Financial innovation is a crucial component of ongoing efforts to build a better, more efficient, and bigger World Bank Group, one that is equipped to address urgent, overlapping global challenges. That is why, as part of its evolution, the World Bank Group is transforming its financial model while seeking additional resources from donors, the private sector, and other development partners.
Through innovative financing instruments and by stretching its own available capital, the World Bank has the potential to increase lending capacity by an additional $150 billion over 10 years, while continuing to protect the Bank¡¯s Triple-A credit rating. The Bank is also easing the burden on clients by making its loans more affordable.
Because we know that governments and multilateral institutions will fall short of providing the trillions required annually for climate, fragility, and inequality, we are also making a concerted effort to develop practical and scalable solutions that crowd in more private sector investment into emerging markets and address the barriers that prevent it.
ľ¹ÏÓ°Ôº Group has implemented reforms and developed innovative financial instruments as part of the Capital Adequacy Framework review, which the G20 Expert Group recommended. This includes lowering the IBRD¡¯s equity-to-loans ratio to 18 percent from 20 percent and increasing limits for shareholder bilateral guarantees. This increases potential lending commitments by approximately $80 billion over ten years ($70 billion from lowering the equity-to-loans ratio, up to $10 billion from the bilateral guarantees, and $1 billion from a guarantee from the Asian Infrastructure Investment Bank).
Other increasing capacity innovations include a shareholder hybrid capital instrument and a Portfolio Guarantee Platform, new products announced at the 2024 World Bank Group/IMF Spring Meetings. So far, 12 shareholders have pledged more than $11 billion for the two instruments, which can be leveraged to expand financial capacity by more than $70 billion over 10 years.
The shareholder hybrid capital instrument is a bond that pays a coupon. Still, it also includes features that allow it to be considered equity. It is the first instrument of its kind among multilateral development banks (MDBs). The Platform Guarantee Platform allows IBRD shareholders with strong credit ratings to compensate the World Bank if borrowers do not repay their loans up to a guaranteed amount. In addition, the Bank has found a way to enhance the value of callable capital, part of shareholders¡¯ capital that can be called on in extreme circumstances. In a first for development banks, this Enhanced Callable Capital is a portion of callable capital that can be leveraged like equity or called on earlier if the Bank¡¯s rating is under pressure. Shareholders can now sign up for this instrument.
The Bank is working hard to make it easier for countries to borrow and to pay back their loans more easily by removing some fees on IBRD loans. This includes removing the pre-payment premium, introducing a grace period for paying commitment fees on undisbursed balances and extending IBRD¡¯s lowest pricing to more vulnerable, small states.
Incentives have been introduced for both donors and borrowing countries to increase investments in eight global challenges with a cross-border impact: climate change mitigation and adaptation, biodiversity, food and nutrition security, water security and access, energy access, fragility and conflict, pandemic prevention and preparedness, and enabling digitalization.
The Framework for Financial Incentives (FFI), approved by the World Bank¡¯s Board of Executive Directors on April 9, 2024, includes measures to help borrowing countries access more funding and price incentives to reduce costs for eligible projects. It is the first holistic framework among MDBs to provide dedicated financing for projects with cross-border benefits.
The FFI includes the creation of the Global Solutions Accelerator Platform, which will provide additional financing for projects that address global challenges. The FFI also introduced the Livable Planet Fund, for which Japan is committed to making the first contribution.
Other innovative financial tools include:
Outcome Bonds: These bonds allow investors to channel financing to specific initiatives and projects that often do not have access to financing. Examples include a Wildlife Conservation Bond, which supported Black Rhinos and local communities in South Africa, and a plastic waste reduction-linked bond, which channeled private capital to two projects in Ghana and Indonesia that aim to reduce and recycle plastic waste in vulnerable communities, cutting plastics leaking into nature and oceans.
Catastrophe Bonds and Insurance: The Bank has made it more accessible for countries to transfer disaster risk to international insurance and capital markets by allowing countries to finance the costs of such risk transfer using Bank financing or by adding the costs to the interest rate of Bank loans.
Climate Resilient Debt Clauses: IBRD has expanded these debt clauses to allow small state borrowers the option to defer interest and principal loan payments for up to two years in an extreme natural disaster.
New Contingent Financing Options: The Bank introduced a new contingent financing product (Investment Project Financing with Deferred Drawdown Option - IPF-DDO) to provide immediate access to funds in times of crisis. It can shock-proof specific projects or public institutions¡¯ funds to ensure resources are available during crises.
Callable Capital: In April 2024, a report on IBRD Callable Capital was published, clarifying processes related to this unique asset. The report demonstrated how unlikely a call on callable capital would be, the strong legal foundations on which callable capital subscriptions rest, and the strong shareholder capacity to respond to a call if ever necessary. The report, alongside those by other MDBs, was well received by credit rating agencies.
To achieve the aspiration of building a bigger and better Bank, tapping into the trillions held by global banks, institutional investors, and asset managers is crucial. IFC is developing new platforms that connect investors with borrowers in developing countries and raising more money for development. Selective use of concessional finance is also helping us to offset risk and unlock more private investment.
For example:
IFC¡¯s Managed Co-Lending Portfolio Program, IFC¡¯s syndications platform for institutional investors, has raised more than $16 billion from institutional investors and credit insurers. IFC recently closed a $3.5 billion credit insurance policy with 13 global insurers to support over $7 billion in new IFC lending to financial institutions.
IFC¡¯s One Planet platform is the world¡¯s first portfolio of emerging-market loans aligned with the Paris Agreement. It has raised $2.5 billion to date.
Various Global Debt Funds such as BEST, Avatar, REGIO, and EGO mobilize private investment into emerging markets.