Will the AIIB and the NDB Help Reform Multilateral Development Banking?
| Published date | 01 September 2015 |
| DOI | http://doi.org/10.1111/1758-5899.12250 |
| Author | Helmut Reisen |
| Date | 01 September 2015 |
Will the AIIB and the NDB Help Reform
Multilateral Development Banking?
Helmut Reisen
Shifting Wealth Consult, Berlin
Abstract
What will be the future impact of the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank
(NDB), two multilateral banks created in 2014 outside the established Bretton Woods system, on multilateral lending
shares? So far, the bulk of multilateral lending has been provided by institutions created and ruled by the west. Will
the new institutions led by China and Brazil, Russia, India, China and South Africa (BRICS) help rebalance multilateral
development finance away from western dominance? The answer comes in three steps: first, the pressure for the BRICS
to ‘exit’rises with past, present and expected failure for ‘voice’reform in the established international financial institu-
tions (IFIs). Second, excess demand for multilateral soft loans and, third, the potential lending capacity by the AIIB and
the NDB are quantified to assess how much relative business –hence political influence –the existing IFIs might lose
in favour of the new competitors. Based on current evidence for loan-equity leverage ratios in established multilateral
development banks (MDBs), it is estimated that the NDB and AIIB combined will attract sufficient cofinancing to rival
the established MDBs in terms of annual lending. The combined loan portfolios (c. US$230 billion) of AIIB and NDB
would equal the combined loan portfolios of ADB and International Bank for Reconstruction and Development (IBRD),
according to a simple scenario presented in this survey article.
Infrastructure finance will benefit from the creation of
the New Development Bank (NDB) and Asian Infrastruc-
ture Investment Bank (AIIB) by tapping the considerable
saving potential in China and Brazil, Russia, India, China
and South Africa (BRICS). The new institutions should
therefore be supported, not discouraged, by western
governments and donors as well. The new multilateral
development banks (MDBs) may introduce choice for
potential borrowers in terms of funding cost and modali-
ties, but they need to respect procurement and environ-
mental standards to generate sustained development
benefits. Competition in multilateral development bank-
ing may have a negative impact on loan enforcement
mechanisms. The international financial institutions (IFIs)
of the existing Bretton Woods system and the new
development banks will have to unite by imposing
cross-default clauses to safeguard their preferred creditor
status.
Multilateral lending is shifting away from
western dominance
With hindsight, 2014 may well be noted as the year
when serious competition has been built into multilateral
development banking, especially for the World Bank and
the Asian Development Bank (ADB). The new BRICS bank,
officially called the NDB (to be headquartered in Shang-
hai), has been launched at the sixth summit of the BRICS
countries, held in Brazil in July 2014. The bank will have
subscribed starting capital of US$50 billion, with Brazil,
Russia, India, China and South Africa initially contributing
US$10 billion. Authorised capital is US$100 billion, paid-
up capital will be US$10 billion, with US$40 billion
callable on demand.
Representatives from 21 Asian countries signed the
Memorandum of Understanding on Establishing AIIB on
24 October 2014 in Beijing. By the end of March 2015,
almost 50 countries –two-third Asian, one-third nonre-
gional –had filed applications to join as founding mem-
bers of the Beijing-based AIIB. Its subscribed capital is US
$50 billion, half of which is paid in by China.
Like the NDB, the authorised capital for the AIIB is US
$100 billion, the paid-up capital US$10 billion. The NDB
has been established with a global remit to lend to
developing countries. The AIIB is focused on Asia. Both
new institutions are intended to concentrate on funding
infrastructure projects. One of the major barriers to eco-
nomic development in low and middle-income develop-
ing countries is the lack of critical infrastructure such as
ports, railways, roads and power. Although the two new
banks were launched in 2014, the decisions to create
them reflects the growing discontent for many years
among developing nations that the governance structure
of the International Monetary Fund (IMF)and World Bank
Global Policy (2015) 6:3 doi: 10.1111/1758-5899.12250 ©2015 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 6 . Issue 3 . September 2015 297
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