MDBs are development financial institutions (DFI) which provide financial and technical support to developing countries to help them strengthen economic management and reduce poverty. These institutions are owned by respective member countries. The 2021 declaration statement issued post the meeting under Italy’s Presidency noted that MDBs play a crucial role in global development. The statement also said that an expert panel will conduct an independent review of the capital adequacy frameworks of MDBs. The idea behind the review was to strengthen the capital adequacy of MDBs to enale them to play a more prominent role in development.
The expert panel submitted its independent review in 2022 under the Indonesia Presidency. The review studied the business models of 15 MDBS. Of the 15, four belonged to the World Bank group: International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA). MIGA does not provide loans but provides guarantees (political risk insurance and credit enhancement) to investors and lenders. Thus, capital adequacy framework is for the 14 MDBs.
No Uniformity In Funding
The key financials of the 14 MDBs show that there is no uniform way of funding the MDBs. The World Bank group’s IDA is the largest in terms of capital and the Caribbean Development Bank is the smallest in terms of capital. The MDBs are special organisations and require a small capital to function. The average leverage ratio (assets to capital) of all the 14 banks is 3.8 with the European Investment Bank having highest leverage of 7.4 and IDA with lowest leverage of 1.2. The MDBs make up for the difference between equity and loans with issuance of bonds. The MDBs aim to get the highest ratings on their bonds from credit rating agencies and they usually get it.
The independent review suggested five strategies to maximize the impact of MDB capital. First, the MDBs should reduce their dependence on rating agencies and build internal risk metrics. Second, there should be callable capital, which means that the shareholders should be willing to pay back the bondholders in case of negative shocks to the MDBs. Third, expand the use of financial innovations to diversify risks of loans and access markets for finance. Fourth, the credit rating agencies should refine their methodologies “to better account for the unique mission, track record and financial strength of MDBs”. Fifth, conduct regular capital reviews of MDBs for demystifying their financial models.
In July 2023, G20 issued another report to assess the progress of the recommendations and suggest a future roadmap. The report noted that there had been good progress in the implementation so far. In the roadmap, it suggested that there was a need to clarify the processes and procedures for callable capital and shareholders’ response to them. MDBs also need to strengthen the ability of their boards to set capital adequacy policies.
Roadmap Endorsed
This brings us to the declaration in the G20 meeting at Delhi. The declaration endorsed the roadmap and called for its “ambitious implementation”. The declaration noted that the measures suggested by the roadmap could lead to additional lending of $200 billion over the next decade. Further, the statement urged MDBs to accelerate progress towards Sustainable Development Goals (SDGs). The G20 committed to raising more financial resources to boost the World Bank’s capacity to provide stronger support to poor countries. The group awaits the second volume of the report of the independent review, expected to be submitted in October 2023.
What does one make of the above? While capital adequacy is important, the issue of governance of MDBs is equally important. While regional MDBs like those of Asia, Latin America and Africa have members of developing and poor economies, the global MDBs such as the World Bank group are governed by developed economies. The share of the World Bank group in the total capital and loans of MDBs is 46 percent and 30 percent, respectively. If we remove the European MDBs, the share of the World Bank group in the total capital and loans of MDBs is 60 percent and 50 percent, respectively. All the three G20 meeting declarations held in Italy, Indonesia and now India are silent on this much needed reform.
Amol Agrawal teaches at Ahmedabad University, and is the author of 'History of Private Banking in South Canara district (1906-69)’. Views are personal, and do not represent the stand of this publication.
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