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.
• 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.
• 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 politico-economic factors.

The effect of foreign aid on the foreign exchange market is to:

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 • increase the supply and ease the pressures of demand,
• to facilitate the transfer mechanism in the currency markets and
• 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

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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
• Strengthening the ability of the governments to deliver quality services, efficiently and
transparently
• Protecting the environment
• Supporting and encouraging private business development Promoting
reforms to create a stable macroeconomic environment, conducive to
investment and long-term planning.
• 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.

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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 raised Movement of money from one country to
from foreign investors for investment purposes another in the form of aid for development is
in development projects in a host country. referred to as the foreign aid.

2. Foreign capital can enter the country in the Foreign aid flows to developing countries in
form of: the form of loans, assistance and outright grants
from various governmental and international
- Direct Investment: means the concerns organizations.
of the investing country exercise de
facto control over the assets created in
the capital importing country by means
of that investment. E.g. MNC’s

- 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 Foreign aid is more important than foreign
expenditures such as education, public health, capital because the financial needs of the
technical training and 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.
- It overcomes not only capital
deficiency but also technological
backwardness.
- It also helps in industrializing the
economy.
- It creates more employment.
Foreign aid facilitates investment in low-
yielding 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 sluggish export
growth and other foreign exchange problems.
- It minimizes inflationary pressures
- It also overcomes the balance of
payments difficulties.

5.There are no special repayment schedules or Foreign aid is allocated on long repayment
soft terms. schedules, at lower interest rates and softer
terms. Debt servicing becomes a burden if aid
is tied or the terms of aid are onerous.

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6. It generates money in the economy and helps Generally repayment of principal and interest
in minimizing the inflationary pressures. exceed the gross external aid with the result
that there is net outflow on this account.

6.Foreign capital helps in movement of Foreign aid leads to dependency amongst the
technical know-how and advancements and developing countries & is often used for
proves to be of great dynamism. extremely wasteful projects.

7. Foreign capital is advanced to the Trade follows aid: i.e. aids make way for
developing countries mainly after observing the investments in the recipient countries
opportunities and evaluating the credibility of resources.
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.

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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.
- For augmenting the capacity of other public or private insurers of political risks through co-
insurance or re-insurance.
- For insuring investment in countries restricted or excluded by the policies of other national
insurers or through specific policies adopted by governments;
- For servicing investors who do not have access to other official political risk insurers;
- For providing coverage to investors of different nationalities in a multinational syndicate, thereby
affording convenience in insurance contracting and claims settlement,
- For providing coverage of forms of investment not offered.
- 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 cross-border investments originating in any MIGa member country, destined for other
developing member country. Projects supported by MIGA have widespread benefits:

- Local jobs were created

- Tax revenue was generated
- Skills and technological know-how were 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.
- Since its inception MIGA has issued more than 500 guarantees for projects in 78 developing
countries.
- The total coverage issued exceeds $9 billion, bringing the estimated amount of foreign direct
investment facilitated since inception to more than $41 billion.
- 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.
- MIGA develops and deploys tools and technologies to support the spread of information on
investment opportunities.
- 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.
- 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.

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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
another. financial institutions for use in the import of
goods and services 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 the Multilateral aid is generally more preferable
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.
- Foreign exchange fluctuations would also not be affecting the recipient country.
- The terms of multilateral aids tend to be milder as compared to that of the bilateral aid.
- It safeguards the interest of the donor countries since it is through a common source.
- 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-

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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 project-related
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

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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

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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.

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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.

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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.

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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 post-World 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:

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 • 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.

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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

• 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.

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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.

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