By Onu Okorie

Development banks are turning increasingly to financial engineering to stretch scarce public capital and draw more private money into emerging markets, as the gap between developing countries’ financing needs and available public funding continues to widen.

A group of 30 multilateral development banks and financial institutions on Thursday unveiled new joint methodologies designed to measure more accurately how much private capital their operations mobilise — and, ultimately, encourage them to mobilise more.

The initiative, backed by the G20, marks the first major overhaul since 2018 of the rules used by development banks to measure capital mobilisation.

At the heart of the effort is a simple constraint: development banks cannot meet the growing financing needs of emerging economies through their own balance sheets alone.

The pressure has intensified as Western governments have shifted a greater share of public spending towards defence and domestic priorities, limiting the prospect of substantially larger aid and development budgets.

The new guidelines therefore seek to give greater recognition to financial structures that allow development banks to support more lending without committing equivalent amounts of their own capital.

Among the mechanisms covered are collateralised loan obligations (CLOs) and significant risk transfers (SRTs), in which development banks transfer some credit risk to private investors. By reducing the amount of risk retained on their books, such transactions can free up capital for additional lending.

“This comes from common shareholder, and stakeholder, pressure to do more with the capital that we have,” said Daniel Borrego Cubero, head of debt mobilisation product development at the European Bank for Reconstruction and Development.

The group behind the new methodology includes some of the world’s largest development lenders, including the World Bank, African Development Bank, Asian Development Bank, Inter-American Development Bank and EBRD.

The changes are also intended to make it easier for other institutions and investors to see which financial instruments can be used to bring private capital into development projects.

“It captures what is there,” said Bart Raemaekers, the Asian Development Bank’s head of mobilisation and blended finance. “It also has the effect of showing to other participating entities what products you can use to actually mobilise.”

The shift is already visible in the growing use of risk-transfer transactions.

In May, the EBRD launched a €1 billion significant risk transfer transaction, describing it as a major milestone in its efforts to mobilise private investment and expand its lending capacity.

The World Bank has also reported a sharp increase in private capital mobilisation. In the year to the end of June, it said it attracted $112 billion in private capital, up 60% from the previous year and more than three times the amount recorded in fiscal 2022.

The new measurement framework is intended to bring such transactions into a common system, giving shareholders and policymakers a clearer picture of how effectively development banks are using their existing capital.

For the institutions involved, the challenge is no longer simply raising more money. It is finding ways to make each dollar of public capital support a larger pool of financing for projects in emerging and developing economies.