Does IDA Engage in Defensive Lending?

Abstract

Multilateral development banks are sometimes thought to engage in "defensive lending" -- the practice of extending new loans purely in order to ensure that existing loans are repaid. We empirically examine this hypothesis using data on lending extended by and repayments to the International Development Association (IDA), which is the largest multilateral provider of concessional development loans to low-income countries. We argue that key institutional features of IDA both (i) potentially create incentives for defensive lending and also (ii) enable particularly sharp tests of the defensive lending hypothesis. We find that there is a surprisingly robust partial correlation between disbursements on new IDA loans and repayments on existing loans. However, a closer look at the evidence suggests that defensive lending is unlikely to be a major explanation for this relationship.