International Finance Corporation Essay Example
International Finance Corporation Essay Example

International Finance Corporation Essay Example

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  • Pages: 14 (3707 words)
  • Published: April 23, 2017
  • Type: Case Study
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Introduction

The International Finance Corporation (IFC) is a branch of the World Bank Group that was established in 1956 to decrease poverty and enhance lives through promoting sustainable private sector investment in developing nations. Based in Washington, DC, the IFC shares the same objective as other institutions within the World Bank Group, which is to improve living conditions in member countries. Acting as the primary source of funding for private sector initiatives in developing areas, the IFC offers financial assistance to projects and companies situated there to foster sustainable development.

IFC supports private companies in developing countries by helping them access financing from global financial markets. They also offer guidance and technical assistance to businesses and governments, aiming to promote sustainable economic development through the private sector. To accomplish this goal, IFC invests in companies and financial institutions in emerging markets while actively seeking innovative solutions

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for development challenges.

IFC's primary focus is on countries in dire need of investment, recognizing that making a positive impact on development is crucial for successful business operations. IFC acknowledges the significance of responsible environmental and social practices in achieving sustainable economic growth and aims to enhance the quality of life in developing nations.

Ownership and Management of IFC: 182 Member Countries


Membership Requirements:

  • Being a member of the World Bank (IBRD) is necessary.
  • Signing IFC's Articles of Agreement is mandatory.
  • Submitting an Instrument of Acceptance for IFC's Articles of Agreement to the Corporate Secretariat of the World Bank Group is required.

These member countries collectively determine IFC's policies and approve investments. The Board of Governors, composed of representatives appointed by member countries, holds corporate powers within IFC. Member countries contribute t

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IFC's share capital, with voting rights based on their share ownership. Over time, IFC has accumulated authorized capital amounting to $2.
+

The International Finance Corporation (IFC) had a net worth of $9.8 billion as of June 2005, incorporating authorized capital and retained earnings. The Board of Governors delegates its powers to the Board of Directors, consisting of Executive Directors from the International Bank for Reconstruction and Development (IBRD), who represent member countries of the IFC. The Board of Directors holds the responsibility to assess all projects. Furthermore, the President of the World Bank Group concurrently serves as the President of IFC.

The CEO and Executive Vice President of IFC are responsible for managing the day-to-day operations. Although IFC collaborates with other institutions in the World Bank Group, it operates independently with its own legal and financial autonomy. It also has its own Articles of Agreement, share capital, management, and staff. The Board of Governors and Board of Directors provide guidance for IFC's programs and activities. These boards are appointed by member countries, with each country appointing one governor and one alternate. The corporate powers of IFC are held by the Board of Governors, which delegates most powers to a board consisting of 24 directors. Voting power on presented matters is determined by the share capital represented by each director.

The directors meet at World Bank Group headquarters in Washington, DC to review and decide on investment projects and offer strategic guidance to IFC management. They also serve on standing committees that examine policies and procedures in detail to help the Board fulfill its oversight responsibilities. The Audit Committee provides advice on financial and risk management, corporate governance, and

oversight matters. The Budget Committee discusses business processes, administrative policies, standards, and budget issues that greatly affect the cost-effectiveness of Bank Group operations.

The Committee on Development Effectiveness is responsible for overseeing progress on poverty reduction by focusing on operations, policy evaluation, and development effectiveness. The Personnel Committee provides advice on significant personnel policies, including compensation. Additionally, directors also serve on the Committee on Governance and Executive Directors' Administrative Matters. IFC has a staff of over 3,400 individuals, with 51% working in field offices and 49% at headquarters in Washington, D.C.

C.

Objectives Ifc’s

  • Purpose is to create opportunity for people to escape poverty and improve their lives by
  • Promoting open and competitive markets in developing countries
  • Supporting companies and other private sector partners where there is a gap
  • Helping to generate productive jobs and deliver essential services to the Underserved.

In order to achieve its Purpose, IFC offers development impact solutions through: firm-level interventions (direct investments and advisory services); standard- setting; and business enabling environment work. IFC, as the private sector arm of the World Bank Group, shares its mission to fight poverty with passion and professionalism for lasting results. To help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors.

Funds of Ifc

The IFC's equity and quasi-equity investments are funded out of its paid-in capital and retained earnings (which comprise its net worth). Strong shareholder support, triple-A ratings, and a substantial capital base allow the IFC

to raise funds on favorable terms in international capital markets.

As of June 30, 2006, retained earnings accounted for approximately 75% of the IFC's net worth of $9.8 billion.

Strategic Focus of IFC

The primary strategic focus of the IFC is (A). The Frontier Strategy involves investments and services aimed at making a significant impact. They concentrate their efforts in sectors and countries that the private sector is hesitant or incapable of entering independently, whether due to unfavorable economic conditions or lack of proven business success.

IFC serves as a catalyst for other project sponsors, like commercial banks, to invest in developing countries. The organization primarily concentrates on sectors that have a significant impact on the economies of these countries, benefiting many individuals and other parts of the economy. These priority sectors encompass the financial sector, health and education, infrastructure, information and communication technologies (ICT), and small and medium enterprises (SMEs). In fact, these sectors constitute around 70 percent of IFC's operations. In addition to investments, IFC also offers technical assistance and advisory services to enhance businesses and promote private sector development.

Key capacity-building initiatives offered by IFC include training and advisory services for small and medium enterprises, investments in small business, and development facilities that cater to specific regions or sustainability-related issues. Through its Sustainability Initiative, IFC ensures that economic growth is centered around environmental and social benefits. As a part of the World Bank Group, IFC is dedicated to reducing poverty and making tangible progress towards the Millennium Development Goals set by the international community for completion by 2015.

Financial Products and Advisory Services by IFC

IFC continuously works on creating new financial tools

that help companies mitigate risk and expand their access to both foreign and domestic capital markets.

Our financial products include: Financial Services following are the financial services offered by IFC. Loans for IFC's Account: IFC offers fixed and variable rate loans for its own account to private sector projects in developing countries. These loans for IFC's own account are called A-loans. Most A-loans are issued in leading currencies, but local currency loans can also be provided. The loans typically have maturities of 7 to 12 years at origination. Grace periods and repayment schedules are determined on a case-by-case basis in accordance with the borrower's cash flow needs.

Our range of financial products includes: Financial Services which consist of various options provided by IFC. One such option is the provision of fixed and variable rate loans known as A-loans, exclusively available to private sector projects in developing nations under IFC's own account. While most A-loans are issued in major currencies, it is possible to obtain local currency loans as well. These loans usually have durations ranging from 7 to 12 years upon initiation, with grace periods and repayment schedules tailored according to each borrower's specific cash flow requirements.

IFC offers extended loans and grace periods, if necessary for the project. Some loans can be extended for a duration of up to 20 years. IFC takes a commercial approach and solely invests in projects that generate profit. It applies market rates for its products and services.

The International Finance Corporation (IFC) offers loans to both new companies and expanding projects in developing countries. They also provide loans to banks, leasing companies, and other financial institutions for further lending purposes. These credit

lines mainly target small and medium enterprises or specific sectors. A-loans are usually limited to 25% of the total projected costs for new projects or 35% for small projects in order to involve other private investors. However, when it comes to expansion projects, IFC may finance up to 50% of the project cost as long as their investment remains below 25% of the total capitalization of the project company.

Generally, A-loans range from $1 million to $100 million and are repaid solely from the project's cash flow. There is no obligation or limited obligation for the project sponsors.

Syndicated Loans

IFC's syndicated loan program, known as B-loans, allows commercial banks and other financial institutions to provide funding for IFC-financed projects that they might not have otherwise considered. These loans play a significant role in attracting additional private sector financing in developing countries, thus expanding IFC's impact on development. Under this program, financial institutions assume full responsibility for the commercial credit risk of projects while IFC remains the official lender.

Participants in IFC's B-loans benefit from the advantages of being associated with IFC, a multilateral development institution. This includes having preferred creditor access to foreign exchange in the event of a foreign currency crisis in a specific country. Additionally, participant banks are exempted from mandatory country-risk provisioning requirements imposed by regulatory authorities when they lend directly to projects in developing countries.

Equity Finance

IFC engages in equity financing by acquiring equity stakes in private sector companies, financial institutions, portfolio and investment funds in developing countries. As a long-term investor, IFC typically holds onto these equity investments for a period of 8 to 15 years.

IFC's preferred method of exit when selling its shares

is through the domestic stock market, specifically through a public offering that benefits the enterprise. IFC operates commercially, investing solely in for-profit projects and charging market rates for its products and services. To encourage the participation of other private investors, IFC typically subscribes to a project's equity between 5% and 15%. However, IFC never becomes the largest shareholder and generally does not hold more than a 35% stake in a project. The equity investments made by IFC are determined based on the project's needs and expected returns.

The Corporation does not actively manage company operations. IFC risks its own capital and does not rely on government guarantees. However, IFC shareholdings can be considered domestic capital or local shares to comply with national ownership requirements.

Quasi-Equity Finance

IFC offers a comprehensive selection of quasi-equity products for private sector projects in developing nations. These products, known as C-loans, possess characteristics of both debt and equity. In addition to other instruments, the Corporation provides convertible debt and subordinated loan investments that require a fixed repayment schedule.

IFC operates on a commercial basis, investing exclusively in for-profit projects and charging market rates for its products and services. It also offers preferred stock and income note investments with flexible repayment schedules and provides quasi-equity investments to ensure sound funding for projects.

Equity; Debt Funds

IFC encourages foreign portfolio investment in developing countries by establishing and investing in various funds, including private equity funds and debt funds that focus on emerging-market securities. Through the introduction of these funds, IFC has facilitated the entry of international portfolio investors into emerging markets.

Through its mobilization efforts, IFC enables both large and small companies in the

developing world to access longer-term finance, often for the first time. By accessing financing from international markets, these companies are able to enhance their competitiveness in more open economies globally. IFC's investment operations are overseen by regional departments as well as sector/industry departments.

Structured Finance

IFC has created products that offer clients access to cost-effective financing options that may not be available to them otherwise.

Products offered by IFC include credit enhancement structures for bonds and loans, such as partial credit guarantees, risk-sharing facilities, and participations in securitizations. With partial credit guarantees, IFC can utilize its international triple-A credit rating to assist clients in diversifying their funding sources, extending maturities, and obtaining financing in their preferred currency, including local currency. In securitization transactions, IFC plays the role of a structuring investor or guarantor. Additionally, partial loan and bond guarantees aim to enhance clients' access to both international and local capital markets.

Credit enhancement structures assist clients in attracting financing in their preferred currency, reducing borrowing costs, and extending maturities beyond what private investors would typically offer. With risk-sharing facilities, clients can transfer credit risk to IFC from their existing or new portfolios. The assets generally remain on the clients' balance sheet, while the risk transfer occurs through IFC's partial guarantee. Typically, clients engage in such facilities with IFC to increase their ability to originate new assets in an asset class where IFC aims to expand its exposure. Securitizations enable IFC's clients to access financing that might be otherwise unavailable or unsuitable due to perceived credit risk. This financing method involves pooling and selling financial assets, as well as issuing securities that are repaid through the generated cash flows from

these assets.

The risk associated with this form of financing comes from the asset pool rather than the institution that originated those assets. Securitizations are commonly done for mortgages, credit cards, auto and consumer loans, corporate debt, and other assets with relatively predictable cash flows.

Intermediary Services

A large chunk of IFC financing is channeled to private sector projects in developing countries through intermediaries. IFC uses its full range of financial products to provide finance to a wide variety of financial intermediaries. Working through intermediaries allows IFC to extend its long-term finance to more companies, in particular to small and medium enterprises (SMEs) and microfinance entrepreneurs. In many regions of the world, small private companies are the principal engines of economic growth and employment creation.

Micro, small, and medium-sized investments have high transaction costs, which restrict smaller companies' ability to access long-term finance. However, IFC finance can be accessible to these businesses by collaborating with local or specialized financial institutions. IFC operates in a commercial manner, exclusively investing in for-profit projects and providing products and services at market rates.

Investments in financial intermediaries can take various forms, including credit and equity lines provided to banks for the purpose of on-lending to local companies. The primary objective of such investments is to assist these banks in offering working capital and investment financing solutions to their corporate customers. Additionally, financial intermediaries receive investments from private equity and investment funds, such as index funds and country funds. Furthermore, IFC directs its investments towards venture capital funds that facilitate the allocation of funds to unlisted companies which often go unnoticed by larger investors. Another key area where investments are made is in leasing companies.

These entities play a crucial role in the growth of small and medium-sized enterprises (SMEs) as they enable such firms to lease expensive capital equipment. In countries with smaller economies or lower per capita incomes, leasing becomes especially vital for the overall development of the financial sector.

IFC has actively assisted in the establishment of leasing industries in countries all over the world. VIII. Risk Management Products a) Hedging Products Through IFC, the organization is one of the few organizations that are willing to provide long-maturity risk management products to clients in emerging markets. The risk management products, also known as derivatives, are exclusively available to our clients for hedging purposes. By allowing private sector clients in emerging markets to access the international derivatives markets to hedge against currency, interest rate, or commodity price exposure, IFC helps companies improve their creditworthiness and profitability. IFC's role is to fill the credit gap between its clients and the market by offering access to products that may not be directly accessible due to credit or country risks.

IFC acts as an intermediary between the market and private companies in emerging markets, offering risk management products. Since 1990, IFC has transacted risk management products for approximately 60 clients in 30 countries. IFC has a unique position to provide developing countries a variety of financial risk management products, including the ability to take long term credit risk of emerging market clients, a triple-A rating for access to global financial markets, extensive market relationships, and technical and legal expertise in financial risk management derived from their own use of derivative products in areas like funding, asset management, and liability management. Additionally, companies with

revenues in local currency should borrow in the same currency to avoid exchange-rate volatility and focus on their core business.


IFC offers local currency debt financing through various methods:

Loans from IFC in the local currency; Risk management swaps for clients to hedge foreign currency liabilities back to the local currency; Credit enhancement structures for borrowing in the local currency from other sources; and Credit lines from local financial institutions. Promoting local currency financing is a priority for IFC to support the development of local capital markets. Companies receiving financing in the same currency as their revenues are considered more creditworthy by IFC.

Subnational Finance Joint IFC

World Bank Subnational Finance Department: The Subnational Finance Department is a collaboration between the World Bank and the International Finance Corporation.

We offer financial support and access to capital markets to states, provinces, municipalities, and their enterprises without requiring sovereign guarantees. We also provide financial assistance to nationally owned enterprises in natural monopoly infrastructure sectors on a selective basis. Our main goal in all our financing initiatives is to enhance the borrowers' capacity to provide essential infrastructure services including water, wastewater management, transportation, gas and electricity, while also improving their efficiency and accountability as service providers.

Advisory Services

IFC provides various advisory services to promote private sector development in developing countries. We offer guidance to private companies and governments on sustainable business growth and creating a favorable investment climate.

IFC's advisory services are carried out by nearly 1,000 staff members across 60 regional offices. These services are categorized into five business lines: Access to Finance, Investment Climate, Environmental and Social Sustainability, and

Infrastructure Advisory. Access to Finance focuses on providing advisory services to government bodies, investment clients, and other entities in order to create a more inclusive financial system in emerging economies. Investment Climate aims to assist client countries in implementing reforms that improve their business environment and attract investment, ultimately fostering market competitiveness, growth, and job creation. Environmental and Social Sustainability focuses on the development and testing of innovative business models related to biodiversity, carbon finance, cleaner technologies, corporate social responsibility, sustainable energy, and sustainable investing. Lastly, Infrastructure Advisory offers guidance to national and municipal governments in structuring private sector involvement in fundamental infrastructure projects.

. Corporate Advice: Assisting large companies in incorporating local small and medium enterprises into their supply chain; providing guidance on corporate governance to companies, countries, and industries.

Project Cycle

The project cycle demonstrates the phases that a business idea undergoes as it evolves into an IFC-financed project. IFC offers a diverse range of financial products for private sector projects in developing nations. The project cycle outlines the stages that a business idea passes through to become an IFC-financed project. Stages of the Project Cycle: .

IFC financing does not have a standard application form. Companies or entrepreneurs, whether local or foreign, can directly approach IFC to establish a new venture or expand an existing enterprise. The best approach is to read the guidelines for applying for financing and submit an investment proposal. Once the initial contacts and a preliminary review are completed, IFC may request a detailed feasibility study or business plan to assess the project.

Project Appraisal

Typically, a project appraisal team comprises an investment officer with

financial expertise and country-specific knowledge, an engineer with technical expertise, and an environmental specialist. The team evaluates the technical, financial, economic, and environmental aspects of the project.

The process involves visiting the proposed project site and having extensive discussions with the project sponsors. Upon returning to headquarters, the team presents their recommendations to senior management of the relevant IFC department. If the project financing is approved at the department level, IFC's legal department, with assistance from outside counsel if necessary, drafts the necessary documents. Any outstanding issues are negotiated with the company and other involved parties. Before the investment is submitted to the IFC Board for review, the public is notified of the main project details and provided with access to the environmental review documents. The project is then reviewed by IFC's Board of Directors for approval. IFC also works to mobilize additional finance by encouraging other institutions to invest in the project. If approved by the Board and if all negotiated stipulations are met, IFC and the company will sign a legally binding deal. Funds are disbursed according to the terms of this legal commitment.

viii. Project Supervision: Upon the disbursement of funds, IFC closely monitors its investments. This includes periodic consultations with management and field missions to visit the enterprise. Furthermore, it requires quarterly progress reports, as well as information on any factors that may significantly impact the invested enterprise. This information includes annual financial statements that have been audited by independent public accountants. ix.

Closing When an investment is repaid in full, or when IFC exits an investment by selling its equity stake, IFC closes its books on the project.

Summary

IFC is an important international financial institution that plays a crucial role in international developments. It provides various forms of assistance, including financial and advisory services, which are particularly beneficial for underdeveloped countries.

Practice Questions

  1. What is the role of IFC in international developments?
  2. What are the main functions of IFC and how does it perform these functions?

Suggested Readings

  1. Edward S. Mason ; Robert E. Asher, “The World Bank since Bretton Woods”, The Brookings Institution
  2. Devesh Kapur, John P Lewis, Richard Web, “The World Bank- It’s First half century”
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