China’s AIIB bank set to become major player while new BRICS bank lags behind

1 May 2015
Comment

The creation of the BRICS New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB) is one of the most dramatic recent shifts in the development finance landscape. China and other emerging economies, dissatisfied with existing multilateral development banks, are opting to create new institutions rather than continue waiting for traditional donor nations to accept meaningful reforms at existing ones.

However, the two banks appear to be headed in different directions. While both banks are likely to be financially viable, the NDB’s capacity may be hamstrung by understandable – if misguided – political decisions.

BRICS bank not likely to be a global game-changer

The NDB’s initial shareholder capital was divided equally among the five founders. This is a laudable statement of equality among shareholders, but the result is a bank much smaller than it could have been had China been able to contribute more. The BRICS could have created a bank with greater potential to achieve meaningful scale and developmental impact by using more innovative governance models, such as that used by the Andean Development Corporation, which allow for differentiated capital contributions but more balanced voting.

The BRICS also wrote voting rules guaranteeing themselves control over all aspects of NDB governance, from membership to capital structure to loan approvals. For non-BRICS countries, this might look like another World Bank (or worse), just with different countries in charge. Nor did the BRICS allow any other countries to participate in designing the rules of the NDB, and they have made no public effort to enlist new members. Thus far, it has the look of a private club.

This is not the way to build an effective development bank. Without rich country shareholders, the NDB will not have a AAA bond rating. As a result, middle-income countries will find its loans less attractive, and they may not be inclined to join as junior members of a BRICS-run club. As a result, the bank will likely be initially comprised of the BRICS plus a collection of low-income countries with few alternatives for finance – a reasonable niche, but hardly a global game-changer.

AIIB set to become one of world’s largest multilateral banks

The AIIB has taken a very different approach. China energetically lobbied other countries to join, and any country that signed the memorandum of understanding on the AIIB before 31 March is eligible to take part in the negotiations of the bank’s governance rules and policies (currently underway). Even though China is putting up at least half the AIIB’s initial capital, it has signaled that it is willing to reduce its governance authority, down to a 25-30% voting share and no veto power over capital structure and governance rules akin to what the US has at the World Bank, IMF and Inter-American Development Bank.

By bringing in 57 countries (at last count) to decide on the bank’s statutes, the AIIB will have a much broader global legitimacy than the BRICS bank, as well as much more capital. And with 16 of the world’s 20 largest economies as shareholders, the AIIB is almost certain to get a AAA bond rating, which will give it greater operational capacity.

Estimates indicate that the AIIB could easily have a loan portfolio of US$90-100 billion within ten years, compared to maybe half that for the BRICS bank. This would make the AIIB among the largest multilateral banks in the world, while the NDB will likely be smaller than both the Inter-American and Asian Development Banks.

Chinese officials clearly understand what is required to build a viable multilateral bank. When the BRICS chose a more politicised route, China signed the agreement, smiled politely for the photograph, and immediately moved on to build a more viable AIIB. It’s a telling sign that while the AIIB is quickly being brought into operational reality, the BRICS have made no public move to open the NDB in nearly a year since it was formally announced.

Many questions remain unanswered about the two banks, including environmental and social safeguards, technical assistance and expertise, public vs private sector focus, and more. What is evident is that the AIIB is well positioned to become a major player in development finance in coming years, while the NDB’s future impact is much less clear.