Q:

What is a development bank?

A:

Quick Answer

Development banks provide capital to companies and organizations when raising money for ventures is difficult, particularly in countries where investment capital tends to be scarce. National development banks provide an important alternative to companies and projects that find it difficult to raise money to finance an endeavor.

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These financial institutions in a particular country, thus, solve capital market imperfections that would otherwise undermine the development of a new entity or innovation. Development banks serve a particularly important role in developing and third-world countries where lending is more scarce and finding capital to underwrite financial activity is harder. Development banks lend money for the construction of new buildings and public projects as well as to companies that are seeking outside sources to fund a new venture or business initiative.

The injection of capital from these institutions may well help a firm develop a new digital technology or help it expand into a new market opportunity. Development banks have received some criticism from outside observers for helping some companies that have been poorly managed as well as at times being more focused on political patronage efforts rather than seeking opportunities that benefit the larger societies that they serve.

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