Asian Development Bank (ADB)

What Is The Asian Development Bank (ADB)?

Asian Development Bank is a multilateral development bank. It was established on 19 December 1966 and is headquartered in the Ortigas Center in Mandaluyong, Metro Manila, Philippines.

It has 31 field offices worldwide to promote social and economic development in Asia. At the time of establishment, it had 31 members but has grown to 68. 

ADB was modeled after the World Bank with the objective of social and economic development to reduce poverty in Asia and the Pacific region. It has the same voting structure as the World Bank, where votes are weighted in proportion to members' capital subscriptions.

The USA and Japan have the highest voting power, having 12.751% weightage each. Followed by China at 5.437%, India at 5.347%, and Australia at 4.913%.  

The Asian Development Bank's investment primarily focuses on;

• Education
• Financial Sector 
• Infrastructure 
• Environment Sustainability Regional Cooperation and Integration 
• Private sector lending

History of the Asian Development Bank

After the success of the Marshall Plan in the post-war reconstruction of Europe and Japan's own economic recovery, the finance minister of Japan, Hisato Ichimada, floated the idea of a development and financial institution for the Asia-Pacific region. 

The USA was not interested then, so the plan was scrapped. In 1962, the momentum again picked up, and a group of leading economists led by Takeshi Watanabe, a senior economist with the Japanese government, proposed the idea of the Asian Development Bank.

The idea was to copy the structure of the World Bank and its voting system, where the weight of the vote was based on the subscribed capital of the member country.

At first, the US was not opposed to the idea but didn’t want to commit any funding to the project. But as US involvement in Vietnam increased, then US President Lyndon B. Johnson felt an institution like ADB would help the USA increase its influence in Asia.

As ADB was the brainchild of Japan, it was expected that the headquarters would be established in Tokyo. But the headquarters location was decided by vote; Tokyo got 8 votes while Manila got 9. So it was decided that the Philippines would be the home of ADB.

Even though Japan was not pleased with the vote result, it still committed to financing a large chunk of the bank's capital. Japan contributed 22.6% of the total ordinary capital resources ($173.7 million) and 59.6% of the total special funds ($122.6 million), becoming the most significant contributor.

The Organizational Structure of the Asian Development Bank

Asian Development Bank has a Board of Governors as its policy-making body; it consists of one representative from each member country. 

Then there is the Board of Directors and their deputies, which consists of 12 representatives elected by the Board of Governors. Eight Board of Directors are from the Asia-Pacific regional members, and the other four are from non-regional members.

The Board of Governors also elects the president of ADB, the current president being Masatsugu Asakawa, elected on 17 January 2020. 

Each member country has a different voting weightage based on their contribution to the capital.

The Ten Largest members by subscribed capital are:

Source: ADB Annual Report 2021 Toward a Green and Inclusive Recovery

The Asian Development Bank has 68 members. 49 members are from the Asian and Pacific Regions, and 19 are from other regions. 

List of Asian Development Bank members:

Source: About ADB | Asian Development Bank

Financing Programs

Asian Development Bank provides many different types of funding and funds a variety of sectors as needed. 

They fund large government and private infrastructure projects and provide loan and equity financing. However, all of these can generally be grouped into 3 different types of funding. 

1. Sovereign Funding

Sovereign funding is given to the government to finance development programs. These loans are provided in different forms depending on the project and the country's income.

These loans can be soft loans with a low-interest rate or hard loans with a high-interest rate. Or it can be structured where the loan is sanctioned in parts based on the completion of specific goals set in the contract, also known as Result-based Loans (RBLs).  

This sovereign funding can be provided in either US dollars or the borrowing country's local currency. Some of these loans are issued for big infrastructure projects.

2. Private Financing

Private Financing is loans issued to a private sector company. These private or non-sovereign financings can be sanctioned in 3 ways.

a. Debt Financing

As the name suggests, the ADB uses debt instruments to finance the loan. These can be in the form of regular loans or bonds. The term of these loans and bonds depends on the company availing the finance. 

b. Equity Investing

In this, the ADB acquires an equity stake in the business and requires that they have a board seat. Although the bank does not interfere with the company's management, it still monitors the functioning of the business.

c. Guarantees

ADB sometimes works as a guarantor to encourage private investors to invest in a business that might be located in a country with an unstable government or is suffering from rocky economic conditions.

ADB uses its standing to guarantee private investors that if the company goes under, investors' losses will be limited. 

3. Co-financing

ADB arranges the loan in collaboration with other financial institutions and private equity entities in this case. 

These arrangements can be categorized into two types: official & commercial arrangements. 

Official arrangement loans are issued in cooperation with other big multilateral banks like the World Bank. Commercial arrangement loans are issued in partnership with more traditional financial institutions or big private equity investors.

Researched and authored by Kunal Raj | LinkedIn

Reviewed and edited by Mohammad Sharjeel Khan | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Asian Infrastructure Investment Bank 
• Development Economics
• International Monetary Fund (IMF)
• Multilateral Development Bank (MDB)
• World Trade Organization (WTO)