International Financial Institutions

UIAMS,
Panjab University

Chandigarh

Definition
IFI refers to financial institutions that have been established by more than one country. The most prominent IFIs are creations of multiple nations, although some are bilateral financial institutions.

Introduction

The purpose of these international financial institutions is maintain orderly international financial conditions and to provide capital and advice for economic development, particularly in those countries that lack resources to do it themselves

Which are international financial organizations

1)

The world bank group- international bank for Reconstruction and Development (IBRD) and its three subsidiaries

a) b) c)

International Association

Development

International Finance Corporation Multilateral Investment Guarantee Agency (MIGA)

2) International Monetary Fund (IMF)

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3) Bank of international Settlements ( BIS) 4) Asian Development Bank

5) African Development Bank

6) European Bank for Reconstruction and Development 7) Inter- American Development Bank

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These international organization obtain funds for the lending activities from two basic sources: The first is contribution of capital that each nation makes when it becomes a member The second borrowings source is through

1)

2)

The World Bank Group

The world Bank began in 1946 with 38 members. Now the number of members has been increased to 184 The world bank and International Monetary Fund ( IMF) were conceived as twin pillars of the post war economic order at a conference of Britain, America and their war-times allies at Bretton Woods, in July 1944

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The world bank is a publicly owned financial intermediary ( FI)

For most part it borrows on commercial terms to finance investments in countries in need. The IMF is not bank, but a club Member countries pay a subscription and agree to abide by a mutually advantageous code of economic conduct

IBRD

The objective is to help raise standards of living in developing countries by channeling financial resources from developed countries to the developing world .

The article of agreement of IBRD require it to promote private foreign investments by means of guarantee or participations in loan and other investment made by private investors.

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In the development task, banks main objectives are to stimulate, support and provide from its own resources flow of capital to worthwhile projects and programmes in developing countries. In addition the Bank group aims to improve the quality of project planning and in some case to improve the general economic policies of recipient countries

Bank provides technical assistance mainly in the form of project evaluation.

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Beginning in 1980, the bank started to shift towards policy based loans which differ from standard project loans. These loans are not targeted building highway or housing complex but at fostering far-reaching structural reforms, such as end to import restrictions or the establishment of market prices of agricultural goods.

Objectives of IBRD

The original objective was to make loans to develop the war shattered economies of Europe in the Second World War. To promote investment by means of guarantee and participation in loans and other investments made by private investors To provide loans to big projects To help the poor countries by providing them loans and information assistance.

Sources of credit generation of IBRD

Quotas: The membership of the world is the same as that of IMF .Members make contribution in relation to their IMF Quota. Bonds: The World Bank also sells Bonds in the capital markets to raise funds Income: A very small proportion of the IBRD funds come from the interest on loans advanced by it.

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These loans are of basic two types:

1)
2)

Structural Adjustment Loans

Sector Adjustment Loans

Human development plays a crucial role in the Banks overall strategy to reduce poverty. Bank focused on Lending and non-lending services to support population control, health nutrition and education Efforts to improve the quality of bank services by working more closely with clients, collaborating with partners and establishing a human development network to strengthen the banks ability to provide quality services

a)

b)

International Development Association (IDA)

The money lent under the IBRD label is raised through bond sales in the market. Borrowers pay interest rate on the basis of market rate of interest
IDA loans, however, are much more concessional. These resources are not raised through borrowing, but through subscriptions from rich member countries. IDA loans are offered only to poorest countries.

IMF

Establishment: It was the outcome of Wood Agreement signed by 44 major countries of the world in July 1944 in USA.

Organization: It is an autonomous body and is affiliated to UNO. The management of Fund is under control of two bodies:
a)Board of governor, b)Board of Executive directors

IMF (International Monetary Fund)

a)Board of governor : it formulates the general policies of the Fund b)Board of Executive directors :

it is responsible for the day to day activities of the Fund .

Membership: All those counties which agree to subscribe to Funds Article of Agreement are eligible to Funds Membership. The membership of Fund has risen from 44 nations to183now

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Quotas: Each member has to contribute a quota to fund. The size of the quota depends upon the national income and share in international trade of that country. The quota is made up of 75% in the country's currency and 25% in gold.

Functions of IMF

Maintaining exchange stability among the members countries

Borrowing: The credit facility has been raised up to 45% of ones quota over a three years period.
Correcting Balance of Payment (A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country s exports and imports of goods, services)

Interest charges : It charges interest on the credit provided to member countries

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Technical Assistance it helps the members by providing the services of specialist and experts in concerned fields. Compensatory Finance Scheme : if a member is facing difficulty in receipt of export credit, the IMF can give loan to member with few conditions. The extended Fund Facility : For the assistance of correcting the balance of payments of the member countries, introduced in 1974 by IMF8) The Supplementary Financing Facility :This scheme was introduced in 1979 in order to give long term loans to less developed counties

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Increasing international monetary cooperation. Promoting the growth of trade. Promoting exchange rate stability.

Establishing a system of multilateral payments member countries

Building reserve base

Funding facilities.

ADB

Established on December4,1966 with an authorized capital of 58 billion dollars. The purpose of its formation was to lend funds, promote investment and provide technical assistant to the countries mainly in Asian region.

Asian Development Bank

This was emerged as a result of the Economic Commission For Asia and Far East held in Manila in December 1963

It was decided that the capital formation in the developing countries is not possible through domestic savings only and capital should be made available to the low income countries by establishing a bank

Functions

Provide loans to low income countries Promote investments in private as well as in public sector. Help the member counties in foreign trade It provides technical assistance for preparation, financing and execution of development projects It also helps the UNO in various projects

IFC

IFC was set up with the objective of providing capital for private enterprises in order to encourage the development of local capital markets and promote foreign private investments in developing countries. IFC does guarantee not require a government

Its functions are like that of investment banks. It can participate in private ventures , providing up to 25 % of the capital

MIGA ( Multilateral Investment Guarantee Agency)

MIGA was created in 1988 by 42 world bank member countries specifically to encourage foreign private investments
MIGA insures investors in developing countries against losses caused by the outbreak of war or civil disturbance or by acts of government, such as expropriation or imposition of restrictions on transfer of currency of profits

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1) 2)

MIGA membership categories Category 1 ( countries)-19

is

divided

into

two

developed/

industrialized

Category 2 ( developing countries)-121

MIGA does not provide guarantee Category 1 member countries

in

A guarantee from MIGA is particularly attractive for commercial banks in countries such as France or Spain, as these banks will not then need to make special provisions for developing countries.

THANK U!