# Understanding Multilateral Development Banks: Types and Key Examples

How Institutions Like the World Bank Fund Worldwide Initiatives

![Man walking on the street beside the World Bank](https://www.investopedia.com/thmb/fR6yCWIJvtarE-PI6PLmlDa6Gww=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2147859636-de9647a33c7a4a82942d87e7bc34d24c.jpg)

*— Anadolu / Contributor / Getty Images*

> **Definition**
>
> A multilateral development bank (MDB) is an international financial institution chartered by two or more countries to encourage economic development in lower and middle-income countries. 

## What Is a Multilateral Development Bank (MDB)?

After World War II, multilateral development banks (MDBs) were organized to rebuild economies devastated by the conflict and support global stability. Since that time, MBDs have grown to become dependable economic partners for developing nations.

MDBs deliver a lifeline of financial support to these nations during crises, such as natural disasters, and funding for infrastructure, like essential road construction, and development projects, like clean water initiatives, worldwide. Their no- to low-interest loans and project-specific expert assistance contrasts with the profit motives of commercial banks. Decades past their first efforts to help a war-torn Europe recover, MDBs control trillions of dollars in assets and operate worldwide. Their influence plays a crucial role in addressing global crises relating to the climate, healthcare, water distribution, and more.

### Key Takeaways

*   Multilateral development banks (MDBs) were established post-World War II to rebuild economies and promote global financial stability.
*   MDBs focus on economic development, offering low-interest loans and grants, unlike commercial banks prioritizing profits.
*   Examples of MDBs include the World Bank, the Inter-American Development Bank, and the Asian Development Bank.
*   MDBs have been criticized for promoting free-market policies that may not align with local needs and for causing environmental damage.
*   Recent MDB initiatives focus on global challenges like climate change and poverty reduction, while striving for transparency and inclusivity.

## How Multilateral Development Banks (MDBs) Operate and Support Development

Multilateral development banks and other international financial institutions, such as the International Monetary Fund ([IMF](https://www.investopedia.com/terms/i/imf.asp)), were born in the waning days of World War II. This was when the U.S. and its allies established the Bretton Woods institutions to rebuild war-ravaged countries and establish the postwar international financial system. The [World Bank](https://www.investopedia.com/terms/w/worldbank.asp), an MDB, has always been seen unofficially as an arm of the U.S. and its allies. Since its founding, it's been based in Washington, D.C., and its president is, by custom, always an American.

Unlike commercial banks, MDBs do not seek to maximize profits for their shareholders. Instead, they focus on development goals, such as ending extreme poverty and reducing economic inequality. MDBs fulfill their mission through several key functions:

1.  **Financial support**: 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.
2.  **Technical assistance**: MDBs offer expertise to help countries design and implement complex development projects. This can include feasibility studies, project management advice, and helping local institutions handle these major endeavors.
3.  **Policy advice**: MDBs guide their partners on economic policies, governance reforms, and sector-specific strategies. This has always been an area of controversy regarding them.
4.  **Research and knowledge sharing**: MDBs research development economies and are a major source of [best practices](https://www.investopedia.com/terms/b/best_practices.asp).
5.  **Networking power**: They can bring together diverse stakeholders, including governments, private sector entities, and civil society organizations, to address development challenges.
6.  **Mobilizing private capital**: In recent decades, MDBs have been nodes for bringing private sector investments to developing countries, using their financial strength to help mitigate risks private investors would otherwise face.

## Exploring Different Types of Multilateral Development Banks

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

The second type of multilateral development bank is formed by governments of low-income countries that can borrow collectively via the MDB to secure more favorable rates. The Caribbean Development Bank [(CDB)](https://www.investopedia.com/terms/c/caribbean-development-bank-cdb.asp) is an example of this type.

> **Fast Fact**
>
> The World Bank doesn't just fund initiatives in lower- and middle-income nations. Many of its projects are in the so-called developed world.

## Understanding the Governance Structure of MDBs

MDBs typically have a similar governance structure designed to balance the interests of member countries. Heading the MDB is a board of governors comprising one representative from each member country, usually the finance minister or central bank governor. This board convenes annually to set the overall policy direction and make major decisions affecting the bank's operations.

Day-to-day operations fall under the purview of the [board of directors](https://www.investopedia.com/terms/b/boardofdirectors.asp). This smaller body consists of executive directors representing either individual countries or groups of countries, depending on their economic size and contributions to the bank. The board meets regularly to approve loans, policies, and strategies.

Leading most MDBs is a president who chairs the board of directors and oversees the bank's management. How the president is selected varies. For instance, by tradition, the World Bank's president has always been a U.S. citizen.

Supporting these governance bodies is a cadre of professional staff from member countries.

> **Fast Fact**
>
> In addition to financial assistance, multilateral development banks provide member nations with advisers, auditors, and expert assistance in implementing and monitoring bank-funded projects.

## Key Multilateral Development Banks and Their Roles

![World Bank Group Building, Washington D.C.](https://www.investopedia.com/thmb/S10uHv2M08xkxmZAHBXCqM7mehM=/1024x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2171754742-42b00365b630440da653209c901608dd.jpg)

*Ever since the World Bank opened in 1946, its address has been on H Street in Washington, D.C. — qingwa / Getty Images*

The World Bank Group is the oldest and most prominent MDB, and its mandate is global. It comprises the following institutions:

**International Bank for Reconstruction and Development (IBRD)**: The [IBRD](https://www.investopedia.com/terms/i/international-bank-of-reconstruction-and-development.asp) is the original World Bank institution, founded in 1944. It provides loans, guarantees, risk management products, and advisory services to middle-income and creditworthy low-income countries. The IBRD raises most of its funds through the international capital markets and is designed to be financially self-sufficient.

**International Development Association (IDA)**: Established in 1960, IDA focuses on lower-income countries. It provides concessional loans (credits) and grants for programs that boost economic growth, reduce inequalities, and improve people's living conditions. IDA is funded largely by contributions from member governments

**International Finance Corporation (IFC)**: Created in 1956, the IFC promotes private sector investment in developing countries by providing investment, advisory, and asset management services. The IFC invests in for-profit and commercial projects and helps to mobilize capital from other sources.

**Multilateral Investment Guarantee Agency (MIGA)**: MIGA was established in 1988 to promote [foreign direct investment](https://www.investopedia.com/terms/f/fdi.asp) in developing countries. It offers political risk insurance (guarantees) to investors and lenders to protect against risks such as expropriation, breach of contract, war and civil disturbance, and currency inconvertibility.

**International Centre for Settlement of Investment Disputes (ICSID)**: Founded in 1966, ICSID is an autonomous institution that arbitrates international investment disputes.

> **Fast Fact**
>
> Foreign direct investment is when an investor, company, or government takes ownership or management of a foreign company or project.

## Notable Regional Multilateral Development Banks

**Asian Development Bank (ADB)**: Based in Manila, Philippines, the ADB provides loans, technical assistance, grants, and equity investments to promote social and economic development in the region. It focuses on infrastructure, health, education, and regional cooperation and integration. The ADB has 68 member countries, with Japan and the U.S. as the largest shareholders.

**African Development Bank (AfDB)**: Founded in 1964, the AfDB is based in Abidjan, Côte d'Ivoire. Its mission is to promote sustainable economic growth and reduce poverty in Africa. The AfDB Group comprises the African Development Bank, the African Development Fund (which provides concessional funding for low-income countries), and the Nigeria Trust Fund. It focuses on infrastructure development, regional integration, private sector development, governance, and skills and technology.

![Street shot of the African Development bank building](https://www.investopedia.com/thmb/Ld-0c4Ik90PxojeD9XuRnIuvZYo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-454951232-0084034d1b3c4b548263d7540280e723.jpg)

*— SIA KAMBOU / Stringer / Getty Images*

**[IDB](https://www.investopedia.com/terms/i/idb.asp)**: The IDB, established in 1959 and based in Washington D.C., is the largest source of development financing for Latin America and the Caribbean. The IDB Group also includes IDB Invest, which focuses on the private sector, and IDB Lab, which is meant to develop new ways of thinking about development.

![ Entrance of the Inter-American Development Bank headquarters at Washington, D.C., the largest source of development financing for Latin America and the Caribbean.](https://www.investopedia.com/thmb/XlQVDAZcljKNnFlc5iwzjaJbkmA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-12490372301-95bfeefc1f81491398fa8c721bae84a7.jpg)

*Entrance of the Inter-American Development Bank headquarters at Washington, D.C., the largest source of development financing for Latin America and the Caribbean. — JHVEPhoto / Getty Images*

**European Bank for Reconstruction and Development ([EBRD](https://www.investopedia.com/terms/e/european-bank-for-reconstruction-and-development.asp))**: Created in 1991 after the fall of the Berlin Wall, the EBRD is based in London, U.K. Unlike other regional MDBs, it was founded with a specific political mandate to assist former Soviet bloc countries in transitioning to market economies. The EBRD invests primarily in private sector projects, especially those that promote democratization and privatization. It operates in over 30 countries, from central Europe to central Asia and the southern and eastern Mediterranean.

![The London headquarters of the European Bank for Reconstruction and Development, in London, U.K.](https://www.investopedia.com/thmb/cOlx3ZIAAyytDG2cgUP5FRoJ40Q=/683x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-94576973-badc9bab46624102a52da8735b6779ce.jpg)

*Fronted by a Broadgate Venus sculpture by Fernando Botero at Exchange Place in London, U.K., European Bank for Reconstruction and Development is responsible for projects across Europe into Asia and around the Mediterranean. — Suzanne Plunkett / Getty Images*

**Islamic Development Bank (IsDB)**: Established in 1975, the IsDB is based in Jeddah, Saudi Arabia. Its focus is development in member countries and Muslim communities under the principles of [Islamic finance](https://www.investopedia.com/articles/07/islamic_investing.asp). The IsDB provides various forms of financial assistance, including interest-free loans for development projects and trade financing.

**New Development Bank (NDB)**: Also known as the BRICS Development Bank, the NDB was established in 2014 by Brazil, Russia, India, China, and South Africa. Based in Shanghai, China, it supports projects within the BRICS and other emerging economies. The NDB represents a shift in the global economic order, with emerging economies taking a more active role in development finance.

**Asian Infrastructure Investment Bank (AIIB)**: Founded in 2016 and based in Beijing, China, the [AIIB](https://www.investopedia.com/terms/a/asian-infrastructure-investment-bank-aiib.asp) supports infrastructure development in the Asia-Pacific region, though it has members from beyond this part of the globe. It's a direct counter to the U.S.-dominated ADB. The U.S. reportedly attempted to discourage allies from signing on to the project, putting pressure on South Korea and Australia in particular. Both joined, along with 58 other members and 22 prospective members.  

![Meant to act as an alternative to U.S.-backed MDBs, the Asian Infrastructure Investment Bank is located in Beijing, China, the MDB's main backer.](https://www.investopedia.com/thmb/USOIFH2CpQ_VJ37V1sfDPnwJd6U=/1024x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1232556210-7c88e090bb8c465399fd0554d1a3ccfe.jpg)

*Meant to act as an alternative to U.S.-backed MDBs, the Asian Infrastructure Investment Bank is located in Beijing, China, the MDB's main backer. — Xinhua, Li Xin / Getty Images*

## Sources of Funding for Multilateral Development Banks

Member countries offer two types of funding: paid-in and callable capital.

**Paid-in capital**: Actual funds transferred to the bank by member countries. Though this is a small part of total capital, it serves as the initial financial backbone.

**Callable capital**: This is most of the funding, pledged by member countries if needed. This callable capital serves as a guarantee, enabling MDBs to borrow in the international capital markets at favorable [rates](https://www.investopedia.com/interest-rates-4689789).

MDBs raise significant funds by issuing bonds in international markets. Their strong credit ratings, based in the callable capital of their members, allow them to secure low interest rates, which they can then pass on to borrowers.

In addition, MDBs generate income from their operations. Interest earned on loans and investment returns helps cover operating expenses and build reserves.

## Challenges and Criticisms Facing Multilateral Development Banks

While playing a crucial role in global development, MDBs face numerous criticisms about their effectiveness, governance, and wider impact in an era supposedly after the colonialism of the past. These critiques have changed with shifts in development and global politics.

### The Washington Consensus and Its Impact on Aid

One major criticism was their enforcement of the 'Washington Consensus,' [free-market](https://www.investopedia.com/terms/f/freemarket.asp) policies often required for loans. This approach, prevalent in the 1980s and 1990s, was criticized for imposing a one-size-fits-all model of development that often ignored local contexts and potentially infringed on national sovereignty. While MDBs have since moved away from strict adherence to the Washington Consensus, concerns about loan conditionality persist. Critics say loan conditions may not always match a country's best interests or priorities.

They also point to a record of results that haven't lived up to the promises of 1980s-era economists at the World Bank about adhering to these conditions (generally lowering government spending and cutting private sector regulation). As [Paul Krugman](https://www.investopedia.com/terms/p/paul-krugman.asp), the Princeton economist, _New York Times_ columnist, and a proponent of such "structural adjustment programs" in the 1990s puts it, "In Latin America, where the Washington Consensus had the greatest impact on policy... \[g\]rowth didn’t take off, and inequality rose instead of falling."  

> **Tip**
>
> Over the past couple of decades, MDBs have been pushed to seek out far more funding through private-sector partners, though this has proven difficult. For example, in recent years, for every dollar of climate finance MDBs provided, they mobilized only about a quarter of that in private finance. However, this was a major increase than over the previous decade. MDBs have been far better at coordinating and building up sources of public financing.

### Adapting MDBs to Address Climate Change Challenges

MDBs have faced significant criticism for funding projects with often disastrous ecological effects, particularly large infrastructure projects like the notorious 4,000-megawatt Tata Mundra coal-fired power station in Gujarat, India, which received hundreds of millions in financing from both the World Bank Group's IFC and the ADB. This resulted in calls for stricter environmental safeguards and sustainability criteria in project selection.

In the past decade, MDBs have made meeting international climate agreements like the Paris Climate Accord ([Cop 21](https://www.investopedia.com/terms/p/paris-agreementcop21.asp)) more central to their work. But this aim has been undercut by member nations wanting MDBs to find funding in the private sector, which has thus far been a significant challenge.

> ****
>
> In 2023, MDB-backed global climate finance reached a record of $125 billion in 2023, more than double the figure for 2019. About 60% of that was finance targeting projects in low- and middle-income economies.

### Addressing Governance and Power Imbalances in MDBs

MDB governance, especially at the World Bank, has long been contentious. Critics say MDB operations are not open enough, making it hard for communities to engage or hold them accountable. They argue that voting power on their boards, often tied to financial contributions, gives disproportionate influence to wealthy nations. This disparity can skew priorities away from [developing countries' needs](https://www.investopedia.com/terms/d/developed-economy.asp) and toward wealthier nations' economic or political interests.  

### Enhancing Transparency and Accountability in MDB Operations

Observers argue that MDBs' operations lack sufficient openness, making it difficult for affected communities and civil society groups to engage meaningfully with them or hold these institutions accountable. This opacity often leads to a disconnect between MDB initiatives and local needs and realities. It's also a significant problem for democratic accountability: those affected by MDB policies on the ground very often have no say in these decisions.  

### 3.3 Billion

The number of people living in countries where servicing external debt eclipses national spending on health or education.

  

### Overcoming Debt Burdens and Economic Dependence in Developing Countries

A major concern is the potential for MDB loans to lead to unsustainable debt burdens, potentially trapping nations in cycles of borrowing and repayment. Critics argue that this has perpetuated economic dependence in low- or middle-income countries, undermining long-term sustainable development.

Altogether, this section shouldn't be taken to mean that the World Bank, etc., have stood still in repeating the same practices as the past. MDBs have responded to many of these criticisms over time and, especially over the past decade, have worked to improve environmental standards, increase transparency, and adapt their approaches to be more country-specific and results-oriented.

However, as global challenges evolve, so do the critiques of MDBs. Mid-2020s debates often center on how these institutions can better address global issues like climate change, inequality, and technological disruption while still meeting the diverse needs of developing countries.  

## How Did Creating the Asian Infrastructure Investment Bank Shift How MDBs Are Viewed?

The AIIB, established in 2016, represents a change in global economic power, with China at that point attempting to take a leading role in international development finance. The AIIB is challenging the traditional dominance of Western-led institutions like the World Bank and Asian Development Bank.

## What Is the Role of the World Bank in International Development?

The World Bank is central to international development as the largest and most influential MDB. It provides loans, grants, and technical assistance to developing countries for various projects, including [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp), education, and healthcare. The World Bank's influence extends beyond finance, often setting standards for development practices and policies other institutions and countries adopt.

## What is the Oldest MDB?

The oldest MDB is the International Bank for Reconstruction and Development (IBRD), which was created in 1944. The IBRD is one of the World Bank's three lending facilities.

## The Bottom Line

Since organizing to help rebuild nations once World War II ended, multilateral development banks have been crucial to global economic development, providing financial and technical support to countries worldwide. While traditionally dominated by Western powers, the MDB system is evolving to include institutions like the Asian Infrastructure Investment Bank and the New Development (BRICS) Bank.

MDBs differ from commercial banks with their focus on long-term development and poverty reduction rather than profit maximization for shareholders. They provide financial support, technical assistance, policy advice, research, and mobilize private capital. Critics of MDBs point to issues of governance, transparency, environmental impacts, and debt burdens. These institutions are taking important steps to address these concerns so that their efforts to support sustainable and inclusive development in both lower- and middle-income countries can continue.

> **Article Sources**
>
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> 2.  Inter-American Development Bank. "[MDBs Working as a System for Greater Impact and Scale](https://www.iadb.org/en/home/idbimpact/mdbs-working-system-impact-and-scale)."
>     
> 3.  International Finance Corporation. "[Mobilization of Private Finance by Multilateral Development Banks](https://www.ifc.org/en/insights-reports/2024/mobilization-of-private-finance-by-mdbs-dfis-2022-joint-report)."
>     
> 4.  John Williamson. "[What Should the World Bank Think about the Washington Consensus?](https://documents1.worldbank.org/curated/en/624291468152712936/pdf/766500JRN0WBRO00Box374385B00PUBLIC0.pdf)" _World Bank Research Observe_r, vol. 15, no. 2 (2000), pp. 251-264.
>     
> 5.  Paul Krugman. "Inequality and Redistribution," in "[The Washington Consensus Reconsidered: Towards a New Global Governance](https://growthlab.hks.harvard.edu/files/growthlab/files/serra8.pdf)," eds. Narcís Serra and Joseph E. Stiglitz, p. 35.
>     
> 6.  World Resources Institute. "[Key Insights from the 2022 Joint Report on Climate Finance](https://www.wri.org/insights/mdb-climate-finance-joint-report-2022)."
>     
> 7.  Sierra Club. "[New Report Once Again Shows Danger of MDB Financing for Large Fossil Fuel Projects](https://www.sierraclub.org/compass/2015/04/new-report-once-again-shows-danger-mdb-financing-large-fossil-fuel-projects)."
> 8.  _Banker_. "[Climate Challenges Require Radical Reform of MDBs](https://www.thebanker.com/Climate-challenges-require-radical-reform-of-MDBs-1696929154)."
>     
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>      
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>      
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