Financial Institutions: World Bank Assoc. Prof. Week 11

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BUS 362 Financial Institutions and
Markets
Week 11: Financial Institutions: World Bank
Assoc. Prof. Hülya Hazar
Faculty of Economics and Administrative Sciences, Department of
Business Administration
[email protected]
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Financial Institutions and Markets
1. What is the World Bank
2. The History of the World Bank
3. The Institutions that make-up the World
Bank
4. The Difference Between the World Bank
and the International Monetary Fund (IMF)
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Financial Institutions and Markets
World Bank
• The World Bank can be thought as an investment bank
• Intermediating between investors and recipients, borrowing
from the one and lending to the other
• Its owners are the governments of its member nations
• The number of shares a country has is based roughly on the size of
its economy.
• The United States is the largest shareholder
• Lends only to governments and companies of developing
nations
• It seeks to promote the economic development of the world’s
poorer countries
• It is composed of five institutions
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Financial Institutions and Markets
History
• Established in 1944 at Bretton Woods
• Aim: to help rebuild Europe and Japan after World War II
• Its first institution was the International Bank for
Reconstruction and Development (IBRD)
• When it first began operations, it had 38 members. Today,
most of the countries in the world are members.
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Financial Institutions and Markets
Institutions
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the International Bank for Reconstruction and
Development (IBRD) [Developing countries borrow –
repaid in 12-15 years]
the International Development Association (IDA) [lends
only to governments of very poor developing nations -IDA
loans are interest free and have a maturity of 35 or 40
years. ]
International Finance Corporation (IFC) [mobilizes funding
for private enterprises in developing countries]
the International Center for Settlement of Investment
Disputes (ICSID)
the Multilateral Guarantee Agency (MIGA)
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Financial Institutions and Markets
The International Bank for Reconstruction and Development
(IBRD)
• Provides loans, guarantees, risk management products, and
advisory services to middle-income and creditworthy lowincome countries
• Created in 1944 to help Europe rebuild after World War II
• Aims for a global development to reduce poverty and build
shared prosperity
• The largest development bank in the world
• Owned by 189 member countries
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Financial Institutions and Markets
The International Bank for Reconstruction and Development
(IBRD)
• Works with the public and private sectors in developing
countries
• Developing countries are making rapid economic and social
progress, and they play an ever larger role in finding
solutions to global challenges.
• Developing countries have limited access to private finance
which make these countries vulnerable to economic shocks
and the crises that cross borders, including climate change,
forced migration, and pandemics.
• IBRD finances investments across all sectors and provides
technical support and expertise at each stage of a project.
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Financial Institutions and Markets
The International Development Association (IDA)
• IDA supports economic and social development across the
poorest countries in the world
• The association shares the World Bank's mission of
reducing poverty and aims to provide affordable
development financing to countries whose credit risk is so
prohibitive that they cannot afford to borrow commercially or
from the Bank's other programs.
• These countries suffer from the lowest gross national
income, from troubled creditworthiness, or from the lowest
per capita income
• IDA offers loans and grants to these countries
• It was established in 1960
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Financial Institutions and Markets
The International Development Association (IDA)
• The IDA has 173 member countries which pay contributions
every three years as replenishments of its capital.
• The IDA lends to 75 borrowing countries, over half of which
(39) are in Africa.
• Throughout its lifetime, 44 borrowing countries have
graduated from the association (graduation: eligible to
receive loans from IBRD or other banks).
• To be eligible for support from the IDA, countries are
assessed by their poverty and their lack of creditworthiness
for commercial and IBRD borrowing.
• As of 2019, to borrow from the IDA, a country's gross
national income (GNI) per capita must not exceed $1,145.
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Financial Institutions and Markets
International Finance Corporation (IFC)
• Aim: private sector solutions to address development
challenges.
• Governments alone can’t solve, providing business-based
answers that are innovative, inclusive, and equip leaders
with key tools for success.
• IFC offers investment, advisory, and asset-management
services
• It was established in 1956, as the private-sector arm of the
World Bank Group
• It invests in commercial projects for poverty reduction and
promoting development
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Financial Institutions and Markets
International Finance Corporation (IFC)
• IFC focuses on a set of development goals:
increase sustainable agriculture opportunities
• improve healthcare and education
• increase access to financing for microfinance and
business clients
• advance infrastructure
• help small businesses grow revenues
• invest in climate health
Loan maturities: 7 – 12 years
IFC determines a suitable repayment schedule and grace
period for each loan individually to meet borrowers'
currency and cash flow requirements.
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Financial Institutions and Markets
The International Center for Settlement of Investment Disputes
(ICSID)
• An international arbitration institution
• Established in 1966
• Aim: to settle legal disputes between international investors
and states
• It is a specialized institution to encourage international flow
of investment and mitigate non-commercial risks by a treaty
drafted by the International Bank for Reconstruction and
Development's executive directors and signed by member
countries.
• The center performs advisory activities and maintains
several publications.
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Financial Institutions and Markets
The International Center for Settlement of Investment Disputes
(ICSID)
• ICSID conciliation and arbitration is entirely voluntary.
• However, once the parties have consented to arbitration
under the ICSID Convention, neither party can unilaterally
withdraw its consent.
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Financial Institutions and Markets
The Multilateral Guarantee Agency (MIGA)
• It is an international financial institution which offers political
risk insurance and credit enhancement guarantees.
• These guarantees help investors protect foreign direct
investments against political and non-commercial risks in
developing countries.
• MIGA was established in 1988 as an investment insurance
facility to encourage confident investment in developing
countries.
• Its shareholders are 182 member governments that provide
paid-in capital and have the right to vote on its matters.
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Financial Institutions and Markets
The Multilateral Guarantee Agency (MIGA)
• MIGA offers insurance to cover five types of non-commercial
risks:
currency inconvertibility and transfer restriction
2. government expropriation
3. war, terrorism, and civil disturbance
4. breaches of contract
5. the non-honoring of financial obligations
MIGA will cover investments such as equity, loans,
shareholder loans, and shareholder loan guarantees.
The agency generally offers insurance coverage lasting up
to 15 years with a possible five-year extension depending
on a given project's nature and circumstances.
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Financial Institutions and Markets
Smilarities of the World Bank and the International Monetary
Fund (IMF)
• Known collectively as the Bretton Woods institutions
• Founded by the delegates of 44 nations in 1944
• Twin intergovernmental pillars supporting the structure of the
world’s economic and financial order
• Exhibit many common characteristics:
• Both are owned and directed by the governments of 180+ member
nations
• Both institutions concentrate their efforts on broadening and
strengthening the economies of their member nations
• Both share the same facilities, regularly exchange economic data,
sometimes present joint seminars, daily hold informal meetings, and
occasionally send out joint missions to member countries.
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Financial Institutions and Markets
Differences of the World Bank from the International Monetary
Fund (IMF)
• Each has a different purpose, a distinct structure, receives
its funding from different sources, assists different categories
of members, and strives to achieve distinct goals through
methods peculiar to itself.
• The fundamental difference is this: the World Bank is
primarily a development institution; the IMF is a cooperative
institution that seeks to maintain an orderly system of
payments and receipts between nations.
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Financial Institutions and Markets
Differences of the World Bank from the International Monetary
Fund (IMF)
• At Bretton Woods the international community assigned to
the World Bank and to IMF different purposes.
• The World Bank’s first loans were extended during the late
1940s to finance the reconstruction of the war-ravaged
economies of Western Europe. When these nations
recovered some measure of economic self-sufficiency, the
Bank turned its attention to assisting the world’s poorer
nations.
• The World Bank has one central purpose: to promote
economic and social progress in developing countries by
helping to raise productivity so that their people may live a
better and fuller life.
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Financial Institutions and Markets
Differences of the World Bank from the International Monetary
Fund (IMF)
• IMF was established as a reaction to the unresolved
financial problems instrumental in initiating and protracting
the Great Depression of the 1930s: sudden, unpredictable
variations in the exchange values of national currencies and
a widespread disinclination among governments to allow
their national currency to be exchanged for foreign currency.
• IMF requires members to allow their currency to be
exchanged for foreign currencies freely and without
restriction
• Members need to keep the IMF informed of changes of their
financial and monetary policies and modify these policies on
the advice of the IMF to accommodate the needs of the
entire membership.
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Subjects Covered
1. What
I
is the World Bank
2. The History of the World Bank
3. The Institutions that make-up the World
Bank
4. The Difference Between the World Bank
and the International Monetery Fund (IMF)
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References
Readings:
various sources
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Financial Institutions and Markets
See you next week…
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