Can South–South Cooperation Compete? The Development Bank of Latin America and the Islamic Development Bank

Caracas, Venezuela. Photo by Jorge Salvador via Unsplash.

The last few decades have seen significant progress in multilateral institutions across the Global South. Southern-led multilateral development banks (MDBs) play a key role in harnessing global capital to finance the sectors most important to borrowers, especially infrastructure. Two prominent Southern MDBs, the Development Bank of Latin America (CAF) and the Islamic Development Bank (IsDB), have become crucial drivers of regional infrastructure growth. 

In a new journal article published in the journal of Development and Change, Rebecca Ray and Rohini Kamal explore whether CAF and IsDB have lived up to their goals of establishing borrower control over bank governance without sacrificing financial dynamism. Ray and Kamal use power-weighted voting indices for member representation on bank boards, to measure the practical power of each country in forming decision-making coalitions on those boards. They also analyze bank operations to determine whether the new approach to MDB governance reflects in their internal performance. The authors compare the banks’ financial performance with that of their Northern peers, the Inter-American Development Bank (IDB) and the World Bank International Bank for Reconstruction and Development (IBRD), in development finance and their ability to address borrower needs in the development of infrastructure projects.

Main findings:
  • The CAF and IsDB have become major players in development finance, including in sustainable infrastructure, successfully challenging the influence of traditional Northern MDBs, like the IBRD and hybrid institutions like the IDB. 
  • The CAF and IsDB offer greater voice for borrowing countries in decisions governing how development finance is made, especially for larger borrowers, than their Northern-based counterparts.
  • The more representative structure of the Southern-led MDBs has not hampered their financial performance, with both banks having grown rapidly in the last decade. 
    • The CAF and IsDB are now major lenders whose business models will have significant impacts on the regions in which they operate.
  • The banks’ borrower-forward approach does hamper their ability to raise capital and achieve investment-grade bond ratings, AAA bond ratings.
  • These banks have focused on infrastructure finance to an increasing extent, filling a gap left by the IBRD as it shifts toward ‘softer’ loan projects, proving that representative institutions based in the Global South can hold their own among major banks.
  • Neither the CAF nor IsDB, have instituted comprehensive environmental and social safeguards for major infrastructure projects. 

Important issues remain in relation to their continued internal capacity development, especially with regard to the environmental and social safeguards necessary to oversee lending. For Ray and Kamal, it remains to be seen whether these lessons will be learned in the future by borrower-led MDBs.

Read the Journal Article