Multilateral Development Banks Need Serious Reform

There should be a joint MDB strategy to co-finance large-scale projects, standardize financial instruments, and share expertise across regions.

- HUGH DUGAN & DANIEL WAGNER

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 derisking tools—to crowd in more private investors. They should shift away from direct lending to acting as catalysts for private sector funding.