WASHINGTON, DC: Although the multilateral development banks (MDBs) have made some noteworthy progress in reforming their operations, there remains much to do, for there are many important gaps that need to be filled and challenges that only seem to get worse with time. While they have made measurable progress in climate finance, private sector engagement, and financial optimization, the Banks face limitations in scaling their impact and ensuring long-term sustainability. Foremost among them—the MDBs continue to take a cautious approach to risk, limiting their ability to unlock large-scale investment in emerging markets, fight poverty, and allocate funding on concessional terms.
As the lenders of last resort, and oftentimes being the only institutions that will support transactions in the neediest, poorest, and often highest perceived risk countries, the Banks have an obligation to create and capitalize on strategic opportunities as well as assume more risk. Their recovery abilities are second to none, so there should be little reason not to become less risk averse. The Banks should enhance their risk-sharing mechanisms—such as first-loss guarantees, blended finance, and innovative de-risking tools—to crowd in more private investors. They should shift away from direct lending to acting as catalysts for private sector funding.
The Banks face a dilemma: The rating agencies require them to maintain their low risk profiles or risk a downgrade; At the same time, they are under pressure to increase the quantum of their lending operations to meet their development objectives. Reducing these Banks’ ratings to AA+ could increase lending by unlocking capital but would come at the cost of higher borrowing rates and potential investor concerns. They must weigh the benefits of greater development impact against the risks of financial instability. A hybrid approach—wherein some MDBs explore partial capital optimization without a full downgrade—might be an alternative solution.
The governance structures of many MDBs still reflect historical power dynamics, where wealthier nations dominate decision-making. Developing country representation needs to be increased—particularly for Africa, Latin America, and small island nations—through more meaningful forms of voting and representation. The Banks often have extremely slow project approval processes, delaying critical financing for infrastructure, climate resilience, and crisis response. Their procedures should become simplified, decision-making decentralized, and approval mechanisms streamlined, especially for urgent development needs. Implementing more “fast-track” approval windows for projects related to climate adaptation, energy transition, and digital transformation should be a priority.
Many developing nations face continual debt distress, limiting their ability to accept additional MDB loans. Creating more concessional financing options, offering longer-term repayment periods, and scaling debt relief mechanisms can help alleviate the issue. The G20 Common Framework for Debt Treatments, launched in 2020, provides low-income countries with a coordinated approach to debt restructuring, particularly for those eligible for the Debt Service Suspension Initiative. These, and other programs like them, need stronger MDB participation to prevent debt crises from continuing to hinder development.
While MDBs are certainly increasing climate finance and access to it, much of this comes in the form of loans rather than grants, adding to the debt burden of developing nations. The Banks need to do more to ramp up adaptation finance by scaling up climate adaptation grants, issuing more green and blue bonds, and incentivizing private sector investment in sustainability projects. There is so much more they could be doing.
Many MDBs also often fund similar projects in the same countries, leading to inefficiencies and competition instead of collaboration. There should be a joint MDB strategy to co-finance large-scale projects, standardize financial instruments, and share expertise across regions. The Global Infrastructure Facility is an important step toward MDB coordination.
Although the Banks do regularly communicate with one another, this has achieved too little utilizing existing communication frameworks. While the MDB sherpas have established working groups and the heads of the Banks do meet at least semi-annually, this is too infrequent and they meet for too short a time to make a real difference. Existing working groups need to do a better job of assigning tasks and having routine follow up meetings that achieve results and that the heads of the Banks should meet at least quarterly—and not just for a few hours or even a day—but for several days each time, locked up in a room, so that they can dig in to details and focus on how best to implement strategies that achieve faster and better results.
In short, while the MDBs have started meaningful efforts intending to transform their approaches to resolving this plethora of challenges, they really must move faster and take bolder steps. Assuming more financial risk to mobilize private capital, reforming governance to empower developing nations, cutting red tape, approving projects more swiftly, supporting debt relief while maintaining lending capacity, shifting toward more grant-based climate financing, enhancing MDB coordination for greater impact, and expanding digital and financial inclusion for marginalized groups is a massive “to do” list. But if the Banks can find a way to more fully enact and implement these reforms, they will be better equipped to tackle climate change, poverty, and underdevelopment on a larger scale while simultaneously renewing their raison d’etre.
Hugh Dugan and Daniel Wagner are co-authors of the forthcoming book “The New Multilateralism: Making Multilateral Organizations Accountable and Fit in the 21st Century”, which will be available exclusively on Amazon.
