The World Bank has been pivotal in using its convening power to integrate standards for emerging markets’ payment systems into the global financial architecture. The Bank Group, especially IFC, has also played a leading role in stimulating housing finance markets in a handful of countries, notably Colombia and Russia.

In September last year, world leaders committed to the sustainable development goals (SDGs) – a new ambitious agenda that seeks to end poverty, protect the planet and ensure peace and prosperity for all by 2030. To meet these ambitious goals, countries around the world will need to mobilize trillions of dollars in new investments at a time when global growth is slowing and overseas development assistance is declining. Many experts have pointed to the need for increasing domestic resource mobilization and tapping the capital markets, as part of the solution.

Are capital markets the answer?

A new report by the Independent Evaluation Group examines the World Bank Group’s role in supporting capital market development in its client countries. The report assesses the extent to which the Bank Group has been relevant, effective and efficient in supporting client countries to develop functioning domestic capital markets. It looked at 1,071 Bank Group interventions in 64 countries, spanning a ten year period, from FY2004 to FY2014.

What insights can we draw from the World Bank Group’s own experience in supporting capital markets in developing countries?

The World Bank Group has invested significantly in supporting capital market development in its client countries across a spectrum of supporting activities, including policy advice to governments and regulators. Through the Global Emerging Markets Local Currency Bond and the Efficient Securities Markets Institutional Development program, the Bank Group has provided direct support for bond market development by promoting corporate bond issuance, and fostering a deep and liquid sovereign bond market that establishes a reference yield curve for corporate issuers. Through its private sector arm, the International Finance Corporation, the Bank Group has also issued local currency bonds in a number of countries.

IEG’s evaluation finds that many of the Bank Group’s interventions contributed positively to the goal of strengthening capital market operations in its client countries. In Vietnam, for example, the Bank Group’s support contributed to a significant increase in the volume of corporate bond issues. Bonds with 5-9 year maturities rose from almost zero and peaked at $2.7 billion in 2011, stabilizing at $1.4 billion by the end of 2013. In India, IFC’s successful Rupee bond issuance program, especially its offshore ‘masala bonds’ raised over $3 billion (see evaluation) and influenced the country’s decision to permit domestic Indian entities to access offshore financing through their own bond issues.

IEG also found that the World Bank has been pivotal in using its convening power to integrate standards for emerging markets’ payment systems into the global financial architecture. The Bank Group, especially IFC, has also played a leading role in stimulating housing finance markets in a handful of countries, notably Colombia and Russia. For more on the Bank Group’s work in promoting housing finance, read our earlier blog.

The impact of these interventions was, however, somewhat undermined by the Bank Group’s piece-meal approach. IEG found that in many cases, an integrated approach across different Bank Group units and interventions and stronger coordination with client countries and other development partners were either missing or weak. In countries like Colombia, where such integration was more evident, there were stronger overall outcomes.

Opportunities to further scale impact

Although the Bank Group has amassed vast experience helping client countries develop their capital markets, IEG’s evaluation found that this experience is not sufficiently curated. This significantly undermines the potential for knowledge sharing and learning within the Bank Group and externally with client countries. Investing in strengthening knowledge management across the Bank Group’s capital market development operations is therefore a critical area for attention. 

IEG’s report also points to the need for more stable sources of funding to ensure sustainable capital market development efforts in client countries. The report notes that much of the Bank Group’s work supporting capital market development has largely been financed through trust-funds – which are vulnerable to shifting donor priorities. To ensure long-term sustainability, it is important to commit stable funding to both support global capacity investments and local client country programs. This is key for building the necessary financial system efficiency, stability, and risk management required for a well-functioning capital market.

To enhance capital mobilization, IEG suggests that the Bank Group and its client countries could consider enhancing the guarantees program. Such guarantees can help developing countries tap bond markets for better terms than they would otherwise receive without the guarantees. The Bank Group has done this successfully in Jordan, Colombia and Argentina, for example. IEG, however, noted a noticeable decline in the use of guarantees over the review period, perhaps reflecting the more challenging operating environment following the financial crisis. IEG’s report paves the way for the ongoing Bankwide review of its guarantee instruments.

Read the full report: The World Bank Group's Support to Capital Market Development

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