International Financial Institutions

INTERNATIONAL FINANCIAL INSTITUTIONS CONCEPTS: 1. ODA (Official Development Assistance) Many developing countries continue to struggle under the grips of extreme poverty. The trends in globalization and economic transition have had both a bright and dark side. Certain countries have been left behind by or out of the entire process, and in others, the gulf between the rich and poor has widened. As a result of this they are in a constant need of funds and other forms of assistance to develop them. The assistance provided for this purpose from one country to another is termed as ODA. Previously it was granted to a country that needed to rebuild itself after the war. ODA came in the form of infusions of aid from the international community, ODA is a vehicle through which countries strive to cultivate a sound international environment and promote ties of goodwill with other countries ODA was instrumental in helping lay essential infrastructure and in other ways set the stage for the economic takeoff of developing countries. ODA can serve as a vital diplomatic tool for to help create a desirable international climate and promote closer ties with other states. The main goals of ODA can be included in following points: •

Providing humanitarian assistance for the purpose of attaining global prosperity and development.

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Tackling Global Issues such as global environmental degradation, the population explosion, the food and energy crises, AIDS and other infectious diseases, to drug abuse, terrorism, crimes against international society, and now financial turmoil.

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Creating a harmonious environment of security in terms of ensuring peace and security for the human race and the world at large,

2. Foreign Aid One of the important methods of financing trade is through aid. Larger trade is possible through larger aid and it is in this context that a study of the mechanics of aid is relevant in international finance. Movement of money from one country to another in the form of aid is referred to as the foreign aid. The donor countries not only look into their own capacity to grant aid but at the recipient country’s capacity to absorb aid. The latter is judged by the efficiency and productivity in the resource allocation in the pattern of planning and investment and in priorities of allocation, the methods of raising resources and the overall performance of the economy. Availability of foreign aid for the purpose of investment would accelerate growth by helping the cooperating factors at home to be fully deployed and by accelerating the rate of investment. This would enable the necessary technical innovation and accelerate the entrepreneurial function. Foreign aid augments domestic economic growth. The pattern of flows under foreign aid does not depend upon pure economic factors nor on pure commercial considerations but more on politicoeconomic factors. The effect of foreign aid on the foreign exchange market is to: •

increase the supply and ease the pressures of demand,

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to facilitate the transfer mechanism in the currency markets and

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to obviate the need for frequent changes in the exchange rates, pending the process of structural adjustment in the domestic economy.

The inflow of foreign aid would however increase the money supply, which may not lead to inflationary pressures so long as funds are efficiently and productively used in the development process. The basic postulate is that foreign aids fills in the gaps make available non-available and complimentary resources and augments the investment process. 3. Multilateral Investment Guarantee Multilateral Investment Guarantee is a non-commercial guarantee (insurance) for investments made in developing countries. Such a guarantee protects investors against the risks of transfer restriction (including convertibility), expropriation, war and civil disturbance and breach of contract. MIG has a joint sponsorship by developed and developing countries and multilateral character. MIG supplements national and private agencies supporting foreign direct investment through their own investment insurance programmes. The MIG encourages foreign investments by providing viable alternatives in investment insurance against non-commercial risks in developing countries thereby creating investment opportunities in those countries. E.g. Investors who would like to invest in a developing country like Africa would surely like to get a cover for their investments and can attain this insurance through a Multilateral Guarantee and thus can invest jointly in such an investment project. 4. Multilateral Aid Multilateral means "many sides". Here organisations that involve many countries, give help. This aid is run by groups such as the World Health Organisation (WHO) and United Nations Educational, Scientific and Cultural Organisation (UNESCO) - both of which are part of the United Nations (UN). Economic aid for development by the developed countries is based on political affinities with the recipient country. Such an aid may be bilateral or multilateral. Multilateral aid is through international financial institutions for use in the import of goods and services from any country. Multilateral aid is usable anywhere and hence its rate of utilization will be high. 5. Bilateral Aid Bilateral means "two sides". This type of aid is from one country to another. An example would be Britain giving money and sending experts to help build a dam in Turkey. Quite often bilateral aid is also tied Aid. This is the most common type of aid. In this type of aid the giving (or donor) country also benefits economically from the aid. This happens, as the receiving country has to buy goods and services from the donor country to get the aid in the first place. In building a dam, for example, the Britain may insist that their companies, experts and equipment are used. Whether the aid is given may depend on the receiving country agreeing to buy e.g. military jets from the donor. Bilateral aid is from one government to the other. Generally bilateral aid constitutes the bulk of the total aid granted to any country. It may be tied or untied. II Descriptive Questions 1. Although the job of reconstruction is over long ago, the development of poor countries is yet to take place.” Discuss in the light of the above comment the role-played by the World Bank.

The World Bank Group is one of the world's largest sources of development assistance. In fiscal year 2001, the institution provided more than US$17 billion in loans to its client countries. The World Bank consists of the IBRD, IDA, IFC, MIGA and the International Centre for Settlement of Investment Disputes (ICSID). It works in more than 100 developing economies with the primary focus of helping the poorest people and the poorest countries. For all its clients the Bank emphasizes the need for: •

Investing in people, particularly through basic health and education Focusing on social development, inclusion, governance, and institution-building as key elements of poverty reduction

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Strengthening the ability of the governments to deliver quality services, efficiently and transparently

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Protecting the environment

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Supporting and encouraging private business development Promoting reforms to create a stable macroeconomic environment, conducive to investment and long-term planning.

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The bank also carries out economic and other reports such as Poverty Assessments, Public expenditure Reviews, Country Economic Memoranda, Social and Structural Reviews, Sector Reports, Knowledge sharing etc.

The Bank has established Advisory Services to provide information and knowledge on numerous facets of the Bank's work, such as environmentally and socially sustainable development, health, nutrition and population, the financial sector, and law and justice. The Advisory Services draw on the work of Thematic Groups, which are organized and coordinated by Bank staff, and focus on specific development topics. Thematic Groups share lessons learned in order to improve the quality of Bank activities. Several groups have prepared toolkits for development practitioners. Topics have included project design; management and monitoring; legal, financial, and procurement requirements; gender; food and nutrition; and resettlement safeguards. Development of Poor Countries The reason why the development of poor countries is yet to take place is the fact that gaps in income with the wealthier countries are still widening, and the worst conditions of privation still affect as many as 1.3 billion people one-fifth the entire global population. About one-third of the world's children suffer symptoms of malnutrition, and about one-half the entire human population has no access to even the most basic medicines. The state of geopolitical flux that has followed in the wake of the Cold War, the world has actually witnessed a proliferation in regional conflicts. By some estimates, at least 26 million people worldwide were displaced by civil war in 1996. Furthermore, in many conflicts, the weaker members of society, particularly women and children, have most frequently been the victims of the carnage, which includes human rights atrocities Poverty and warfare are not the only threats to human dignity and civilization. Humanity faces an array of other formidable problems as well, from global environmental degradation, the population explosion, the food and energy crises, AIDS and other infectious diseases, to drug abuse, terrorism, crimes against international society, and now financial turmoil. In terms of ensuring peace and security for the human race and the world at large, these problems demand a concerted and far-reaching approach by the world community.

For instance, environmental problems of global scale have a serious impact at the ecosystem level, and as such, they pose a major threat to humankind and the rest of the living world. In addition to the issue of industrial waste, the world is also confronted by the urbanization-based deterioration of our living environment, cross-border acid rain, global warming, and the depletion of global forest resources and biodiversity. These pressures now threaten ecosystems and human populations worldwide, developing regions included. In a world that has become increasingly interdependent, no longer can the national interests of any single country be contemplated in isolation from the interests of international society at large. The World Bank has so far worked extensively in the interest of the international society but because of the above-mentioned problems the complete development of poor countries has not been possible. 2. Distinguish between foreign capital and foreign aid. Explain the origin and evolution of IDA.

Foreign Capital

Foreign Aid

1. Foreign capital implies funds that are Movement of money from one country to raised from foreign investors for another in the form of aid for development is investment purposes in development referred to as the foreign aid. projects in a host country. 2. Foreign capital can enter the country in the form of: Foreign aid flows to developing countries in the form of loans, assistance and outright - Direct Investment: means the concerns grants from various governmental and of the investing country exercise de facto international organizations. control over the assets created in the capital importing country by means of that investment. E.g. MNC’ - Indirect Investment: better known as portfolio investment consists mainly of the holding of transferable securities or guaranteed by the govt. of the capital importing country. Such holdings do not amount to right to control the company. E.g. shares, debenture, bonds etc. 3. Foreign capital has nothing to do with social expenditures such as education, Foreign aid is more important than foreign public health, technical training and capital because the financial needs of the research. developing countries cannot be alone met by raising foreign capital.

4. Foreign capital helps reduce shortage of domestic savings through the inflow of capital equipment and raw materials thereby raising the marginal rate of capital formation. -

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Foreign aid facilitates investment in lowyielding and slow projects. Such an aid can be used by the recipient country in accordance with its development programmes. Foreign aid is important for easing of foreign exchange constraint in a country with It overcomes not only capital sluggish export growth and other foreign deficiency but also technological exchange problems. backwardness. - It minimizes inflationary pressures It also helps in industrializing the economy. It also overcomes the balance of payments difficulties. It creates more employment.

5.There are no special schedules or soft terms.

Foreign aid is allocated on long repayment schedules, at lower interest rates and softer repayment terms. Debt servicing becomes a burden if aid is tied or the terms of aid are onerous.

6. It generates money in the economy and Generally repayment of principal and interest helps in minimizing the inflationary exceed the gross external aid with the result pressures. that there is net outflow on this account. Foreign aid leads to dependency amongst the 6.Foreign capital helps in movement of developing countries & is often used for technical know-how and advancements and extremely wasteful projects. proves to be of great dynamism. Trade follows aid: i.e. aids make way for 7. Foreign capital is advanced to the investments in the recipient countries developing countries mainly after resources. observing the opportunities and evaluating the credibility of the recipient country. Origin and Evolution of IDA IDA is the World Banks concessional lending window. It provides long-term loans at zero interest to the poorest of the developing countries. IDA helps build the human capital, policies, institutions and physical infrastructure that these countries urgently need to achieve faster, environmentally sustainable growth. IDA’s goal is to reduce disparities across and within countries especially in access to primary education, basic health and water supply and sanitation and to bring more people into the mainstream by raising their productivity. When the International Bank for Reconstruction and Development (IBRD), better known as the World Bank, was established in 1944, its first tasks was to help Europe recover from the devastation of World War II. Once Europe was rebuilt, the bank turned its attention to the

developing countries. As the 1950’s progressed, it became clear that the poorest developing countries could not afford to borrow needed capital for development on the terms offered by the Bank. They required easier terms. With the US taking the initiative, a group of Bank member countries decided to set up an agency that could lend to very poor developing nations on highly concessional terms. They called the agency the ‘International Development Association’ (IDA). Its founders saw it as a way for the ‘haves’ of the world to help the ‘have-nots’. But they also wanted IDA to be instilled with the discipline of a bank. For this reason, US president Dwight D. Eisenhower proposed, and other countries agreed, that IDA should be part of the World Bank. IDA’s articles of Agreement became effective in 1960. The first IDA loans (known as credits) were approved in 1961, to Honduras, India, Sudan and Chile. Since 1960, IDA has lent $107 billion to 106 countries. It lends, on average about $ 6 to 7 billion a year for different types of development projects. IBRD and IDA are run on the same lines. They share the same staff, the same headquarters, report to the same president and use the same rigorous standards when evaluating projects. IDA simply takes money from a different drawer. A country must be a member of IBRD before it can join IDA; 162 countries are IDA members. IDA lends to countries that have a per capita income in 2000 of less than $885 and lack the financial ability to borrow from IBRD. At present 79 countries are eligible to borrow from IDA. IDA credits have maturities of 35 to 40 years with a 10-year grace period on repayment of principal. There is no interest charge, but credits do carry a small service charge of 0.75 % on disbursed balances. 3. Bring out the need for a multilateral guarantee for investment especially in developing countries and discuss the role played by MIGA. Need for a multilateral guarantee in developing countries is as follows: -

Investors investing in developing countries needed some sort of insurance cover for their monies, hence the need for MIG.

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For augmenting the capacity of other public or private insurers of political risks through co-insurance or re-insurance.

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For insuring investment in countries restricted or excluded by the policies of other national insurers or through specific policies adopted by governments;

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For servicing investors who do not have access to other official political risk insurers;

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For providing coverage to investors of different nationalities in a multinational syndicate, thereby affording convenience in insurance contracting and claims settlement,

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For providing coverage of forms of investment not offered.

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To enhance the flow to developing countries of capital and technology for productive purposes under conditions consistent with their developmental needs, policies and objectives, on the basis of fair and stable standards for the treatment of foreign investment.

Role played by MIGA MIGA is a member of the World Bank Group and membership is open to all World Bank members. The MIGA was created in 1988 to promote foreign direct investment into emerging economies to improve people’s lives and reduce poverty. MIGA fulfills this mandate and contributes to development by offering political risk insurance to investors and lenders, and by helping developing countries attract and retain private investment. MIGA provides investment guarantees against non-commercial risks to eligible foreign investors for qualified investments in developing member countries. MIGA’s coverage is against the following risks, transfer restriction, expropriation, breach of contract, war and civil disturbance. MIGA insures new crossborder investments originating in any MIGa member country, destined for other developing member country. Projects supported by MIGA have widespread benefits: -

Local jobs were created

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Tax revenue was generated

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Skills and technological know-how were transferred.

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Local communities often receive significant secondary benefits through improved infrastructure, including roads, electricity, hospitals, schools and clean water.

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Foreign Direct Investment supported by MIGA also encourages similar local investments and spurs the growth of local businesses that supply related goods and services. As a result, developing countries have a greater chance to break the cycle of poverty.

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Since its inception MIGA has issued more than 500 guarantees for projects in 78 developing countries.

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The total coverage issued exceeds $9 billion, bringing the estimated amount of foreign direct investment facilitated since inception to more than $41 billion.

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MIGA’s technical assistance services also play an integral role in catalyzing foreign direct investment by helping developing countries around the world define and implement strategies to promote investment.

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MIGA develops and deploys tools and technologies to support the spread of information on investment opportunities.

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The agency uses its legal services to further smooth possible impediments to investment. Through its dispute mediation program, MIGA helps government and investors resolve their differences and ultimately improve the country’s investment climate.

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MIGA compliments the activities of other investment insurers and works with partners through its coinsurance and reinsurance programs to expand the capacity of the political risk insurance industry’s income. To date, MIGA has officially established 18 such partnerships.

4. Distinguish between bilateral aid and multilateral aid flows. Why is multilateral aid preferable to bilateral aid? Bilateral Aid Multilateral Aid This type of aid flows from one country to Multilateral aid is through international financial institutions for use in the import of goods and services another. from any country.

It generally results in higher project costs.

Multilateral aid is usable anywhere and hence its rate of utilization will be high.

It constitutes the bulk of the aid taken by Multilateral aid is generally more preferable the developing countries. than the bilateral aid because of the benefits that it offers.

Preference for Multilateral Aid: Multilateral aids are preferred over bilateral aids mainly because of the following reasons: - Since this type of aid is through international financial institutions the host country does not owe to a particular country but to the pool of resources. -

Bilateral aid essentially flows from one country to another and change in policies of the donating country would definitely affect the recipient country.

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Foreign exchange fluctuations would also not be affecting the recipient country.

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The terms of multilateral aids tend to be milder as compared to that of the bilateral aid.

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It safeguards the interest of the donor countries since it is through a common source.

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The project costs become higher when aid is on bilateral basis when the alternative avenues of supplies of goods or services are cheaper and the recipient country has to pay a higher price for the goods imported and for the services rendered from abroad with the result that the debt burden becomes heavier.

POLICIES OF WORLD BANK. What procedures does the World Bank follow? The World Bank has established policies and procedures that help ensure its operations are economically, financially, socially, and environmentally sound. Policies and procedures are codified in the Bank's Operational Manual. They are subject to extensive review while being formulated, and to compliance monitoring once approved Policy Definitions and Documentation Policy Formulation and Review Compliance Monitoring Disclosure of Information

Fiduciary Policies Safeguard Policies Policy Definitions and Documentation The Operational Manual is available online. Volume I deals with the Bank's core development objectives and goals, and the instruments for pursuing them. Volume II covers the requirements applicable to Bank-financed lending operations. The Manual covers several different kinds of operational statements: Operational Policies, Bank Procedures, Good Practices, and Operational Directives. Operational Policies (OPs) are short, focused statements that follow from the Bank's Articles of Agreement, the general conditions and policies approved by the Board of Executive Directors. They establish the parameters for the conduct of operations, describe the circumstances in which exceptions to policy are admissible, and spell out who authorizes exceptions. Bank Procedures (BPs) explain how Bank staff carry out the OPs by describing the procedures and documentation required to ensure Bankwide consistency and quality. Good Practices (GPs) contain advice and guidance on policy implementation such as the history of the issue, the sectoral context, analytical framework, and examples of good practice. Operational Directives (ODs) contain a mixture of policies, procedures, and guidance; these are gradually being replaced by OPs/BPs/GPs. The Operational Policies and Bank Procedures are detailed in the Manual. Operational Directives that are still in effect can also be found in the Manual. Good Practices are maintained and made available by the various Bank units responsible for specific policies. Policy Formulation and Review The Bank's Operations Policy and Country Services Vice Presidency (OPCS) guides policy formulation and review, a process that is managed by the appropriate Network Vice Presidency. Formulation or review of a policy entails bringing together experienced regional and network staff, legal experts, and policy writers. If the policy is complex, the task may take several years, entailing an iterative process of drafting and revising. An initial draft is prepared, often based on sector or thematic strategy work relevant to the policy. The draft statement is then circulated for comments to internal experts, clients, external experts and partners such as NGOs, and the public. Finally, the policy is submitted for comments and approval to responsible units, the Bank's Managing Directors and the Board.

Compliance Monitoring The Bank's credibility rests on effective implementation of its policies. Monitoring compliance with policies is the responsibility of the Operations Poilcy and Country Services Vice Presidency (OPCS). OPCS works to strengthen systems for monitoring compliance. It works in collaboration with the Bank's other vice presidencies, and with other World Bank Group organizations. The Bank has also set up the Inspection Panel, an independent forum for private citizens who believe that their rights or interests have been or could be directly harmed by a Bank-financed project. If people living in a project area believe that harm has resulted or will result from the failure of the Bank to follow its policies and procedures, they or a representative may request a review of the project by the Inspection Panel.

Disclosure of Information The Bank has established its Disclosure Policy to support important goals: to be open about its activities, to explain its work to the widest possible audience, and to promote overall accountability and transparency in the development process. The Bank seeks to provide balanced information, reporting and learning from the failures or disappointments in its operations as well as the successes. Recent extensions of the Disclosure Policy include the release of a greater number of projectrelated documents; disclosure of the Chairman's summaries of Board discussions on Country Assistance Strategies (CASs) and Sector Strategy Papers (SSPs); and a more systematic approach to accessing Bank archives. The Bank continues to review the provisions and implementation of its Disclosure Policy on a regular basis. Fiduciary Policies These policies govern the use and flow of Bank funds, including procurement. The Operations Policy and Country Services Vice Presidency (OPCS) provides guidelines for the procurement of goods and services in Bank projects. The guidelines help ensure that funds are used for their intended purposes, with economy, efficiency, and transparency. They also ensure competitive bidding and help protect Bank-funded projects from fraud and corruption. Bank projects are periodically audited by independent firms to make sure that the procurement rules are being followed. Any allegations of fraud or corruption that surface are referred to the Oversight Committee for follow-up, including investigations where appropriate. If allegations prove true, the Bank may terminate the employment of a staff member, debar firms implicated, and/or cancel the funds allocated to the contract in question. Safeguard Policies These policies help ensure that Bank operations do no harm to people and the environment. There are 10 safeguard policies, comprising the Bank's policy on Environmental Assessment (EA) and those policies that fall within the scope of EA: Cultural Property; Disputed Areas; Forestry; Indigenous Peoples; International Waterways; Involuntary Resettlement; Natural Habitats; Pest Management; and Safety of Dams. The Bank conducts environmental screening of each proposed project, to determine the appropriate extent and type of EA to be undertaken, and whether or not the project may trigger other safeguard policies. The Bank classifies the proposed project into one of four categories (A, B, C, and FI) depending on the type, location, sensitivity, and scale of the project and the nature and magnitude of its potential environmental impacts. MIGA Our Mission The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 as a member of the World Bank Group to promote foreign direct investment into emerging economies to improve people's lives and reduce poverty. MIGA fulfills this mandate and contributes to development by offering political risk insurance (guarantees) to investors and lenders, and by helping developing countries attract and retain private investment.

Our Principles MIGA is led in its mission by four guiding principles: focusing on clients — serving investors, lenders, and host country governments by supporting private enterprise and promoting foreign investment; engaging in partnerships — working with other insurers, government agencies, and international organizations to ensure complementarity of services and approach; promoting developmental impact — striving to improve the lives of people in emerging economies, consistent with the goals of host countries and sound business, environmental, and social principles; ensuring financial soundness — balancing developmental goals and financial objectives through prudent underwriting and sound risk management. Our Members MIGA membership, which currently stands at 154, is open to all World Bank members. The agency has a capital stock of SDR1 billion. In March 1999, MIGA's Council of Governors adopted a resolution for a capital increase of approximately $850 million. The agency received another $150 million in operating capital from the World Bank. Development Impact Projects supported by MIGA have widespread benefits: local jobs are created, tax revenue is generated, skills and technological know-how are transferred. Local communities often receive significant secondary benefits through improved infrastructure, including roads, electricity, hospitals, schools, and clean water. Foreign direct investment supported by MIGA also encourages similar local investments and spurs the growth of local businesses that supply related goods and services. As a result, developing countries have a greater chance to break the cycle of poverty. MIGA's guarantee coverage requires investors to adhere to social and environmental standards that are considered to be the world's best. Without World Bank Group involvement, projects often go ahead without adequate safeguards. Unique Strengths MIGA both supports and draws on the extensive resources of the World Bank Group, applying unparalleled knowledge of emerging economies to the projects it guarantees. MIGA's unique strengths also derive from its structure as an international organization that acts as an umbrella of deterrence against government actions that could disrupt investments, and allows it to influence the resolution of potential disputes. MIGA's capacity to serve as an objective intermediary enhances investor confidence that an investment going into an emerging economy will be protected against non-commercial risks. THE WORLD BANK The World Bank Group is one of the world's largest sources of development assistance. In Fiscal Year 2001, the institution provided than US$17 billion in loans to its client countries. It works in more than 100 developing economies with the primary focus of helping the poorest people and the poorest countries. For all its clients the Bank emphasizes the need for:

OBJECTIVES: 1. Investing in people, particularly through basic health and education 2. Focusing on social development, inclusion governance, and institution-building as key elements of poverty reduction. 3. Strengthening the ability of the governments to deliver quality services, efficiently and transparently 4. Protecting the environment. 5. Supporting and encouraging private business development 6. Promoting reforms to create a stable macroeconomic environment, conducive to investment and long-term planning. Founded in 1944, the World Bank Group is one of the world's largest sources of development assistance. The Bank, which provided US$17. billion in loans to its client countries in fiscal year 2001, is now working in more than 100 developing economies, bringing a mix of finance and ideas to improve living standards and eliminate the worst forms of poverty. For each of its clients, the Bank works with government agencies, nongovernmental organizations, the private sector to formulate assistance strategies. Its country offices worldwide deliver the Bank's program in countries, liaise with government and civil society, and work the increase understanding of development issues. FINANCIAL ASSISTANCE The World Bank raises money for its development programs by tapping the world's capital markets, and, in the case of the IDA,through contributions from wealthier member governments. The International Bank for Reconstruction and Development, which accounts for about more than half of the Bank's annual lending, raises almost all its money in financial markets. One of the world's most prudent and conservatively managed financial institutions,the IBRD sells AAA-rated bonds and other debt securities to pension funds, insurance companies, corporations, other banks, a individuals around the globe. IBRD charges interest to its borrowers at rates which reflect its cost of borrowing. Loans must be repaid in 15 to20 years; there is a three-to-five-year grace period before repayment of principal begins. Less than 5 percent of the IBRD's funds are paid in by countries when they join the Bank. Member governments purchase shares, the number of which is based on their related economic strength, but pay in only a small portion of the value of those shares. The unpaid balance is "on-call" should the Bank suffer losses so grave that it can no longer pay its creditors — something that has never happened. This guarantee capital can only be used to pay bond holders, not to cover administrative cost or to make loans. The IBRD's rules require that loans outstanding and disbursed may not exceed the combined total of capital and reserves. The International Development Association was established in 1960 to provide concessional assistance to countries that are too poor to borrow at commercial rates. IDA helps to promote growth and reduce poverty in the same ways as does the IBRD, but IDA uses interest-free loans (which are known as IDA) "credits", technical assistance, and policy advice. IDA credits account for about one-foot of all Bank lending. Borrowers pay a fee of less than 1 percent of the loan to cover administrative costs. Repayment is required in 35 or 40 years with a 10-year grace period. Nearly 40 countries contribute to IDA's funding,which is replenished every three years. Donor nations include not only industrial member countries such as France, Germany, Japan, the United Kingdom, and the United States, but also developing countries such as Argentina, Botswana,

Brazil, Hungary, Korea, the Russian Federation, and Turkey, some of which were once IDA borrowers themselves. IDA's funding is managed in the same prudent, conservative, and cautious way as is the IBRD's. As with the IBRD, there has never been a default on an IDA credit. Products and Service What services does the World Bank provide? Though known best for its financial services, the World Bank also provides analytic and advisory services and is involved in learning and capacity ,building in developing countries worldwide.  Financial Services  Analytical & Advisory  Learning & Capacity Building Financial Services - include the following three areas: 1. Lending Instruments Depending upon eligibility, a member country will draw on loans from either IBRD or IDA to support a lending project. The Bank offers borrowers a number of lending instruments designed for different kinds of investment and adjustment projects. Most investment projects use Specific Investment Loans (SILs) or Sector Investment and Maintenance Loans (SIMs), while most adjustment projects use Structural Adjustment (SALs) and Sector Adjustment (SECALs) loans. 2. Cofinancing,: The Bank's Resource Mobilization and Cofinancing activities help its members obtain financial assistance from other sources. Cofinancing refers to funding committed by an external official bilateral or multilateral partner, an export credit agency, or a private source in the context of a specific Bank-funded project. Trust funds enable the Bank, along with bilateral and multilateral donors, to mobilize funds for investment operations, as well as debt relief, emergency reconstruction, and technical assistance. Guarantees promote private financing in borrowing countries by covering risks the private sector is not normally ready to absorb or manage. 3. Grants: Grant making complements the Bank's lending services. Grants are seed money for pilot projects with innovative approaches and technologies.Grants help the Bank leverage its financial and human resources, become catalysts for collaboration with partner organizations to promote shared regional and global objectives. The World Bank's Development Grant Facility (DGF) provides overall strategy, allocations, and management of Bank grant-making activities. The DGF has supported programs in such sectors as rural development environment, health, education, economic policy, and private sector development.

Analytic and Advisory Services The Bank undertakes a broad range of analytic and advisory activities to support its development mission. Research by the Development Economics Vice Presidency (DEC) informs the Bank's work on board issues such as the environment, poverty, trade and globalization. Country clients benefit from a tailored program of economic and sector work (ESW) geared to their specific development challenges. ESW examines a country's economic prospects, including, for example, its banking or its financial sectors, and trade, poverty, and social safety net issues. The Bank's diagnostic work is shared with clients and partners, and draws on theirs. The results often form the basis for assistance strategies,government investment programs, and projects supported by IBRD and IDA lending. The Bank has established Advisory Services to provide information and knowledge on numerous facets of the Bank's work, such environmentally and socially sustainable development, health, nutrition and population, the financial sector, and law and justice. The Advisory Services draw on the work of Thematic Groups, which are organized and coordinated by Bank staff, and focus on specific development topics. Thematic Groups share lessons learned in order to improve the quality of Bank activities. Several groups have prepared toolkits for development practitioners. Topics have included project design; management and monitoring; legal, financial, and procurement requirements; gender; food and nutrition; and resettlement safeguards.

Learning & Capacity Building The Bank conducts learning and knowledge sharing programs to enhance the skills and development of its clients, staff, and partners. The lead unit in this area is the World Bank Institute (WBI), whose work includes training courses, policy consultations, partnership with training and research institutions worldwide, and the creation and support of knowledge networks related to international development. Another key initiative is the Staff Exchange Program, which arranges temporary secondment of Bank Group staff and staff of participating companies and organizations. The program enhances the professional and technical skills of participating staff and promotes cultural exchange, fresh perspectives, and diversity forthe institutions involved. IFC The International Finance Corporation (IFC) promotes sustainable private sector investment in developing countries as a way to reduce poverty and improve people's lives. IFC is a member of the World Bank Group and is headquartered in Washington, DC. It shares the primary objective of all World Bank Group institutions: to improve the quality of the lives of people in its developing member countries. IFC Mission Statement. Established in 1956, IFC is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It promotes sustainable private sector development primarily by: The History of IFC The world was a different place 40 years ago. No one spoke of emerging markets. There was no worldwide trend toward privatization, no communications revolution, no globalized economy. World population was less than half of what it is today.

The economies of poor countries were still in very early stages of development, lacking the human resources, physical infrastructure and sound institutions needed to raise incomes and improve living standards. The responsibility for development was almost universally assigned to the public sector. Private sector investment in developing countries was small, and not much thought was given to increasing it. It was into this environment that the International Finance Corporation was born in 1956. For several years officials of the World Bank had been supporting the creation of a new and different entity to complement their own. The World Bank had been founded to finance postWorld War II reconstruction and development projects by lending money to member governments, and had been doing so effectively. Yet in its initial years, some senior staff had seen the need for creating a related institution to spur greater OBJECTIVES OF IFC: • • •

Financing private sector projects located in the developing world. Helping private companies in the developing world mobilize financing in international financial markets. Providing advice and technical assistance to businesses and governments.

IFC Mission Statement The mission of IFC, part of the World Bank Group, is to promote sustainable private sector development in developing countries, helping to reduce poverty and improve people's lives. TYPES OF ASSISTANCE OFFERED: IFC's Products and Services: Ownership and Management IFC has 175 member countries, which collectively determine its policies and approve investments. To join IFC, a country must first be a member of the IBRD. IFC's corporate powers are vested in its Board of Governors , to which member countries appoint representatives. IFC's share capital, which is paid in, is provided by its member countries, and voting is in proportion to the number of shares held. IFC's authorized capital is $2.45 billion. Statement of Capital Stock and Voting Power . The Board of Governors delegates many of its powers to the Board of Directors , which is composed of the Executive Directors of the IBRD, and which represents IFC's member countries. The Board of Directors reviews all projects. Although IFC coordinates its activities in many areas with the other institutions in the World Bank Group, IFC generally operates independently as it is legally and financially autonomous with its own Articles of Agreement, share capital, management and staff. Funding of IFC's Activities IFC's equity and quasi-equity investments are funded out of its net worth: the total of paid in capital and retained earnings. Strong shareholder support and the substantial paid-in capital base have allowed IFC to raise most of the funds for its lending activities in the international financial markets through its triple-A rated bond issues. Of the funding required for its lending operations,

80 percent is borrowed through public bond issues or private placements. The remaining 20 percent is borrowed from the IBRD. Established in 1956, IFC is the largest multilateral source of loan and equity financing for private sector projects in developing countries. It promotes sustainable private sector development primarily by: • • •

Financing private sector projects located in the developing world. Helping private companies in the developing world mobilize financing in international financial markets. Providing advice and technical assistance to businesses and governments.

IFC's particular focus is to promote economic development by encouraging the growth of productive enterprise and efficient capital markets in its member countries. In this context, the advisory work with governments helps create conditions that stimulate the flow of both domestic and foreign private savings and investment. IFC participates in an investment only when it can make a special contribution that complements the role of market operators. Accordingly, it plays a catalytic role, stimulating and mobilizing private investment in the developing world by demonstrating that investments there can be profitable. Project Finance IFC offers a full array of financial products and services to companies in its developing member countries. These include, but are not restricted to: • • • • • •

Long-term loans in major and local currencies, at fixed or variable rates. Equity investments. Quasi-equity instruments (such as subordinated loans, preferred stock, income notes, convertible debt). Syndicated loans. Risk management (such as intermediation of currency and interest rate swaps, provision of hedging facilities). Intermediary finance.

IFC can provide financial instruments singly or in whatever combination necessary to ensure that projects are adequately funded from the outset. It can also help structure financial packages, coordinating financing from foreign and local banks and companies, and export credit agencies. IFC charges market rates for its products and does not accept government guarantees. To be eligible for IFC financing, projects must be profitable for investors, benefit the economy of the host country, and comply with stringent environmental and social guidelines. IFC finances projects in all types of industries and sectors, for example: manufacturing, infrastructure, tourism, health and education, and financial services. Financial service projects represent a significant share of new approvals and range from investments in nascent leasing, insurance and mortgage markets to student loans and credit lines to local banks which, in turn, provide microfinance or business loans to Small and Medium Enterprises. Although IFC is primarily a financier of private sector projects, it may provide finance for a company with some government ownership, provided there is private sector participation and the venture is run on a commercial basis. It can finance companies that are wholly locally owned as well as joint ventures between foreign and local shareholders.

Resource Mobilization Owing to its success record and special standing as a multilateral institution, IFC is able to act as a catalyst for private investment. Its participation in a project enhances investor confidence and attracts other lenders and shareholders. IFC mobilizes financing directly for sound companies in developing countries by syndicating loans with international commercial banks and underwriting investment funds and corporate securities issues. It also handles private placements of securities. IFC operates on commercial terms, targeting profitability. The Corporation has made a profit every year since its inception. Advisory Services IFC advises business in developing countries on a wide variety of matters, including physical and financial restructuring; the formulation of business plans; identification of markets, products, technologies, and financial and technical partners; and mobilization of project finance. It can provide advisory services in the context of an investment, or independently for a fee, in line with market practice. IFC also advises governments in developing countries on how to create an enabling business environment and it provides guidance on attracting foreign direct investment. For example, it helps develop domestic capital markets. It also provides assistance in areas such as restructuring and privatization of state-owned enterprises. ACHEIVEMENTS OF IFC 2000 • •

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Record for new investment approvals in Sub-Saharan Africa (US$1.2 billion). Investment approvals in financial services sector surpass 45%, reaching Small and Medium Enterprises (SMEs), leasing companies, stock markets, microfinance institutions, pension funds etc. Five joint IFC/World Bank departments created to enhance coordination of private investments and public policy advice. Standard & Poor's acquires the Emerging Markets Data Base.

1999 • •

Compliance adviser/Ombudsman appointed to improve accountability to locally affected communities. Increased focus on new IFC sectors such as health and education.

1998 • • • •

Environmental and social policies strengthened, putting leading-edge principles in place. 1997 Regional hubs established in Moscow and New Delhi. "Extending IFC's Reach" initiative launched, targeting countries where difficult environments hamper investments. First investments in Azerbaijan, Tajikistan, Cambodia, Georgia, FYR Macedonia and Mongolia.

1996 • • •

Syndications reach record US$4.8 billion. Membership reaches 170 with the addition of St. Kitts & Nevis and Bosnia-Herzegovina. First investments in Albania, Angola, Croatia, Maldives, Slovak Republic, Vanuatu and Western Samoa.

1995 • •

Capital adequacy framework revised, increasing investment capacity. Information disclosure policy strengthened.

1993 • •

First environmental training for financial intermediaries initiated. Membership exceeds 150 with the addition of the Czech and Slovak Republics.

1992 Infrastructure department created. Environment unit established. Multilateral Fund of the Montreal Protocol and Global Environmental Facility established. • •