Armed with little more than a mandate and modest budget, New Development Bank (NDB) President KV Kamath and four vice presidents from BRICS countries (Brazil, Russia, India, China and South Africa) arrived in Shanghai during July 2015. The task was to set up a new multilateral development bank (MDB) from ground zero. I remember how daunting and intimidating it all seemed then. Outside the office window from our location in the financial district of Lujiazui, we could see a remarkable skyline of skyscrapers hosting hundreds of financial institutions symbolizing the modern flavour of the fast growing metropolis of Shanghai.
Better resourced than most start-ups for sure, but a start-up in all respects, we opened our doors with no staff, technology or systems on day one.
On the eve of the BRICS Heads of State summit to be held on 3-5 September 2017 in Xiamen, China, it is both timely and appropriate to ask what the NDB has achieved so far and what is next? Has - as some critics suggest - the BRICS star faded?
Two years on, the Bank has firmly graduated out of its start-up phase. The original group of five will reach 150 professionals by the end of 2017. Its main headquarters in Shanghai will now be bolstered by its first regional office, the Africa Regional Center, which opened recently in Johannesburg, South Africa.
In this short period, we managed to issue our first green bond raising RMB 3 billion in the Chinese bond market, enabled by the achievement of a AAA domestic credit rating in China.
The core purpose of the NDB is to mobilize resources for infrastructure and sustainable development in BRICS countries. The Bank has committed USD$1.5 billion in loans to member countries so far, with a strong emphasis on renewable energy. Furthermore, plans are on track to reach the target $2.5 billion of loan commitments by end of 2017. This will pave the way to reach between $10 billion and 15 billion of loans by 2021.
The next key milestones for the Bank will be to obtain an international credit rating and expand its membership beyond BRICS countries.
The creation of the NDB happened in the context of a real and continuing power shift in the international system from the developed industrialized world towards emerging market economies. While some are skeptical about the BRICS formation, there is no doubt that this group of countries along with a number of others at similar levels of development is playing an increasingly important role in the global economy. The contribution of BRICS countries to global GDP has increased from 8% in 2000 to 24% today. Being home to 43% of the world’s population, three of the BRICS economies are ranked in the top 10 by GDP size, namely China (2nd), India (7th) and Brazil (9th).
Why was a BRICS multilateral development bank needed?
It is well known that developing countries and emerging markets grew impatient with the slow pace of reform at international financial institutions to obtain a bigger voice. In this respect, the creation of the NDB and several other institutions epitomizes the desire of major developing countries to play a bigger role in global governance.
Despite the efforts by existing multilateral development banks, there remains a major infrastructure-financing gap in BRICS countries. The increased productivity, improved access to markets, higher employment and other economic benefits which result from increased investment in infrastructure continue to lift large numbers of people out of poverty in developing countries.
With a subscribed capital base of $50 billion, the NDB will provide a substantial additional pool of capital to the BRICS nations to fund their own infrastructure plans. Multilateral development banks are able to leverage and raise large amounts of additional resources from the global capital markets. They are able to do so with a modest contribution in shareholder capital from member governments, making it a very efficient financing model.
The NDB’s emerging business model has three distinctive features. It is symbolically significant that in the day-to-day management and governance of the bank, the five member states have an equal share. No single country has a veto in any form. The Bank is fully controlled by its members who all represent the borrowing countries.
Secondly the NDB is committed to develop and deepen local capital markets in its member states by providing loans denominated in local currency in addition to US dollar loans. This will assist borrowing countries and clients to manage and avoid the foreign exchange risks inherent in MDB loans. Thirdly the bank aims to be fast, agile and responsive to the rapid pace of change in technology and the needs of its clients.
Since its establishment, the NDB faced a number of critical challenges in the external environment. Several of the BRICS countries, notably Brazil, South Africa and Russia experienced an almost synchronized economic downturn compounded by some political woes. China, the economic powerhouse of the BRICS bloc, on the other hand, grew at its slowest pace since the global financial crisis.
The deteriorating economic climate was further exacerbated when several of the BRICS countries lost their investment grade status in recent years. Only India managed to accelerate its economic growth rate to record levels. Despite these adverse developments, all BRICS member countries contributed their paid-in capital to the NDB, in some instances ahead of schedule, signaling their strong commitment to the institution.
In 2015 we saw the creation of the Asia Infrastructure Investment bank (AIIB) alongside the NDB. It is not often that global institutions of this kind are created. The successive launch of two new multilateral development banks, both headquartered in China led to a renewed interest in the role, scope and ambition of these institutions. This was reflected in the agenda of the G20 in 2016 in Hangzhou where the enhanced role of MDB’s and their role in promoting green finance were given special prominence.
These early achievements point to the successful launch of NDB as a freshly minted multilateral development bank. However it remains a new kid on the block with a long road ahead.