Multilateral Development Bank (MDB)

An international financial institution established by two or more countries subject to international law

Author: Kiara Andrade
Kiara Andrade
Kiara Andrade
Reviewed By: James Fazeli-Sinaki
James Fazeli-Sinaki
James Fazeli-Sinaki
Last Updated:February 22, 2024

What Is a Multilateral Development Bank (MDB)?

A multilateral development bank (MDB) is an international financial institution established by two or more countries subject to international law. Most multilateral development banks consist of both developed and developing countries. 

The stakeholders include governments as well as international institutions, and global banks. These banks are, therefore, classified as international financial institutions (IFIs).

The purpose of MDBs is to finance social and economic development in developing countries. The banks offer grants and provide both short-term and long-term loans to countries to fund developmental projects and advisory services to governments.

Since MDBs aim to promote economic development and not to increase profits, they often lend at low-interest rates or interest-free. 

Usually, member countries commit a certain amount of funding as a donor commitment. These commitments focus on equity, which means that most of the time, wealthier, more developed countries commit more than poorer, more developing countries.

These donations are used to cover any operating costs, as well as provide loans and grants. In addition to these donations, banks can borrow funds from international capital markets. 

Since MDBs have a strong backing, allowing them to secure financing to lend to developing countries that the countries themselves may likely not have the backing to attain.

Multilateral development banks fund development projects in fields such as:

Key Takeaways

  • MDBs, established by multiple countries, provide crucial financial support for development in poorer nations, offering grants, low-interest loans, and advisory services across various sectors like energy, infrastructure, and education.
  • Operating independently, MDBs maintain impartiality and independence from individual countries' political or economic influences, focusing solely on promoting economic development rather than profit-making.
  • Despite their noble goals, MDBs face criticism for lack of transparency and potential undue influence from major donor countries, highlighting the ongoing challenges in ensuring equitable and effective global development initiatives.

History of Multilateral Development Banks

World War II, which lasted from 1939 to 1945, destroyed the economies of many significantly smaller, developing countries. This created a need for international organizations that would encourage and support the financing and rebuilding of these countries and economies.

In 1944, the Bretton Woods Agreement was negotiated by delegates from 44 countries. The agreement's main goal was to create a global standard system for foreign exchange and promote international economic growth.

Two organizations, the World Bank and the International Monetary Fund (IMF), were created due to the Bretton Woods Agreement and are, therefore, referred to as Bretton Woods Institutions. 

Numerous other MDBs were established in the following years, but the World Bank remains the oldest and the most established institution.

Since the World Bank is a subsidiary of the United Nations, all the member countries of the UN are also members of the World Bank. As a result, it has a strong membership base and access to capital.

Since 1947, the World Bank has funded more than 12,000 projects through loans, grants, and interest-free credits. Today, some of its biggest missions include:

  1. Developing human capital through education, training, nutrition, and healthcare
  2. The energy transition towards cleaner, renewable sources of energy
  3. Technological advances in developing countries
  4. Reducing plastic pollution
  5. Providing aid for social and economic disruptions arising from the conflict between Russia and Ukraine

Types and Examples of MDBs

There are two main types of MDBs. The first type includes the largest and more established organizations, such as the World Bank, that make loans and offer grants to countries. 

Within these organizations, there is usually a distinction between the wealthier member countries that do not borrow and the poorer member countries that do. 

The most well-known examples of this type of bank are listed below.

Name of Bank Year Founded Headquarters Number of Members
World Bank 1945 Washington DC, USA 189
European Investment Bank (EIB) 1958 Kirchberg, Luxembourg 27
Islamic Development Bank (ISDB) 1975 Jeddah, Saudi Arabia 57
Asian Development Bank (ADB) 1966 Mandaluyong, Philippines 68
European Bank for Reconstruction and Development (EBRD) 1991 London, UK 73
CAF - Development Bank of Latin America (CAF) 1968 Caracas, Venezuela 17
Inter-American Development Bank Group (IDB, IADB) 1959 Washington DC, USA 48
African Development Bank (AfDB) 1964 Abidjan, Ivory Coast 81
New Development Bank (NDB) 2014 Shanghai, China 9
Asian Infrastructure Investment Bank (AIIB) 2016 Beijing, China 105
Arab Petroleum Investments Corporation (APICORP) 1975 Dammam, Saudi Arabia 10
Eastern and Southern African Trade and Development Bank (TDB) 1985 Chaussée Prince Louis Rwagasore Bujumbura, Burundi 22

The second type of bank is a sub-regional bank established by governments of borrowing countries. 

These member countries are usually lower-income countries that borrow collectively from the MDB. Due to the shared responsibility and risk, countries often get loans at lower rates through this type of bank compared to larger institutions.

Examples of this type of MDB are listed in the table below.

Name of Bank Year Founded Headquarters Number of Members
Caribbean Development Bank (CDB) 1969 Wildey, St. Michael, Barbados 28
Central American Bank for Economic Integration (CABEI) 1960 Tegucigalpa, Honduras 15
East African Development Bank (EADB) 1967 Kampala, Uganda 5
West African Development Bank (BOAD) 1973 Lomé, Togo 8
Black Sea Trade and Development Bank (BSTDB) 1997 Thessaloniki, Greece 11
Economic Cooperation Organization Trade and Development Bank (ETDB) 1985 Tehran, Iran 10
Eurasian Development Bank (EDB) 2006 Almaty, Kazakhstan 6
North American Development Bank (Nadbank) 1993 San Antonio, Texas 2

Arguments Surrounding Multilateral Development Banks

Let us see what are these arguments:

  • MDBs are subject to international law and are not associated with any specific country. Therefore, they are not subject to any particular country's politics or economic practices and can maintain a higher level of independence and impartiality.

  • They support global development. 

  • They have helped stabilize the global economy in the past. For example, during the 2008 Financial Crisis, most countries' economies crashed, creating a liquidity shortage due to reduced lending and the failure of commercial banks. MDBs provided struggling governments with over $222 billion in funding during this period.

  • Borrowers are not taken advantage of because the primary goal is not the creation of profits.

On the other hand, the criticisms are:

  • Since MDBs do not have to answer to any one government, there is often a lack of transparency in their proceedings, and member countries do not have a sufficient say in the functioning of the banks.

  • Some banks are criticized for being too focused on the United States of America since they are a significant world power and a prominent donor to the banks they are a member of. This is potentially problematic as a member country's economics or political interests should not influence the functioning of these banks.

  • Some banks are more focused on appearances and the movement of capital rather than achieving the desired development from the respective projects. 

Multilateral Development Banks Vs. Commercial Banks

The below table showcase the main point of difference between the two concepts:

Characteristics MDB Commercial Bank
Definition An international financial institution established by two or more countries is subject to international law. A financial institution that provides services to individuals and corporations.
Purpose To promote and fund social and economic development in poorer countries. To make a profit by accepting deposits and lending money at a higher interest rate, to provide banking services to customers.
Clients Governments Individuals, small and medium enterprises (SMEs), businesses
Stakeholders
  • Governments of member countries
  • International finance institutions  
  • Global banks

 

  • Shareholders
  • The Board of Directors
  • Customers
  • Financial markets
  • Government
Nature Proactive Reactive
Goal Economic Development Profit
Source of Funding
  • Donations from members in the form of donor commitments
  • Borrowing from international capital markets
  • Deposits
  • Borrowing from the respective country's central banks
  • Selling bonds
Loans Provided Developmental projects Personal loans (such as education loans, mortgages, and vehicle loans); business loans
Length of Loans Provided Medium to long-term Short to medium-term
Other Services Provided (besides provision of loans)
  • Counseling and advisory services for governments
  • Counseling and advisory services for customers
  • Checking and savings accounts 
  • Credit cards 
  • Wealth management
  • Currency exchange
  • Lockers and safety deposit boxes
  • Money transfer (online transfers, cheques, demand drafts, money orders, etc.)
  • Online services (such as banking applications)

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