Ahead of the New Financial Pact Summit, chaired by Emmanuel Macron, President of the French Republic, and Narendra Modi, Prime Minister of India, the Bill & Melinda Gates Foundation, Open Society Foundations, and The Rockefeller Foundation announced USD 2,781,583 in funding from the $5.25 million Multilateral Development Banks Challenge Fund (\u201cthe Fund\u201d): Albert Ludwig University of Freiburg, Caribbean Development Bank, FSD Africa, IDB Invest, Risk Control Limited, and University of Leeds. The six grantees, which were selected to help increase efficiency and innovation in the world\u2019s development finance system, advance the Fund\u2019s overarching goal of accelerating investment for the United Nations\u2019 Sustainable Development Goals (SDGs) and Paris Climate Agreement.<\/p>\n
The Fund, which is administered by New Venture Fund, was announced\u00a0in October 2022 to help multilateral development banks\u2019 (MDBs) unlock tens of billions of dollars in new development finance with little to no cost to shareholders and while safeguarding their financial integrity. Aligning assistance around the recommendations in the\u00a0G20 Independent Review of MDBs\u2019 Capital Adequacy Framework (CAF) report, its three areas of focus are 1) developing a better understanding of MDBs\u2019 specific features to support better informed discussions about MDB\u2019s risk management and shareholders\u2019 risk appetite; 2) promoting financial innovation and the development of new instruments, with an emphasis on risk transfers and securitization as a means to catalyze private investment; and 3) improving transparency and access to information.<\/p>\n
The latest round of projects will help accelerate the design and implementation of new ideas for MDB innovation and finance research to promote ways in which MDB\u2019s unique resources can be maximized. With grants ranging from $140,000 to $750,000:<\/p>\n
- \n
- Albert Ludwig University of Freiburg, a public research university located in Freiburg in Breisgau, Baden-W\u00fcrttemberg, Germany, will develop a new methodology for assessing concentration risk tailored to MDBs\u2019 portfolio. This aims to provide an alternative to the leading methodology currently in use (e.g. in S&P supranational ratings), which was designed for commercial entities, usually holding much larger portfolios, and can be considered overly conservative when applied to MDBs portfolios that are structurally concentrated but also have other specific features.<\/li>\n
- Caribbean Development Bank (CBD), a regional financial institution, will explore new balance sheet solutions that would enable it to better cushion disaster-related shocks and to provide financing tailored to its members\u2019 needs and challenges. The work on Climate Resilient Debt Instruments has to date predominantly focused on private sector creditors. This project will build the evidence base for consideration of the introduction of climate-contingent loans into MDBs\u2019 activities, accounting for MDB specific features and considering what additional support may be required to enable the implementation of such mechanisms at scale. A holistic balance sheet approach will consider innovation on both sides of the balance sheet, developing a framework replicable by other development banks. Lazard Fr\u00e8res has been retained as financial advisor to CDB to implement this project.<\/li>\n
- FSD Africa, which is incorporated as a non-profit company limited by guarantee in Kenya and funded by the UK Government\u2019s UK aid, will explore the potential for local currency solutions for MDB portfolio transfers, combining the objective of freeing up MDB capital with that of deepening domestic capital markets in smaller emerging markets.<\/li>\n
- IDB Invest, which is the private sector arm of the Inter-American Development Bank (IDB) Group, will structure a securitization of a pool of its development related assets as a means of testing appetite and optimizing capital. The preparatory work will be designed with an eye towards building a new asset class and expanding and scaling the MDB investor base and by exploring options for greater standardization and collaboration between MDBs.<\/li>\n
- Risk Control Limited, a UK-based firm specializing in developing and implementing risk management assessments for international institutions, will launch two projects. The first project will produce comprehensive analysis to support MDB\u2019s efforts to develop markets in their own risk transfer mechanisms, creating a set technical and analytical tools for Balance Sheet Optimization. The second project will aim to benchmark capital adequacy across MDBs to increase transparency for their shareholders, boards, and management, while providing metrics of credit standing that are alternatives to agency ratings.<\/li>\n
- University of Leeds, a public research university in Leeds, West Yorkshire, England, will be investigating MDBs local currency practices, evaluating the scale of the risks and their determinants, and assessing current risk management frameworks, while testing whether the premise that these risks are currently overestimated by limiting the lending capacity of MDBs.<\/li>\n<\/ul>\n
The six new grantees join the first recipients of funding, ODI and Publish What You Fund, which are working to rapidly develop research to improve understanding of MDBs\u2019 callable capital and a system to track and boost MDB mobilization.<\/p>\n
\u201cThe MDB Challenge Fund is designed to jump start MDB reforms. These grants should help financial institutions test methods to meaningfully increase their funding and impact, to enable MDBS\u2019s to better confront the crises facing the world \u2013 especially climate change, energy, the food crises and debt,\u201d<\/em>\u00a0said\u00a0Mike Muldoon, Chief of Staff at The Rockefeller Foundation\u00a0<\/strong>and former member of the independent panel commission by the G20 to conduct the Review of MDBs\u2019 Capital Adequacy Frameworks.<\/p>\n
\u201cThis grant is part of the Bank\u2019s thrust to arrive at innovative solutions for development. Access and affordable financing is the key to resilient prosperity in our region,\u201d<\/em>\u00a0said Dr. Hyginus \u201cGene\u201d Leon, President of the Caribbean Development Bank<\/strong>.<\/p>\n
\u201cAs political momentum around MDBs reforms continues to grow, the pool of projects supported by the MDB Challenge Fund will contribute to identifying innovative and concrete solutions to design development finance instruments that match the pressing liquidity needs of developing countries and help them implement a just and equitable energy transition,\u201d<\/em>\u00a0said\u00a0Laura Carvalho, Global Director of Equity at OSF.<\/strong><\/p>\n
\u201cMeeting the development finance needs of today and tomorrow requires effective, collaborative, and innovative multilateral development banks, truly operating as part of a responsive system rather than as standalone, static actors. The MDB Challenge Fund is investing in this vision by seeding projects that fill key knowledge gaps and demonstrate deepened MDB capacity, collaboration, and impact,\u201d<\/em>\u00a0said\u00a0Kalpana Kochhar, Director of Development Policy and Finance at the Bill & Melinda Gates Foundation<\/strong>.<\/p>\n
\u201cFSD Africa is pleased to be selected among the beneficiaries of the MDB Challenge Fund. We have been at the forefront of innovation and are keen on supporting new ways of doing business to ensure finance works for Africa\u2019s future. Leveraging on the grant FSD Africa intends to undertake detailed assessment and engagement with MDBs and other key stakeholders to curate an innovative approach to unlock MDB capital in a way that enhances efficiency, maximises impact and supports sustainable economic development in Africa,\u201d\u00a0<\/strong><\/em>said\u00a0Mark Napier, CEO, FSD Africa.<\/strong><\/p>\n
\u201cMDB loan portfolios typically consist of a small number of borrowers and hence are exposed to a significant amount of single name concentration risk. The granularity adjustment method currently applied by some rating agencies can, however, substantially overestimate this risk when applied to such small portfolios. In this project, we will develop a new approach that accurately measures name concentration risk in small and highly concentrated portfolios. A more precise measurement of concentration risk may lead to a significant reduction of capital requirements and hence increased lending capacity for MDBs,\u201d<\/em>\u00a0said\u00a0Professor Luetkebohmert-Holtz of the University of Freiburg.<\/strong><\/p>\n
more<\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/article>\n<\/div>\n<\/div>\n