What it means
The EBRD was founded in 1991 and has its headquarters in London. Its shareholders are national governments and international bodies, which provide the capital that allows the bank to lend and invest.
Unlike a commercial bank, its purpose is to promote development and reform, not just to earn a profit. The bank provides loans, equity investments (buying a stake in a company) and guarantees.
It also offers technical advice to help firms improve their governance and management. Much of its work focuses on private companies, banks, energy projects and infrastructure.
A key feature is the idea of additionality. The bank is meant to finance projects that would not get funding from private lenders on the same terms, or to bring in private investors by taking part itself.
When commercial banks are willing to fund a project fully, the bank is expected to step back. The EBRD raises most of its money by issuing bonds in international capital markets.
Because its shareholders are governments and it has a strong credit rating, it can borrow at low cost and pass on some of that advantage to the projects it supports. Its bonds are popular with investors who want high-quality, low-risk holdings.
For a company, working with the bank can bring more than money. Its involvement can improve credibility with other lenders, and it often requires high standards for environmental impact, transparency and corporate governance.
Those conditions can add cost and time, but they also make a business more attractive to future investors and lenders. The bank is one of several multilateral development banks, which also include the World Bank and regional institutions in Asia, Africa and the Americas.
Each has its own mandate and shareholders. A finance professional should check the specific eligibility rules and the countries in which the EBRD operates before assuming support is available.
In practice
Real-world examples.
Example
A mid-sized food processor in a developing market wants to build a new plant costing $30 million. The EBRD provides a $10 million loan, which gives commercial banks the confidence to supply the rest. The company also agrees to publish audited accounts each year, which it had not done before.
Example
A renewable energy developer plans a wind farm. The EBRD takes a minority equity stake and lends part of the cost, while requiring the project to meet strict environmental and reporting standards. The bank's involvement helps the developer attract pension funds as additional investors.
Example
A local bank in an emerging market receives a credit line from the EBRD to lend to small and medium-sized businesses. The bank passes the funds on to local entrepreneurs who struggled to get finance before. The local bank must report each quarter on how many small firms received loans, so that the bank can check that its money is reaching the intended borrowers.
Case study
Seen in the real world.
Danube Grain Cooperative is a fictional farming group that wanted to build modern storage silos. Local banks offered only short-term loans at high rates because the project was large and the co-operative was unproven.
The cooperative approached a development bank like the EBRD, which agreed to provide a 12-year loan for part of the cost. The bank also asked for improvements in financial reporting and environmental practices, and the cooperative's finance team spent six months putting these in place. This included appointing an independent auditor and publishing a simple annual report for members.
In this illustrative case, the better reporting helped the group win a second loan from a commercial bank on cheaper terms. The silos reduced grain losses, and the extra income covered the repayments comfortably. Members also benefited, because the cooperative could now store grain until prices improved instead of selling immediately after harvest.
Watch out
Common mistakes.
- Assuming the EBRD is a charity, when it lends and invests on commercial terms and expects to be repaid.
- Thinking it only operates in Western Europe, when its mission is focused on emerging and transition economies.
- Ignoring the conditions attached to financing, such as governance and environmental requirements.
Questions
People also ask.
Who owns the EBRD?
It is owned by its shareholder countries and international institutions, which provide its capital. No private individual can buy shares in the bank, although anyone can buy its bonds.
Does the EBRD lend to governments?
Its focus is mainly the private sector, although it can also support public-sector projects that meet its mandate. These are usually in areas like energy, transport and municipal services.
How is the EBRD different from the World Bank?
It focuses on promoting market-based economies and private enterprise in particular regions, whereas the World Bank has a global development mandate.
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