
January 13, 2025
The nature of South-South cooperation has evolved significantly over recent decades, from bilateral engagements to triangular cooperation mechanisms into a new phase: true participation in the multilateral system.
The emergence of Southern-led multilateral development banks (MDBs) such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) in the last decade epitomizes that shift. It also represents a bold move by the Global South to carve out a larger role in the international financial architecture.
Our recent study zeroes in on a group of recipient countries that do not get their due attention in the discourse on financing for development: the graduating least developed countries (LDCs). Over the next few years, five LDCs—São Tomé and Príncipe (2024), Bangladesh (2026), Lao People’s Democratic Republic (2026), Nepal (2026), and Solomon Islands (2027)—are scheduled to graduate from the UN’s least developed country category. This is a development milestone worth celebrating, without doubt, reflective of growth and rising living standards, but also one that may limit these countries’ access to some important concessional financing at a moment of significant economic and political pressures. In this study, we explore how two Southern-led MDBs—the AIIB and the Islamic Development Bank (IsDB)—can more effectively support two graduating LDCs, Bangladesh and Nepal. In the process, we identify reforms that would make the Southern MDBs more effective in these countries.
Here’s a summary of what we found.
New players, same problems?
The rise of Southern-led MDBs was initially understood as a challenge to the dominance of “legacy MDBs” such as the World Bank and the Asian Development Bank (ADB). Recipient countries expected the Southern MDBs to offer fresh “Southern” perspectives and new approaches to development financing, breaking away from the standards set by the legacy banks. Despite their relative novelty, we found that these new banks appear to be falling into step behind their legacy counterparts: their focus is also squarely on infrastructure, and their financing also largely relies on market-based instruments. With limited sectoral engagement and an even more limited array of financial instruments, recipient country stakeholders contend, for the most part, that these new Southern MDBs are more geopolitical tools than key development partners.
Yet this perspective dismisses their importance and potential. Southern MDBs are led by Southern countries, which means they are uniquely positioned to respond to the needs of the Global South, even if thus far that distinction has not come into play. To rise to the occasion and offer a true alternative, Southern MDBs will need to move beyond merely following in the footsteps of their legacy counterparts. Reform is essential if these MDBs are to realise their full potential and, in that process, also harness the potential of South-South cooperation. In this regard, we see four areas that demand attention.
First, expand the capital base and introduce a window for concessional financing
Market-based lending dominates the portfolios of AIIB and IsDB, even for operations in countries with weaker fundamentals, such as Bangladesh and Nepal. This exposes borrowers to interest rate volatility, particularly the Secured Overnight Financing Rate (SOFR). Since 2021, SOFR has surged from 0.04 percent to over 5 percent, significantly raising debt-servicing costs for countries with already shrinking fiscal spaces. While AIIB has offered hedging options, they have been underutilised, pointing to a broader issue of limited capacity among government officials to negotiate complex loan terms. For LDCs to successfully graduate from the group, access to fixed, lower-than-market rates is crucial. Southern MDBs should consider adopting a concessional financing model similar to the World Bank’s International Development Association (IDA), which pools softer funds from its wealthier member countries. This would provide a much-needed buffer for countries facing economic headwinds.
Second, establish a stronger local presence
AIIB and IsDB’s engagement remains palpably distant. AIIB operates out of Beijing and does not have any country offices, while IsDB runs regional hubs, one of which happens to be in Bangladesh. AIIB’s decision to open its second office in Abu Dhabi—a financial hub rather than a recipient country hub—further reinforces the perception among recipient countries that AIIB is more interested in boardroom deals than on-the-ground development. Having a presence in recipient countries would help Southern MDBs better understand local realities, meaningfully engaging and building trust with recipient governments and communities. Establishing country offices could also enhance the effectiveness of grievance redress mechanisms, mechanisms that local communities may not even be fully aware of but which help ensure MDBs are accountable to the people their projects are intended to serve. Piloting a country office in a major recipient country would be the right step forward for the AIIB and IsDB.
Third, assessment and evaluation need to be modernized and disaggregated
Both AIIB and IsDB follow results frameworks that closely mirror those used by the legacy MDBs or recipient governments for project financing. For instance, IsDB’s Strategic Realignment (2023-2025) incorporates key performance indicators to track development progress and produces standardised reports like the Country Portfolio Performance Report (CPPR) and the Project Implementation Assessment and Support Report (PIASR). Similarly, AIIB mandates that every project must have a results framework before financing, typically using frameworks influenced by legacy MDBs such as the World Bank. This heavy reliance on legacy playbook underscores a tendency among Southern MDBs to replicate established practices, rather than innovating or tailoring contextualised, disaggregated results framework that better reflects local development needs.
Fourth, adopt a demand-driven allocative strategy
AIIB’s operations remain project-based and disconnected from the broader development strategies of recipient countries. IsDB, while more aligned with national plans, often defaults to project-centric financing in practice. This approach frustrates countries like LDCs, which seek medium-term, predictable financing that aligns with their national development strategies.
Southern MDBs must embrace a more comprehensive, country strategy-oriented approach over a fragmented, project-oriented approach. Development finance should be coordinated with recipient governments to ensure alignment with national priorities. Platforms like the Global Partnership for Effective Development Co-operation (GPEDC) and national forums such as the Bangladesh Development Forum offer opportunities for better coordination between Southern MDBs, legacy MDBs, and other development partners.
As Southern MDBs grow in influence, they are positioned to offer graduating LDCs an alternative to the traditional, Northern-led financial institutions. To do so, however, they need to be able to effectively meet the development financing needs of these countries. This would entail expanding concessional finance, enhancing meaningful local engagement, adopting disaggregated results assessment, and aligning financing with national priorities. These reforms may echo the practices of their legacy counterparts but are essential if Southern MDBs are to become key development partners of LDCs, especially those en route to graduation. If shareholders rise to the challenge and help these institutions evolve, Southern MDBs could reshape and rebalance the development financing landscape for good.
This blog is the second in a two-part series based on a multi-country research study led by the Centre for Policy Dialogue (CPD) that explores the roles of Southern MDBs, specifically the AIIB and IsDB, in contrast to two legacy MDBs, the World Bank, and the ADB, in Bangladesh and Nepal.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.