Unlocking Synergies Between Multilateral Development Banks and National Development Banks

By Chiara Mariotti and Richard Kozul-Wright

2025 will be a pivotal year for development and climate cooperation, with financial matters coming to the fore at a range of key policy events, from the upcoming Finance in Common Summit taking place at the end of February in Cape Town to the 30^th United Nations Climate Change Conference (COP30) in Belém and the Group of 20 (G20) Heads of State in Johannesburg in November. These fora will ensure that the discussion on the state of the international financial architecture will remain at the top of the global policy agenda. The decision of the United States to pull back from its engagement with multilateral agencies will, no doubt, be a major talking point. But the challenges facing the international financial institutions have deeper roots – and a wider reach.

The Finance in Common Summit, which brings together national development banks (NDBs) and financial institutions from all around the world, offers a particularly valuable opportunity to shift the conversation towards harnessing the synergies across public financial institutions to support national and global goals. Strengthening multilateral development banks (MDBs) has also featured highly on the agenda of G20 Finance Ministers and Central Bank Governors. The Cape Town meeting will be an important opportunity to underscore the roles that NDBs can play in marshalling resources behind national development plans and the coordinating function they could play to steer finance from diverse sources by anchoring country platforms.

A new report by the Boston University Global Development Policy Center argues that as part of a bigger and bolder reform and capital mobilization agenda, development finance institutions (DFIs) should focus on establishing partnerships with other public finance institutions that are clearly aligned with the host government’s development and climate change priorities and focus on transformational programs and projects that would not be realized in the absence of public support. This “blending from the ground up” is, moreover, better placed to mobilize private capital which is risk-tolerant, patient as well as willing to share risks and rewards of investments in a policy environment which is enabling but also regulated and accountable to citizens.

Why it matters

International development finance has persistently fallen short of developing country needs, with the climate crisis only further widening the gap. While detailed estimates of that gap vary, all agree that trillions of dollars will have to be mobilized annually by 2030 if countries are to realize the just and sustainable future governments have promised their citizens and that the planet desperately needs.

In recent years, heightened expectations have been placed on DFIs, and MDBs and NDBs in particular, as critical actors capable of mobilizing capital to build productive capacity, manage climate risk and invest in sustainable infrastructure. In 2024, the G20 under the Brazilian Presidency identified DFIs as key to strengthening transitional planning and consolidating country platforms to deliver on climate ambitions.

DFIs are “mission-oriented” institutions: while they must strive to recover costs, their business models are such that they can operate with lower expected financial returns on their investments than the private sector. This allows them to focus on projects where social and/or developmental benefits exceed the purely commercial returns, often with long or uncertain lead times, and on sectors, locations or firms where private finance is unlikely to go and on borrowers who may be small, new, lack collateral or a credit history.

However, although DFIs have a long history and upwards of $23 trillion in combined assets, they still lack an effective institutional framework for cooperating amongst themselves to leverage those assets for structural transformation in general and green structural transformation in particular. To date, their emphasis has been on “public private partnerships (PPPs),” and associated blending techniques, to derisk the desired investment projects making them more attractive (that is, profitable) for private investors. This approach reflects the dominant narrative that has put too much faith in the capacity (and desire) of private finance to deliver public goods, at both the national and global levels. But this approach has failed to live up to its promise of using billions of dollars of public money to attract trillions of dollars of private finance to deliver on development and climate goals.

Key lessons for effective MDB-NDB partnerships

The report examines five case studies of MDBs collaboration with NDBs to advance the energy transition. It considers how partnerships have worked in practice and provides the empirical foundation for identifying the opportunities and barriers to scaling up MDB-NDB collaboration.

The MDBs examined are the Islamic Development Bank (IsDB), the European Investment Bank (EIB), the Asian Development Bank (ADB), the Interamerican Development Bank (IDB) and the New Development Bank. The five case studies relate to partnerships with three public NDBs including the Development Investment Bank of Türkiye (TKYB), the Development Bank of Southern Africa (DBSA), and the Brazilian National Bank for Economic and Social Development (BNDES); one private NDB (the Industrial Development Bank of Turkiye, or TSKB); one semi-public guarantee institution (the China National Investment and Guaranty Corporation, or I&G) and several Latin American public and private DFIs.

The report focuses on five key potential areas where collaboration between MDBs and NDBs can be mutually beneficial, and the main instruments available to put them into action: improving access to capital and widening access to different financing sources (e.g., through on-lending and equity injections), lowering the cost of capital and sharing and managing risk (through guarantees, credit enhancement instruments and green financing platforms), and project identification and capacity building.

Building on their experience and synergies, partnerships between MDBs and NDBs can play a critical role in mobilizing additional capital and linking political ambition with policy action. Working as an ecosystem, they can shift investment horizons away from debt-dependent, short-term (often speculative) financial instruments, towards the productive investments and public goods needed to meet development and climate goals. Moreover, they can work together to overcome the limitations of existing de-risking instruments, which have transferred too much risk to the public sector while losing sight of and impact on the intended development and climate goals.

The case studies examined in the report also show that modalities and the complexity of MDBs-NDBs collaboration vary greatly, reflecting differences across MDBs, their partner NDBs, and the financial and political circumstances of the host economy. This variety is reflected in the fact that most MDBs don’t have specific policies or strategic frameworks for engaging with NDBs and neither track nor report their NDBs financing as a separate category.

The favorable terms at which NDBs obtain financing from MDBs are critical to making capital affordable for the intended beneficiaries and helping hedge risk (especially currency risk) that NDBs can’t manage on their own. For example, the EIB’s credit line to DBSA in support of its Embedded Generation Investment Program Facility, along with co-financing from the Green Climate Fund, contributed to improving the concessionality of the sub-loans provided under the program.

Projects which are embedded in comprehensive programs, clearly aligned with government priorities and backed by an enabling policy environment are more predisposed to innovation and success. For example, the presence in Türkiye of a favorable national policy for renewable energy, including the adoption of a feed-in-tariff at a pre-determined price anchored to the US dollar, encouraged the IsDB and its national partners, TSKB and TKYB, to experiment with a new financial instrument. This ultimately enabled greater investment in renewable energy programs.

Notably, local currency lending remains under-utilized. In only one of the case studies examined were loans extended in local currency: EIB extended a credit line to DBSA with the option to draw funds in ZAR. In all cases, the burden of foreign exchange risk hedging fell on the borrowing NDBs, adding to the cost of the loan.

The case studies revealed that technical assistance significantly increases the chances of success of a project, and capacity building at scale can contribute to nurturing a coherent global ecosystem of public-public financing, while also boosting financial leverage. This is well illustrated by IDB’s technical assistance strategy aimed at nurturing the role of Latin American NDBs in green finance. The pool of programs implemented contributed to raising awareness on green finance and climate risk, creating demand for partnerships, mobilizing new funding and promoting the development of the sector at the regional level.

Partnerships between MDBs and NDBs are characterized by a strong reliance on different types of derisking instruments, mostly without the means to assess their additionality and ensure accountability of the private sector involved. The EIB, ADB and New Development Bank’s loans were used by the respective borrowing NDBs to provide different kinds of credit enhancements through local financial intermediaries, such as the provision of subordinated debt for small- and medium-sized financing in South Africa (DBSA) and credit enhancement for issuance of green bonds in China (I&G) and for infrastructure bonds in Brazil (BNDES).

The appetite for deeper MDB-NDBs collaboration has been growing in recent years and will continue to do so. However, NDBs are still largely seen as actors which can help with the roll out of increasingly sophisticated derisking instruments aimed at mobilizing private capital. Not only has this approach so far failed to scale up the mobilization of financial resources, but it is also not where their advantage lies. Their role should, instead, be seen as attracting sources of risk-tolerant and patient capital (especially domestic sources), and to identify investment opportunities, including and, and most importantly, public investments, that are in alignment with government priorities, in recognition of their public mandate.

Those sources can still come from capital markets, but working together, MDBs and NDBs can play a much more strategic role in combining their concessionary resources and structuring innovative financial instruments and solutions, so that these are more clearly grounded in country priorities and country ownership, while ensuring accountability and additionality of the public funds used.

This report recognizes and reflects on the limited success that the “billions to trillions” agenda has had in mobilizing private investment to support the UN 2030 Sustainable Development Goals. By identifying how MDBs and NDBs could cooperate more closely, this report aims to pivot the conversation on resource mobilization to one that is publicly led and supported by private capital that is risk tolerant and willing to share the rewards. The emphasis on country platforms suggested in the report offers an opportunity to lay out a framework for how development finance institutions can cooperate amongst themselves to support structural transformations across developing countries.

Chiara Mariotti is a development economist with expertise in research, policy and advocacy in international development and global economic governance.

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