
January 13, 2025
The emergence of two multilateral development banks (MDBs) based in the Global South, the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), has sparked significant interest over the last decade. While “Southern MDBs” like the Islamic Development Bank (IsDB), have existed since the 1970s, the newest entrants were established purportedly in response to the hegemony of what we term the “legacy MDBs”, i.e., the World Bank and regionally focused MDBs like the Asian Development Bank (ADB), originated from the Bretton Woods system. Many see the emergence of Southern MDBs as an outcome of a broader shift in the international development finance architecture, potentially tilting the balance of influence towards the Global South. Not to mention, these Southern MDBs were initiated by countries that were once recipients of foreign aid themselves.
Historically, the legacy MDBs have faced criticism for the underrepresentation of Southern countries in their shareholding and voting structures. This representation imbalance was likely a factor in agreement on policy approaches that align more closely with the interests of major shareholders from the Global North such as the United States and Japan.
Our research revealed that the rise of Southern MDBs has redefined the development finance aspirations of the Global South. Southern MDBs are thought to be more attuned to the interests of recipient countries. These banks are perceived as innovators—introducing new financial instruments, channelling funds into sectors that legacy MDBs may have overlooked, and amplifying Southern perspectives in the global development dialogue.
In an era marked by polycrisis, strained resources, and growing populist influence, the budget earmarked for development finance by the OECD countries is under increasing pressure. Competing priorities, such as addressing climate change and providing humanitarian aid, vie for attention and funding. As a result, the call to “do more with less” has never been more urgent. Since 2021, the discourse on reforming the multilateral development financing system has gained momentum, with the Bridgetown initiative leading a renewed push for systemic change amid growing demands for increased funding.
Southern MDBs may be (relatively) newer actors, but they have grown increasingly important in the global financial architecture. Any discourse around reform of the multinational financial system will remain incomplete without considering these institutions. This blog post, drawn from our study that focuses on two such institutions—IsDB and AIIB—explores whether Southern MDBs, truly represent a departure from the practices of their legacy counterparts or if they are merely new actors playing by old rules.
The burden of expectations
There is widespread expectation among stakeholders in recipient countries that Southern MDBs better understand their development perspectives and can generate demand-driven funding with more affordable terms and conditions. This belief is rooted in the assumption that Southern member countries share comparable political economy and institutional contexts as well as similar development trajectories in the recent past.
These claims may not always be true. Ultimately, the lending terms and conditions from Southern MDBs are shaped by funding sources and strategic earmarks set by the headquarters. Unlike legacy MDBs like the World Bank and ADB, the AIIB and IsDB predominantly rely on market-based lending, with little to no concessional lending or grant windows.
The demand for additionality
From a recipient-country perspective, Southern MDBs are expected to invest in areas where legacy MDBs might not venture, like oil and gas projects. Their solo financing efforts have focused on filling gaps in “hard” sectors such as transport and communication, as well as financing fossil fuels. For example, IsDB’s single largest project is financing fossil fuel imports in Bangladesh.
Southern and legacy MDBs also benefit from working together, including through co-financing. Southern MDBs can also benefit from using feasibility studies conducted by the legacy MDBs at the country level. In 2024, both Southern MDBs and legacy MDBs announced their intent to deepen collaboration to strengthen development financing approaches and deliver more effectively as a system.
Not a different playbook
Southern MDBs have not become as innovative in their operational modalities as some may have expected. For example, the environmental and social standard guidelines of Southern MDBs are very similar to the legacy MDBs. The operational modalities and decision-making of the boards are also quite similar. In practice, Southern MDBs focus on project-level results structures, requiring each project to establish a clear framework for monitoring and evaluation, often using standard models or those provided by co-financier legacy MDBs.
Largely a project-based approach
The AIIB, in contrast to legacy MDBs and even older Southern MDBs like IsDB, adopts a project-oriented financing approach over having a country-strategy approach. AIIB defines itself as a “project finance bank” with a business model based on partnerships and mobilisation. This shift towards a project-oriented approach has contributed to fluid but potentially fragmented development efforts, further undermining the predictability of financing across sectors at the country level—a weak point within the development financing ecosystem. The result is that the recipient countries need to be more responsible for ensuring coordination and upholding development effectiveness. Lately, IsDB has adopted a more comprehensive results framework as part of its 2023–2025 strategic realignment to monitor and assess its performance across member countries and operations, operational efficiency, and organisational performance.
The limitations of a cost-effective “lean and thin” approach
Southern MDBs have sought to streamline their processes to maximise efficiency and reduce bureaucracy by going “lean.” For instance, instead of establishing country offices, both IsDB and AIIB have opted for regional hubs or, in AIIB’s case, only one overseas office, in Abu Dhabi. AIIB has taken the “lean” concept even further by establishing a non-resident board. While this approach has been perceived to lead to faster project preparation and approval processes, it could also limit these MDBs’ outreach and inadvertently slow down their efforts to establish a stronger foothold and build trust in the recipient country’s development financing landscape. The stakeholders of the recipient countries appreciate MDBs being within arm’s reach, as this encourages building relationships and trust through direct, in-person communication.
Loose engagement in global processes
On paper, both IsDB and AIIB emphasise the importance of working closely with other MDBs and development partners. However, in practice, these Southern MDBs often take a backseat at the country level, particularly in local consultative groups led by legacy MDBs like the World Bank. This disconnect is also reflected in their broader engagement within the development financing ecosystem. For instance, although the World Bank and ADB are actively involved in the Global Partnership for Effective Development Cooperation (GPEDC) process, AIIB and IsDB are not. While IsDB produces an Annual Development Effectiveness report which briefly mentions the GPEDC, it primarily adheres to its own processes for gauging development effectiveness. AIIB neither partakes meaningfully in the GPEDC processes nor explicitly states its engagement in these processes. This disconnect may be due to several factors. As relatively new players, Southern MDBs may not yet have the same level of involvement or influence in the development financing arena as their more established counterparts. However, they are already lending on a meaningful scale, and their potential for growth is significant. For context, the subscribed capital bases of IsDB and AIIB stand at $70 billion and $100 billion, respectively—similar to the ADB’s Ordinary Capital Resources (OCR) at $135.6 billion, though far smaller than the World Bank’s International Bank for Reconstruction and Development (IBRD) with a global mandate and a capital base of $296 billion.
Limited engagement with the broader stakeholders
Both legacy and Southern MDBs share a similar understanding of the recipient client on paper. For instance, the World Bank and ADB have broad definitions that cover borrowers, recipients, guarantors, and other stakeholders. Similarly, AIIB includes recipients, guarantors, beneficiaries, and sponsors of its projects, while IsDB focuses on financing beneficiaries and project implementers. These definitions clearly include the citizens of the recipient countries—the ultimate beneficiaries of development projects. However, in practice, both Southern and legacy MDBs tend to focus primarily on the recipient government as their primary client. This approach assumes that an elected government serves as a proxy for democratic accountability, ensuring that the interests of its citizens are represented. Yet, this assumption does not always hold true. In some cases, particularly where democratic accountability is weak, a recipient government may not fully reflect the will or needs of their people, raising questions about whether these MDBs are truly accountable to the broader group of beneficiaries they claim to serve. There are three areas where both legacy and Southern MDBs could engage more effectively with representatives of the beneficiaries: during project preparation consultations, through more robust information dissemination, and by conducting independent impact evaluations. Such engagements could ensure that the voices of those most impacted by development projects are heard, ultimately leading to outcomes that better align with the intended goals of these financial institutions.
When it comes to “Southern MDBs,” what’s really in a name? Admittedly, these institutions have brought their own ethos as well as positive operational modalities, including leaner operations and faster project preparation and approval processes. Nonetheless, the extent of their divergence from the legacy MDBs remains arguably limited. It may be safely predicted that in due time, we will see more convergence in terms of prudential and robust operational policies, however divergent their declared positions may be.
This blog is the first in a two-part series and it draws on insights from a forthcoming multi-country research study led by the Centre for Policy Dialogue (CPD) that explores the roles of Southern MDBs, specifically AIIB and the Islamic Development Bank (IsDB), vis-à-vis legacy MDBs, particularly the World Bank and the Asian Development Bank 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.
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