources, but most don’t even consider it in their risk assessments. They should.
  3. Innovate: Sharing risk with commercial partners through innovations like the “Room2Run” initiative could unlock lending headroom without requiring new capital. These sorts of innovations transfer some of the risk from a block of loans to a group of investors for a fee, thus freeing up new lending headroom. Issuing non-voting hybrid capital to private investors could also significantly increase available capital and therefore lending capacity.
  4. Improve credit rating agency assessments: The world’s three major credit rating agencies (Moody’s, S&P, and Fitch) issue ratings that influence the cost of borrowing on international markets. The three agencies use different methodologies in determining those ratings, with very different results. S&P Global states that MDBs could nearly triple their loan portfolios without losing their AAA rating, while Fitch’s position is that a change to MDBs’ loan portfolios, such as the greater use of callable capital, could negatively impact their credit ratings. Standardising the approach could unlock much more lending headroom. 
  5. Increase transparency: Better data disclosure and harmonisation would help MDB shareholders, credit rating agencies, and private investors more accurately assess the risk of loans. Analysis from available data indicates that preferred creditor status matters a lot: the risk of default and losses is much lower for MDB loans than for loans to the same borrowers by commercial banks.

What would it take to implement these five recommendations?

MDB shareholders have the power to implement these recommendations. And a few have outsized power because of how many shares they hold. Nine shareholders (in order of voting share: US, Japan, China, Germany, UK, France, Russia, India, and Canada) hold 49% of voting power at the IBRD (part of the World Bank). 

A few countries control most of the votes at the World Bank

This chart shows the share of votes controlled by members of the International Development Association (IDA) and the International Bank For Reconstruction and Development (IBRD).

The latest data for IDA is for 20 July 2022, and for IBRD 07 December 2022.

See here for the latest intel on where they stand.

What needs to happen and when?

Fulfilling this agenda will require joint action by major shareholders to implement all of the recommendations together. Speed will be critical in responding to the urgency of need and to take advantage of the current political appetite for reform. 

Here’s what needs to happen and when:

Q1-2 2023

  • Major shareholders should support all five recommendations and push the MDBs to implement them in the next two years, with a clear timeline to set expectations and ensure concrete progress.
  • Borrower countries should articulate a clear set of demands for reform, including the most critical uses of new financing and for tackling the challenges of speed, flexibility, and responsiveness.
  • The MDBs should develop a time-bound roadmap for the implementation of the five recommendations by the end of 2024, laying out any technical or political issues for resolution.

Q3-4 2023

  • Major shareholders should hold the MDBs to account for progress in implementing the five recommendations.
  • Borrower countries and major shareholders should work together to lay out clear plans for how increased finance should be utilised, ensuring sufficient time for pipeline and project development and internal organisational modernisation. 
  • The MDBs should make progress on implementing reforms and provide transparent progress reports to all stakeholders.