What Is a Multilateral Development Bank (MDB)?

A multilateral development bank (MDB) is an international financial institution chartered by two or more countries for the purpose of encouraging economic development in poorer nations. Multilateral development banks consist of member nations from developed and developing countries. MDBs provide loans and grants to member nations to fund projects that support social and economic development, such as the building of new roads or providing clean water to communities.

Key Takeaways

  • Multilateral development banks (MDBs) originated in the aftermath of World War II to rebuild war-ravaged nations and stabilize the global financial system.
  • Today, MDBs fund infrastructure, energy, education, and environmental sustainability in developing countries.
  • While commercial banks seek to make profits on loans and other financial services, the goal of MDBs is to issue grants and low-cost loans to improve the economic conditions of impoverished or developing nations.
  • MDBs now operate throughout the world and control trillions of dollars in assets.

How a Multilateral Development Bank (MDB) Works

Multilateral development banks are subject to international law. They and other international financial institutions, such as the International Monetary Fund (IMF), originated in the waning days of World War II when the United States and its allies established the Bretton Woods institutions to rebuild war-ravaged nations and stabilize the post-war international financial system. The World Bank, which has been semi-officially dominated by the U.S. since its founding, is one of these institutions.

Unlike commercial banks, MDBs do not seek to maximize profits for their shareholders. Instead, they prioritize development goals, such as ending extreme poverty and reducing economic inequality. They often lend at low or no interest or provide grants to fund projects in infrastructure, energy, education, environmental sustainability, and other areas that promote development.

"At a time when few institutions were lending during the global financial crisis, the MDBs provided $222 billion in financing, which was critical to global stabilization efforts," according to the U.S. Department of the Treasury.

Along with financial assistance, multilateral development banks often provide member nations with advisers, auditors, and expert assistance in implementing and monitoring bank-funded projects.

Types of Multilateral Development Banks

There are two main forms of multilateral development banks. The first, which includes the largest and best-known institutions, makes loans and grants. These banks often distinguish between poorer, borrowing members and wealthier, non-borrowing members. Examples include the World Bank, founded in 1945, and the Inter-American Development Bank (IDB), founded in 1959.

The second type of multilateral development bank is formed by governments of low-income countries that can then borrow collectively via the MDB in order to secure more favorable rates. The Caribbean Development Bank (CDB), founded in 1969, is an example of this type.

According to the World Bank's 2019 Annual Report, the organization disbursed $49.4 billion during the year to member countries in the form of grants and low-interest loans.

Special Considerations

Many countries have chafed at the U.S.'s influence over the World Bank and regional MDBs, such as the Asian Development Bank, founded in 1966 and based in the Philippines. In October 2013 Chinese President Xi Jinping proposed the Asian Infrastructure Investment Bank (AIIB) as an alternative to these American-dominated institutions. The AAIB began operations in 2016, with headquarters in Beijing.

The U.S. reportedly attempted to discourage allies from signing on to the project, putting pressure on South Korea and Australia in particular. Both ended up joining, along with 58 other members and 22 prospective members. As of 2019, the AIIB has grown to 70 members and 23 prospective members.

Major Multilateral Development Banks

The following is a list of the major multilateral development banks, ranked by total assets as of Dec. 31, 2018, except for the World Bank Group, which reflects Dec. 31, 2019 assets (exchange rates are as of April 15, 2020):

  • European Investment Bank: €555.8 billion ($606.5 billion)
  • International Bank for Reconstruction and Development, World Bank Group: $283 billion
  • Asian Development Bank: $191.9 billion
  • International Development Association, World Bank Group: $188.5 billion
  • Inter-American Development Bank: $129.5 billion
  • European Bank for Reconstruction and Development: €61.9 billion ($67.7 billion)
  • African Development Bank: 33.8 billion UA
  • Asian Infrastructure Investment Bank: $19.6 billion
  • Islamic Development Bank: 22 billion Islamic dinars ($18.5 billion)
  • Central American Bank for Economic Integration: $10.9 billion
  • New Development Bank: $10.4 billion