In the wake of the global financial crisis, there is growing consensus that national development banks play a valuable role in development finance. This chapter looks first at the theoretical background justifying the need for development banks. The chapter then describes empirically some of the key features of national development banks, including their lending and funding structure. Finally, it analyses in depth five main functions which national development banks perform: (i) providing countercyclical lending; (ii) promoting innovation and structural transformation; (iii) enhancing financial inclusion; (iv) supporting infrastructure investment; and (v) supporting the provision of public goods, and particularly combatting climate change.
There are two areas where national development banks (NDBs) play crucial roles. The first relates to their contribution to economic, social, and green development. This includes their direct contribution to supporting innovative sectors with long‐term funding. We highlight the role of NDBs linked to structural change. The support of innovation with long‐term financing is complementary to other functions of these institutions, including supporting the provision of public goods, particularly through investments that help combat climate change, and financial inclusion. NDBs should not supplant private financing but complement it and leverage additional private funds. The second major contribution of NDBs relates to their role in helping avoid risks associated with boom‐bust cycles in domestic private financing. NDBs should also be active in the provision of countercyclical financing, especially during and after financial crises, when private finance grows less.
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