Background Note
Regional development banks in the broader multilateral development bank reforms

Background

Low- and middle-income countries (LMICs) are grappling with sustainably financing their development priorities, amidst sluggish growth, high debt levels, and geoeconomic fragmentation. The IMF has described this situation as posing a policy trilemma. Growth in the low income countries is projected to remain below pre-pandemic levels at 4–4.5% over the next five years. Debt, on the other hand, is expected to continue rising. At the end of 2023, debt owed by LMICs stood at USD 8.8 trillion. International Development Association (IDA) eligible countries saw the highest proportional rise of debt to USD 1.1 trillion, an 18% increase since the pandemic, and this is expected to rise another 11% by 2028. 

A large component of the current financing for development question is the debt situation countries are facing, the scale of any available financing sources, and the cost of that financing. Nearly two-thirds of the countries eligible for the Debt Service Suspension Initiative (DSSI) are at high risk of, or already in, debt distress. Debt servicing costs are the biggest culprit driving this pressure. This has been brought about by the fact that the current creditor landscape for low income and lower-middle income countries has become more diversified, with private creditors occupying a bigger portion of external debt portfolios. 

This shift is a direct result of a confluence of factors—the low interest rate regime that followed the financial crisis in 2008, the rise of China as a bilateral lender, the appetite for large scale infrastructure investments aimed at powering economic growth, and a discontent with the Bretton Woods institutions and their structural adjustment policy conditionalities that accompanied the lending operations of the 1990s. For the least developed countries, however, multilateral development bank (MDB) loans remain the biggest part of debt portfolios, particularly debt owed to the World Bank. For the 73 DSSI-eligible countries, their debt book includes: MDBs at 46%, bilateral debts at 34.5%, and commercial creditors at 19.5%.

In the face of this trilemma, unlocking all sources of financing for development is an imperative. Multilateral development banks (MDBs) are critical players in this space. Regional MDBs are of specific interest. A great deal of focus has been placed on the World Bank as a global MDB, with a lot of effort and attention drawn towards its effectiveness and efficiency. Conversely, regional MDBs have received much less attention, especially on the global stage. 

To unpack their timely relevance, this paper traces the evolution of regional MDBs and the role they continue to play in the international financial architecture. It then seeks to specifically draw out ways in which MDBs are of particular value added based on their unique characteristics. This is particularly relevant as international development actors negotiate a 4th Financing for Development framework in Seville, Spain, in July 2025. 

The evolution of MDBs

In the past 70 years, public development finance has continued to grow and evolve. Following the 1944 establishment of the first multilateral development bank, the International Bank for Reconstruction and Development (IBRD), another 16 MDBs were created between 1950 and 1970, some with a more regional or specialized focus and some still global. New ones have been established in recent years: the China-led Asian Infrastructure Investment Bank (AIIB) in 2015 and the BRICS-led New Development Bank (NDB) in 2014.

The establishment of regional development banks was driven by a sense of disquiet amongst the developing countries on the extent to which they felt the IBRD was not responsive to their priorities. The regional MDBs were originally owned by regional shareholders, but with time the shareholding of these MDBs has diversified, with OECD Development Assistance Committee (DAC) shareholders coming in alongside other emerging donors. The combined asset base of these regional MDBs is about USD 640 billion. 

Funding of regional MDBs. A review of OECD DAC contributions to multilateral funding shows that whilst funding to the World Bank Group (WBG) has been increasing, it has remained stagnant for other MDBs, with a slight downward trend (see Figure 1). It is for this reason that the RMDBs have been trying to undertake financial engineering of their balance sheets, seeking innovative approaches to make up for small balance sheets through leveraging and other innovative blended and hybrid instruments. Though they have been at the forefront of innovation in this regard, this may limit their capacity to provide concessional and grant-based financing to clients. 

Figure 1: OECD DAC funding to various multilateral organizations

Why are RMDBs critical to development finance

At a time of stagnating official development assistance (ODA), greater demand for development, and a rapidly evolving climate crisis, the call for bigger, better MDBs as a strategy to address the financing gap is self-evident. Although this call is directed towards MDBs generally, the narrative has tended to focus more on the World Bank Group. It is important to ensure that calls for bigger, bolder, and better MDBs do not result in only a bigger, bolder, better World Bank Group.

While it is important to improve the World Bank, caution should be exercised against a giant global institution that is unwieldy and lacks fair representation. This would risk an institution that is not effectively accountable to its members and has little fidelity to the priorities of its borrowers. 

Thinking about bigger and better MDBs should be pursued within a framework of global economic governance reform that accounts for the various layers of public development banks. Improvements to the regional and sub-regional MDBs should therefore be central to the pursuit of bigger, bolder, and better MDBs. 

Regional focus. Regional MDBs play a pivotal role in promoting development in their regions. As highlighted, these RMDBs were initially created as a direct response to global MDBs inadequately addressing the needs and priorities of their members, and perceptions that they tended to be under the political influence of their more wealthy shareholders. Because regional and sub-regional MDBs were mostly created by regional member countries, developing country members feel a greater sense of voice within them. Due to their shareholding structure, they are able to give a dominant or exclusive voice to their developing country members, addressing the representation question. In the case of the Development Bank of Latin America and the Caribbean (CAF), European Investment Bank, and Islamic Development Bank, the client countries are the sole shareholders. 

Sense of partnership and ownership. This close relationship is valued for enabling deeper policy dialogue with authorities in member countries. MDB staff are viewed as partners and allies in the development process. It is argued that this could be one reason the rate of disbursement for regional MDBs, such as the African Development Bank (AfDB), is much higher than the World Bank. This sense of ownership and support was echoed very strongly during the AfDB annual meetings in 2024—held in Nairobi—where the Kenyan president committed to increasing their shareholding in the AfDB, Afrexim Bank, and Trade Development Bank.

RMDBs and concessional financing. Providing price-differentiated products for their clients is one of the strong points of MDBs, as is being able to provide grant-based or highly concessional loan products to low-income countries or countries facing fragility, conflict, and violence. Not all RMDBs have a separate concessional or grants window, commonly known as a soft window. 

AfDB has the African Development Fund (AfDF) and the Asian Development Bank (ADB) has the Asian Development Fund (ADF). Both funds are capitalized through a three-year replenishment cycle and have separate balance sheets and administration. The ADF, since 2017, is a purely grant-based fund, providing grants to the most vulnerable and lowest income developing member countries. The AfDF provides concessional funding, grants, project preparation resources, and guarantees to its low income regional members. 

The Inter-American Development Bank (IADB) initially had a separate concessional window known as the Fund for Special Operations. This was merged with IADB in 2016 but still provides concessional and grant-based funding for its lowest income members, currently Haiti, Honduras, and Nicaragua. The Islamic Development Bank (IsDB) mainly provides grants for emergencies and concessional loans for its members. The European Bank for Reconstruction and Development (EBRD), on the other hand, does not have a concessional financing window. 

There is stronger OECD DAC participation in these concessional windows. The three largest donors in each of the three grant and concessional facilities are DAC donors. The size of the AfDF and ADF are comparably very small compared to the World Bank’s International Development Association (IDA). For their impact to be expanded, these funds need additional financing.  

Table 1: Donor contribution to concessional and grant windows

Source: adapted from Table 3.1 (p. 65) in Multilateral Development Finance 2024, under the terms of the CC BY 4.0 license. This is an adaptation of an original work by the OECD. The opinions expressed and arguments employed in this adaptation should not be reported as representing the official views of the OECD or of its Member countries.

Better rates, greater flexibility, and better financing. The Monterrey Consensus acknowledged the role that regional development banks play in providing complementary financing for development and knowledge on economic development to their members. MDB financing is best suited for low income and lower middle-income countries. This is because, MDBs are able to provide long-term concessional and non-concessional financing at scale, and at rates lower than or closer to market rates paid by high income countries. In addition, they provide grants, guarantees, and other risk management mechanisms aimed at mobilizing private sector financing into development projects. 

During major shocks and crises, MDBs are known to play a countercyclical role, enabling countries to remain resilient. This was particularly evident during the COVID-19 pandemic. They also provide non-financial services, such as technical assistance and knowledge products that could include diagnostics studies, collation and analysis of data, and sectoral studies. These inform not only their sovereign clients but also other actors interested in development issues. RMDBs play this role at the regional level.

Figure 2: Multilateral outflows 

Due to their regional outlook and concentration, RMDBs are best placed to invest in regional projects and projects with positive regional externalities, what are described as regional public goods. Their vantage position enables them to play a coordinating role—especially where decisions need to be reached across several countries—for projects such as regional trade, financial and other regulatory systems, integrating systems at regional levels, cross-border infrastructure, and natural resource management systems. They are also able to advise on regulatory issues across the region. They mobilize additional financing from other actors, such as commercial lenders, because their involvement signals to the feasibility of projects they finance. Further, because of their regional focus, and footprint within the region, they are better able to understand the region-specific context, including socio-cultural and political nuances. This proves very valuable when undertaking policy dialogue and advising their clients on policy solutions that are best fit for their specific contexts. 

Bigger bang for your buck. The AAA rating of the major RMDBs enables them to leverage their balance sheet and lend at up to three times their reserve capital on average. As such, each dollar invested in RMDBs expands their lending capacity further. In a time of constrained ODA, disbursing ODA through MDBs can yield greater development coverage than using direct bilateral means. 

An inverted pyramid. A potential downside of RMDBs is their proximity to their clients, who are also shareholders with great stakes. This complicates accountability and oversight. The accountability demanded from international financial institutions (IFIs) is different from the regional MDBs. This has been cited as a reason for donor’s reluctance to increase their capitalization of the RMDBs. Others argue that OECD DAC donors, particularly, are more reluctant to increase their contributions because they feel that their influence is watered down. 

Driving regional transformations. RMDBs have a real opportunity to drive a regional agenda given their engagement in policy dialogue with their clients. RMDBs can be more forward in convening their regional clients to seek regional solutions together. Beyond the one-on-one policy dialogue and advisory services they provide, they can convene high level ministerial officials or even heads of states to discuss regional issues, especially those aimed at promoting regional integration and providing regional public goods. 

Private capital mobilization. In terms of mobilizing private sector capital, RMDBs have room for improvement. The average ratio of MDB private capital mobilization (PCM) is USD 1:0.38, meaning that each dollar invested by MDBs has mobilized USD 0.38 from the private sector. Some regional MDBs surpass this in great measure, such as EBRD, whose ratio has been USD 1:0.9, AIIB at USD 1:0.76, and IsDB at USD 1:0.45. A lot more can be done to increase this average ratio. The G20’s independent expert group recommendations suggest this ratio can be increased to USD 1:2. 

RMDBs mobilize private capital using guarantees, syndicated loans, direct investments in companies, and collective investment vehicles. The originate-to-distribute model—where the RMDBs create portfolios of loans in order to sell them to other institutions and investors—may provide an opportunity to engage with institutional investors for larger scale transactions. TheRoom2Run by AfDB has been an example of how MDBs can crowd in private investors, using risk management instruments such as insurance and guarantees. Room2Run uses a synthetic securitization instrument aimed at sharing the risk of a portion of loans to investors, who act as insurers, thereby freeing up capital for more lending. The IsDB also has an innovative financial instrument for incentivizing the private sector by insuring against political risks such as currency inconvertibility or transfer restrictions, expropriation, the effects of war or civil disturbance, and breaches of contract.

Beyond the private sector, RMDBs can also assist countries in developing a pipeline of bankable projects that can attract co-financing from other MDBs, such as the World Bank. AfDB’s Light Africa initiative is an example of a project initiated by an RMDB and now funded through a co-financing arrangement with the World Bank. The initiative connects 300 million people to electricity under the Mission 300. AfDB has also used other innovations such as the sovereign exposure exchange agreement, which allows it to swap its exposure to certain countries with other MDBs. This has been implemented with the IADB, WBG, and more recently with the ADB in 2023.

Increasing lending capacity amidst demand for grants and concessional financing. Not all country contexts are ready for private sector investment in the near-to-medium term. More vulnerable countries require grant-based or highly concessional financing, which is not attractive for commercial investors. The grant financing and concessional windows of RMDBs are instrumental in countries facing high fragility, conflict, and violence. Armed conflict, violent extremism, transboundary crimes, and natural and climate-related disasters are all contributing to the greater need for emergency assistance and grant-based development aid.

The number of fragile and conflict-affected situations are on the rise in the past decade. As such the demand for grants and concessional financing is not shrinking but growing. For RMDBs to sustain the growing demand for grants, shareholders will need to inject general capital increases on a regular basis. Another useful potential source of capital for MDBs are unused special drawing rights (SDRs). AfDB and IDB have proposed a hybrid capital instrument using SDRs. With this instrument they will be able to leverage USD 1 to USD 4 in additional lending capacity from SDR allocations they receive from shareholders.

Liquidity as a package for debt treatments. RMDBs can support macroeconomic stability by providing liquidity to countries that are solvent but face liquidity challenges. Especially in instances where bilateral and commercial creditors have agreed to restructure a country’s debt, the respective RMDB can step in to provide liquidity. This coordinated approach is aimed at providing countries the room for sustained investment in growth enhancing sectors, to be able to manage their debt obligations better in the future. In the event of shocks and crises, RMDBs should aim to play a countercyclical role. Some of the RMDBs have not been very strong on this. For example, the AfDB was mostly procyclical during the COVID-19 pandemic.

Local currency lending. The monetary tightening of developed countries since 2022 has often accentuated exchange-rate movements. Exchange-rate risks remain a big hurdle for developing countries, especially when it impacts their overall debt positions, which happens when debts are foreign-currency denominated. Expanding local currency lending is an agenda that RMDBs can take on at greater scale to reduce exchange-rate risks in sovereign debt portfolios 

Successful examples include the African, Caribbean and Pacific Investment Facility—led by the EU and European Investment Bank—which undertakes local currency (LC) lending without external hedging. The Facility charges a premium to account for foreign exchange risk when lending in LC. The Currency Exchange Fund (TCX), which is a non-profit entity established by a consortium of development finance institutions, also provides hedging for developing countries.

TCX has demonstrated that currency risks can be effectively managed, and in a profitable way, with a positive annualized return of 1.6%. Other ways through which RMDBs could enhance their LC portfolio would be through issuing local currency bonds or issuing local currency linked bonds. The difference between the two is that in the first the bond is denominated and paid in local currency, while in the latter the debt is denominated in local currency but paid in US dollars. ADB has been very innovative in using currency linked bonds. Issuing local currency bonds, is also a way for RMBDs to support the deepening of domestic capital markets. 

RMDBs have also created what are called currency liquidity pools. These are aimed at allowing RMDBs to move away from back-to-back financing. Currency liquidity pools have been used to warehouse proceeds from bonds and swaps in the interim before disbursement. In some instances these pools have also been able to receive proceeds from local currency loan repayments, thereby building a local currency financing pool. Whilst they exist, they are mostly small. ADB has these types of currency liquidity pools in Chinese Renminbi and Indian Rupees, respectively. AIIB and EBRD are also developing a joint initiative to create local currency liquidity pools through an onshore vehicle, allowing MDBs and smaller development finance institutions (DFIs) to offer flexible local currency financing solutions. IADB Invest also offers local currency products to private sector clients in Argentina, Brazil, Colombia, Mexico, Peru, and Paraguay.

Conclusion

It is evident that RMDBs play a critical and unique role in supporting countries on their development pathway. Enhancing their lending capacity is a good strategy for addressing the current financing for development shortfall. The international community should be careful not to signal only for bigger better international financial institutions, in this case the World Bank Group, while ignoring the RMDBs. RMDBs along with the global MDBs need to work together as a system for greater efficiency and scale in delivering much more coordinated assistance to the countries they serve.