The New Development Bank: An Emerging Multilateral Powerhouse or An Obsolete Competitor?

By Thompson Kum

Introduction: The New Development Bank ~ What Is A Multilateral Bank?

The New Development Bank, a multilateral development financial institution established by the BRICS countries (Brazil, Russia, India, China and South Africa), aims to mobilise resources for infrastructure and sustainable development projects within emerging markets and developing countries (EMDCs).

It acts similarly to the World Bank (WB) and International Monetary Fund (IMF), wherein its member countries are able to provide foreign aid to EMDCs. Multilateral development banks (MDBs) are in greater demand as of late, as they provide assistance to third world countries regarding the emerging issues consisting of climate change, post-coronavirus response and food security, in addition to well-established demands of infrastructure and sustainable development.

Origins: The Outcry of the Third World

The establishment of NDB arose from the political and economic dissatisfaction, which stemmed from the growing inequality between the BRICS countries’ share of the world economy and their representation within the institutions that underpin the global financial architecture. The heads of state in Brazil, Russia, India and China (BRIC) had started meeting annually after the conclusion of the global financial crisis, and discussed common interests between the involved parties.

The leaders of these countries expressed their dissatisfaction regarding the prevailing global financial architecture and wished to institute reforms to institutions such as the IMF and the WB. They called for a worldwide economic order that better reflected the changed international economy. This entailed demands for greater representation, (an increased share of voting rights within existing institutions), greater transparency regarding the election of the head of said institutions and increased recognition of the development needs of these countries within the operations of existing institutions.

In spite of the reforms regarding governance and shareholding introduced by the G20 Agreement, the BRICs leaders still found the global institutions’ policies to be inadequate, and demands for further reform of the global financial architecture persisted over several proceeding BRICS summits. During the 4th BRICS summit in New Delhi in 2012, the idea for the NDB was first considered, and on the 7th of July, 2015, the NDB was established with Brazil, Russia, China and South Africa as its founding members.

The NDB: Foundational BRICS And An Innovative Governance

The BRICS countries, responsible for the development of NDB as a whole, comprise 42% of the global population, and has been one of the fastest growing blocs of developing countries over the recent decades.

Their share of the world’s gross domestic product (GDP), measured in purchasing power parity (PPP), exponentially grew from 18%-32%, a share that doubled that of the European Union’s which only stood at 15%. Despite BRICS possessing a great portion of the international GDP, the net voting shares of its member countries within the WB only total to 15%, as of 2020.

In addition to the issue regarding limited representation and reforms within the existing financial architecture, another keystone foundation of the NDB arose from the imperative economic needs of the BRICS countries. Existing MDBs, particularly the WB, have instituted a noticeable decrease of lending for the development of infrastructure for the favoured development of the social sector and budget support, in spite of continual high demand from the BRICS and other developing countries.

This, I believe has led to the prioritisation of equal voice that governs the administration of the NDB, which better facilitates opportunities for the needs of each member country to be addressed. When first established, the NDB’s founding countries possessed an equal say in the shareholding process, despite the differing economic strength of said countries.

The NDB has an authorised capital (the number of shares a company can issue, as stated in its memorandum of association or in its articles of incorporation, which are formal documents filed with a government body to legally document the creation of a corporation) of $100 billion in addition to a subscribed capital (subscribed shares are shares investors have promised to buy) of $50 billion. Non-borrowing members are limited to a share of not over 20% over the net capital whilst non-founding members are restricted to a maximum 7%.

Within the NDB, China participates in an experiment revolving around a new system of governance for global financial institutions. The NDB’s Articles of Agreement ensured that no single founding member has the overruling constitutional right to reject a proposition, as the NDB operates under a democratic system that allows most decisions to be passed by a simple majority of the founding members.

The presidency of the NDB is rotated amongst the five founding members in the BRICS order, which starkly contrasts with existing global financial institutions’ process of directly appointing chief executives. This is likely due to BRICS countries’ dissatisfaction with that process: the WB is often controlled by an American citizen, the IMF a European citizen and the Asian Development Bank (ADB) a Japanese citizen.

China’s Grip ~ A Different Approach To Expansion

Regarding membership expansion, China has staunchly supported a different system for the NDB as opposed to the one instituted by the Asian Infrastructure Investment Bank’s (AAIB) approach. The AIIB emphasised rapid new membership and has already received 106 members, the NDB has instituted a greatly slower approach.

Despite its membership being open to all members of the United Nations, only in 2021 was the NDB able to welcome its first non-founding members, that being Bangladesh, the United Arab Emirates and Egypt, and Uruguay has been conceived of as an expected member. The NDB expects that its membership will grow consistently yet gradually in the future, reportedly stating that their approach to membership expansion strives for greater diversification of its member countries regarding both geography and development.

The NDB believes that continued membership expansion enables further infrastructure and sustainable development that covers more countries, leaving an impact that reaches beyond the founding BRICS countries. New members should also strengthen their initial investments, support greater portfolio diversity, enhance the mobilisation of resources, vitalise the NDB’s development experience and bolster its role as a platform engineered for wider collaboration amongst emerging markets and developing countries.

Efficient Administration ~ The Redundancy Of Bureaucracy

China has supported a multitude of innovations regarding the administrative model of the NDB, which differs from those within established MDBs. These changes are tailored to target some criticisms against existing institutions, such as the WB, namely their lengthy and bureaucratic administration occasionally resulting in project approvals processes taking years.

The NDB believes that speed of approval is a keystone factor of its operational model, with a stated target of approving loans within six months, whilst not sacrificing quality in doing so. The usage of country systems to manage the environmental and social aspects, in addition to the procurement processes required for the projects the NDB finances, effectively negates the need for its borrowers to navigate around an external institution’s systems.

However, one can argue that this system is much more viable for the NDB, due to their limited clientele consisting of five middle-income country borrowers, and is inapplicable to institutions such as the WB, which manage countries at widely differing stages of development, therefore the NDB’s administrative approach may not be finalised as it expands its membership to countries less developed than BRICS.

RenMenBi(RMB) –– The New Reserve Currency? ~ The Dedollarization Efforts Of The NDB

The NDB also contributes to China’s ambitions towards dedollarization, alongside the internationalisation of the RenMenBi (RMB). These have begun since the latter half of the 2000s, making incremental progress through a series of policy efforts to achieve said goals. As of December 31st, 2022, the NDB has raised approximately $4 billion USD from Chinese capital markets, in addition to another $7.8 billion from international capital markets.

The NDB also provides loans in local currencies to its borrowers, and has made the provision of said loans imperative for its operations. This I believe has increased the viability and competitiveness of the NDB, as this demand has persisted for long from many borrowers from MDBs, and whilst the WB is technically able to achieve this, it has only done so in a limited regard. A great upside to local currency loans is that they reduce foreign exchange risk, wherein their currencies decline in value proportionally to the US or Euro, the most common currencies that act as a medium of exchange.

As of December 31st, 2021, 23% of the NDB’s net lending portfolio ($30 billion USD) were in local currencies, and the NDB thus far has provided local currency financing for China, India and South Africa with competitive interest rates. Similarly to other MDBs, offering improved rates better than the sovereign in local currency acts as a challenge for the NDB.

The NDB has ensured that the pricing of its loans remains competitively viable relative to established MDBs. Currently, the NDB’s credit score has been rated as AA+ (a credit score is a letter grade that denotes the creditworthiness of companies/countries that issue debt securities, such as corporate and government bonds), whilst their contemporaries are rated AAA. From this, one can deduce that the NDB needs to adopt a more efficient administration to maintain lower operating costs to accommodate for the cost difference.