List of International financial institutions: 1. International Finance Corporation (IFC) 2. International Development Association (IDA) 3. Asian Development Bank (ADB).
International Finance Corporation (IFC) was established in July 1956 as an affiliate of the World Bank to provide finance to the private sector. The World Bank grants loans to the governments of the member countries or provides loan capital to the private enterprises on the guarantee of the member governments.
Moreover the World Bank does not provide risk capital. The IFC was established with the specific purpose of providing risk capital to the private enterprises in the less developed countries without government guarantee.
Though the IFC is affiliated to the World Bank, but it is a separate legal entity with separate fund and functions. The membership of the Corporation is open only to the members of the World Bank. The organisation of the Corporation is the same as that of the World Bank.
The Board of Governors and the Executive Directors of the World Bank also function as the Board of Governors and the Executive Directors of the IFC. The Corporation started with the initial authorised capital of $ 100 million which has been increased from time to time. The subscription quota of each member is proportionate to its share of subscription to the capital of the World Bank.
The following are the main features of the investment policy of the IFC:
(i) The IFC considers only those enterprises which are predominantly industrial and contribute to economic development of the country.
(ii) The project to be financed by the IFC must be in the private sector and must be productive in nature.
(iii) Before making any investment, the Corporation satisfies itself that the enterprise has experienced and competent management.
(iv) The IFC’s loan will not be more than half of the capital needed for an enterprise.
(v) The minimum investment to be made by the IFC to a single enterprise is fixed at $100,000- no upper limit is fixed.
(vi) The rate of interest for the IFC loan is determined by mutual negotiation, depending upon the degree of risk involved and other terms of investment.
(vii) The IFC’s loans are disbursed in lump-sum or in installments and are repayable in a period of 5 to 15 years.
To start with, the IFC has been very slow in making investment. Moreover, its lending operations were concentrated mainly in Latin and Central American countries. But, later on, the IFC extended its operations to other areas, particularly to Asian and African countries. The important industries financed by the IFC are iron and steel, mining, fertilisers, paper, cement, textiles, chemicals, etc.
The main drawbacks of the working of IFC are- (a) insufficient resources; (b) high interest rates; (c) rigid terms and conditions of loans; (d) repayment of loans in U. S. dollars; (e) bias towards Latin American countries; etc.
But, in spite of these defects, the IFC has played a significant role in promoting economic development by stimulating the international flow of private capital from the developed to the less developed countries and, in future, is expected to expand its dynamic role in the progress of the backward nations.
The International Development Association (IDA) was established in 1960 as an affiliate to the World Bank. As matter of policy, the World Bank’s finance is conditional and inadequately meets the credit requirements of the underdeveloped countries. Its loans are for specific development purposes; bear relatively high rate of interest (5 to 7%); and are for relatively short period (5 to 20 years).
There are many projects (such as irrigation, railway construction, education, public health, housing, etc.) in the underdeveloped countries which are vital to general economic development, which have longer gestation period and which do not yield sufficient returns to meet the amortisation charges.
As per rates of the World Bank, loans cannot be given for such general development projects. The IDA was started to supplement the World Bank’s development assistance and to make available loans to the developing countries on softer terms and for longer periods. Thus, the IDA has been aptly regarded as the ‘Soft Loans Window’ of the World Bank.
The main objectives of the IDA are as follows:
(i) To provide development finance to the less developed countries on easy and flexible terms.
(ii) To promote economic development, increase productivity, and thus, raise the standard of living in the less developed countries.
(iii) To supplement the objectives and activities of the World Bank.
The membership of the IDA is open to all the members of the World Bank. The members of the IDA are divided into two parts. Part I countries are developed countries which are required to pay their subscription in gold or freely convertible currencies.
Part II countries are less developed countries which are required to pay only 10% of their subscription in gold or freely convertible currencies and the remaining 90% is payable in their domestic currencies. India falls in Part II.
The initial capital of the IDA was $ 1000 million which has been raised from time to time. Although, legally and financially, IDA is a distinct entity from the World Bank, but administratively it is managed by the same staff.
The IDA loans are different from the convential loans.
The following are the distinctive features of the financing policy of the IDA:
(i) The IDA grants loans for projects whether they are directly productive or not.
(ii) The IDA loans are interest free; only a nominal annual rate of 3.4% on the amounts withdrawn and outstanding is charged to meet the administrative expenses.
(iii) The IDA loans are for long periods, i.e., for 50 years.
(iv) There is a 10 years of grace and no amount is repayable during this period of grace. After this only 1 % of the principal is to be repaid annually for 10 years and 3% annually for the remaining 30 years.
(v) IDA loans are generally repayable in foreign exchange.
(vi) IDA loans are granted to the government of the country concerned.
The functions and progress of the IDA has been discussed below:
I. General Progress:
The IDA is a symbol of multilateral cooperation and worldwide commitment to development. Since its inception, it has made a great contribution to economic development by granting soft loans to the less developed countries. Most of its assistance has gone to the building up of infra-structure of the developing countries. By June 1988, the IDA had granted loans worth 47766 million dollars.
General progress of the IDA over the years is shown in Table-4:
Table-4 shows that the number of member countries has increased from 121 in 1980 to 137 in 1988. The number of operations approved has, however, fallen from 103 in 1980 to 99 in 1988. The usable resources have increased cumulatively from 20773 million in 1980 to 48665 million dollars in 1988, the credits approved have gone up from 3838 million dollars in 1980 to 4459 million dollars in 1988 and disbursements have risen from 1411 million dollars in 1980 to 3397 million dollars in 1988.
II. Lending Operations:
Cumulatively, the IDA had granted loans worth 47766 million dollars upto June 30, 1988. Table-4 shows cumulative lending operations of the IDA by different purposes. Table-4 indicates that out of the cumulative lending of 47766 million dollars by IDA upto June 1988, about 37% was for agricultural and rural development, 13% for transportation, 11% for energy, 8% for urban development and water supply and sewerage and 7% for education.
III. Assistance to the Poorest Countries:
The IDA gives special attention to the poorest countries whose per capita income was less than $ 425. This assistance to these countries has increased from an annual average of 3459.4 million dollars during 1979-83 to 4130.3 million dollars in 1988.
Assistance to India:
India has been the largest beneficiary of IDA loans. Upto June 1988, India has received 176 IDA credits amounting to $ 15.2 billion. In 1980-81, India received IDA loans worth Rs. 522 crores, which rose to Rs. 1198 cores in 1985-86 and Rs. 3407 crores in 1992-93. In 1993-94, IDA’s lending to India was Rs. 2083 crore.
The IDA’s assistance to India has been for financing the projects like construction of national highway, river valley projects, sinking tubewells, rural electrification, water supply and sewerage, railways, telecommunications, fertiliser industry, etc.
In the end, we may conclude with the World Bank’s remarks in its publication ‘IDA in Retrospect’- “While substantial progress has been made, the poorest countries of the world remain in desperate need of fresh assistance. The IDA now stands in front line of the struggle against poverty. It continues to need the support of both traditional and new donors.”
Asian Development Bank (ADB) is a regional financial institution which was established under the auspices of a United Nations body, i.e., Economic Commission for Asia and Far East (ECAFE) for promoting economic development and cooperation in the Asian region. The Bank started functioning in 1966 and has the head office at Manila in the Philippines.
The main objectives of ADB, as laid down in its Charter, are “to foster economic growth and cooperation in the region of Asia and Far East, and to contribute to the acceleration of the process of economic development of the developing members in the region, collectively and individually.”
The Bank aims at achieving this broad objective through the following functions:
(i) Mobilisation and promotion of investment of private and public capital for productive purposes.
(ii) Utilisation of its resources for financing those development projects which contribute most to the harmonious economic growth of the region as a whole, with special emphasis on the needs of the smaller or less developed members.
(iii) Coordination of plans and policies of the member countries with a view to achieving better utilisation of their resources, making them economically more complementary, and expanding their foreign trade.
(iv) Provision of technical assistance to the member countries for the preparation, financing and execution of development projects.
(v) Cooperation with the United Nations and its various organs and other international organisations with the objective of persuading them to make investments in this region.
(vi) Undertaking of such other activities which may help to achieve its main objectives.
The membership of the ADB is open to:
(i) Members of ESCAP;
(ii) Associate members of ESCAP; and
(iii) Other countries in the ESCAP region which are members of the United Nations or any of its specialised agencies.
The Bank has a board of Governors, a Board of Directors, a President, a Vice President, and the other staff. The Board of Governors is the highest policy-making body of the bank. Each member country nominates a Governor and an alternate Governor who attends the meetings of the Board in the absence of the Governor. All the powers of the Bank are vested in the Board of Governors which may delegate some of these powers to the Board of Directors.
The Board of Governors elects a Board of Directors. Originally the Board of Directors had ten members; 7 from regional countries and 3 from non- regional countries. Subsequently, the number has been increased to 12. The Board of Governors is responsible for the general conduct of the day-to-day business of the Bank.
The President of the Bank, who is elected by the Board of Directors is the chairman of the Board of Directors. He is elected for a period of five years. President is assisted by the Vice President in the management of the Bank.
Initially, the ADB started with an authorised capital of $1000 million, of which $965 million were subscribe for. The authorised capital can be increased by the Board of Governors if two-third of the members vote for this increase. One half of the subscribed capital is to be paid up and the balance 50% is callable capital. Of the paid up capital, 50% has to be in gold and convertible currencies.
The Bank has two types of resources:
(i) Ordinary Capital Resources:
These consist of subscribed capital, borrowed funds, funds received by repayment of loans, income derived from loans and guarantees.
(ii) Special Fund Resources:
These consist of contributions from time to time by members under special agreement, income from special fund loans and investments, contributions from ordinary resources as approved by Governors of ADB, etc.
The lending operations of the ADB may be classified into two categories:
I. Ordinary operations, and
II. Special operations.
I. Ordinary Operations:
Ordinary operations refer to those lending activities which are financed out of ordinary capital resources of the Bank. The loans under this category are provide in two forms- (a) in the form of foreign currencies, and (b) in the form of national currency of the borrower. The Bank also lends funds to the central bank of a member country, which then re-lends them to the specific institutions for the specific projects.
II. Special Operations:
Special operations refer to those lending activities which are financed out of the special funds of the Bank, such as, multi-purpose special funds, the Asian development fond, agricultural special fond, technical assistance special fond, etc. The loans provided out of the special funds are on liberal terms; they carry low interest rates and are for longer duration.
ADB is an excellent example of mutual cooperation among the countries of Asia to assist their own economic development. The Bank provides loans for the projects in the areas of agriculture, industry, transport, communication, power generation, water supply, education, etc.
By the end of 1985, the Bank had granted 704 loans, with the total amount of $ 17490 million. The purpose wise distribution of ADB loans during 1967-1985 are shown in Table 6.
India has been one of the founder members of the ADB and is the second largest subscriber, first being Japan. Until 1986, India, though eligible, had voluntarily refrained from borrowings from the Bank. But the stagnation in the capital flows from other sources made such borrowing necessary. The assistance from ADB, which commenced in 1986-87 with Rs. 193 crores, has increased sharply to Rs. 801 cores in 1990-91, and Rs. 833 crores in 1995-96.
ADB has attempted a self-appraisal through ‘A Study of Bank’s Operational Priorities and Plans for the 1980s’ by experts and different countries.
The main recommendations made by study are given below:
(i) Maximum amount of Bank’s concessional assistance should be directed to the poorest countries.
(ii) High income developing Member Countries (DMCs) should be encouraged to cooperate more actively in helping the poorest countries of the region.
(iii) The Bank should develop a more close partnership with its DMCs and donors.
(iv) The Bank’s loan policy should be changed. Loans should be extended to support the development strategy of a member country.
(v) The Bank should increase its local cost financing and programme sector lending activities.
(vi) The Bank should also provide more technical assistance in promoting the institutional development of executing agencies of DMCS.
(viii) The Bank should promote the use and development of domestic consultants to reduce dependence of DMCs on outside expertise.
(ix) In order to increase the flow of official and private resources to the DMCs, the Bank should support such measures as increased co-financing with commercial and export credit sources; equity financing operations; partial guarantees, unguaranteed loans; technical assistance in support of private initiatives.
(x) The Bank should explore opportunities to actively support and coordinate with other regional groups and research institutes. It should build and participate in a variety of inter-locking information, research, analytical and training networks.
(xi) All these measures would be effective only if they are adopted as a whole and not implemented in a piece-meal fashion.