WILLIAM GUMEDE: Brics bank needs to rethink its lending model and governance structure

The Brics New Development Bank (NDB), with a new mission, new members and under new leadership, is facing a number of hurdles to establish itself as a development bank for developing countries, rather than just a bank for the Brics+ bloc.

The Shanghai-based NDB was established in 2015 by the Brics nations — Brazil, Russia, India, China and SA — to challenge Western-dominated global financial institutions, such as the World Bank and IMF, for excluding them in shareholding, decision-making, representation voting and ideas. 

Former Brazilian president Dilma Rousseff was appointed president of the bank in March to provide fresh leadership to the organisation. She has stated that the bank’s ambition is to forge what she calls “a bank made by developing countries for themselves”.

However, its ambitions have been short-circuited by Western sanctions against Russia, imposed because of its invasion of Ukraine. The sanctions have slowed the bank’s lending, and its ability to expand more rapidly and secure more diversified funding. The bank suspended all its activities in Russia, fearing Western sanctions, after it couldn’t issue a $1.06bn Russian bond after setting up a rouble programme in 2019. 

The NDB is heavily dependent on US capital markets, with about 70% of its capital in dollars. Sanctions against Russia have increased the bank’s borrowing costs. A five-year $1.5bn bond issued by the bank in 2021 had a 1.125% coupon; two years later it had a 5.125% coupon, more expensive than other development banks. 

The increased costs of the bank’s lending resulted in reduced new lending. The bank lent out only $1bn in loans in 2022. CFO, Leslie Maasdorp said that because “of the capital market challenges of 2022, and in an endeavour to preserve the bank’s core financial ratios, there was indeed a slowdown”. 

Own currencies

The Russia-Ukraine war has propelled the Brics countries to push the bank to play a central role in its strategy to “dedollarise” global markets by increasing its lending in local currencies, reducing its reliance on the dollar as the dominant currency of transactions and reducing the risk of foreign exchange fluctuations. 

Now only 22% of the bank’s transactions are in local currencies, which it wants to increase to 30% by 2026. The idea is that Brics members should be able to use their own currencies to finance projects or do trade in other member countries. However, most developing countries use the dollar to trade, borrow and price the commodities they produce.

Many Brics members also have dollar-denominated debt, which has increasingly become expensive to service as the US central bank often raises interest rates to counter downturns in its domestic economy. This, in turn, destabilises the economies of developing countries.

As part of this new strategy to dedollarise, the NDB will soon start lending in the SA, Brazilian and Indian currencies — either through currency swaps or debt issuing. The bank is planning to register to issue $2.5bn in bonds in Indian rupees over five years. 

It issued its first SA debt sale in 2023 when it sold R1.5bn in bonds, which will be used to fund development, infrastructure and industrialisation initiatives. The NDB also plans to fund SA’s ailing state-owned entities, but says it will provide funding to private companies too.   

Most of the bank’s funding has been from the Chinese market. In May it raised 8.5-billion yuan ($1.2bn) through a so-called panda bond, with the proceeds being invested as part of the bank’s liquid assets. The Bank of China was the lead underwriter of the bond.

Guarantee loans

The NDB’s model is also under pressure. It aims to lend without attaching political conditions — such as good governance, structural adjustment or using the staff or businesses of the lender as part of its loans — to distinguish itself from the World Bank, IMF and Western lenders. But while the bank says it will not demand political conditions for its loans, the challenge will be applying financially responsible conditions to ensure its grants are prudently used and to extract remedies when lending is abused.

Its other challenge is how to ensure the commercial sustainability of projects, particularly since it sources large amounts of its funding from the markets. The one condition the bank requires for its loans is that governments must guarantee the loans they give to domestic state development projects. 

It is moot whether the NDB will be more robust than traditional Western lenders in its respect for the environment, dignity of communities, good governance and human rights in its development projects. It is crucial that civil society organisations, the media and human rights activists in the developing world hold the bank accountable.

In terms of geographic representation, it compares poorly with other development banks. Bringing in new members is critical to diversify its project portfolio, to mobilise capital and to dedollarise. The entry in January 2024 of six new Brics members — Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates — will not only boost the bank’s geographic representation but may bring much-needed fresh capital and projects. 

Voting power

The strength of the dollar is partially based on the currency underpinning oil trade: the petrodollar. Russia is the only current Brics member that is a large oil producer. If the new petrodollar Brics members trade using their own currencies within Brics, it could substantially accelerate the dedollarisation of the world. 

The NDB’s governance structure needs a rethink. It now provides that the five founding members — which jointly hold the majority share of 55%, with each member having an equal vote — will retain the majority voting power and the senior board and executive positions. The agreement stipulates that the bank leadership will be rotated among the shareholders.

Though the bank tries to make decisions based on consensus, there are fears that the founding members will dominate decision-making, similarly to how the US or Europe dominate the World Bank or IMF. The bank will have to find ways to include new members in decision-making, voting and representation. 

The question is also whether the NDB can maintain institutional independence from its shareholders. Many emergent countries’ development banks have failed because decisions to lend are often based on political motivations rather than for purely growth reasons — leading to unsustainable, poor-quality and low development impact projects.

• Gumede is an associate professor at the School of Governance, University of the Witwatersrand, and author of ‘SA in Brics’. This is an edited extract from his paper, ‘Remodelling the Brics New Development Bank’ published by the Inclusive Society Institute.