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:

• Energy
• Sustainability 
• Infrastructure Development
• Education
• Development of Human Capital
• Alleviation of Poverty

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 Multilateral Development Banks

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.

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.

Arguments Surrounding Multilateral Development Banks

In support:

• 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.

Criticism:

• 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. 

Difference Between Multilateral Development Banks and Commercial Banks

Researched and authored by Kiara Andrade

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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