Chapter 7:

The International
Financial Institutions
PROF3: BANKING AND FINANCIAL INSTITUTIONS

LECTURER: YVONNE HITTY L. MIER SACRED HEART COLLEGE

 Learning
Outcomes
After assimilating this chapter,
YOU should be able to discuss and International The International The Export-Import
explain the role of the following Banking Monetary Fund Bank
concept and financial institutions: The World Bank The Bank for The Asian
International Development Bank
Settlements

Yvonne Hitty L. Mier, Jan 2021

 Learning
Outcomes
After assimilating this chapter,
YOU should be able to discuss and
explain the role of the following The European Bank for The Development The US Agency for
Reconstruction and Bank of Japan International
concept and financial institutions: Development (EBRD) Development

Yvonne Hitty L. Mier, Jan 2021


Introduction
International financial institutions
play significant roles in the world’s
financial system. In fact, they are the
prime movers of the whole system.
Their purpose is to encourage the
formulation and implementation of
strong, domestic economic policies
to establish a stable socio-economic
and political set-up before granting
loans.
Yvonne Hitty L. Mier, Jan 2021
▪ The role of international financial institutions is more
prevalent and significant in the Third World or
developing economies as these countries may not
have sufficient funds to finance their own economic
development and growth.
▪ As developing countries, they have to lay the social
and economic foundations of the economy such as
education, health, housing, irrigation, transportation,
communication, and the supply of electricity, amongst
others.
▪ In order to realize these projects for development,
they rely heavily on the international financial
institutions for funding.
4

Introduction
They borrow money to finance their
major development programs.
Among the international financial
institutions that are the biggest
lenders to the poor countries are the
World Bank (WB), the International
Monetary Fund (IMF), and the Asian
Development Bank (ADB).
Yvonne Hitty L. Mier, Jan 2021
▪ Other international financial institutions are the
transnational or multinational banks, which do
business in many countries in the world. Their
customers are giant international companies,
governments and wealthy people.
▪ This chapter presents several of these international
financial institutions.
▪ These are the multinational banks, the World Bank
(WB), International Monetary Fund (IMF), Bank for
International Settlements, Export-Import Bank, Asian
Development Bank (ADB), European Bank for
Reconstruction and Development (EBRD),
Development Bank of Japan (DBJ), and the US Agency
for International Development (USAID).
5
 • The beginning of the 20th century marked the emergence of
giant companies in international business. These companies
operated internationally through their subsidiaries which
function mainly as export agencies. The headquarters of
these subsidiaries were located in the US, Canada, Great
Britain, France and Germany.
• In the developing countries, their presence was felt through
the operations of their warehouses, service offices and sales
agencies.
• In the 1960s, these companies evolved into global
companies, where their foreign operations were integrated

International
into a single organizational structure. They are now known as
“transnational corporations” (TNCs) or “multinational
corporations” (MNCs). These corporations are owned by

Banking highly industrialized countries like the US, UK, France,

Germany and Japan. They perform business activities such as
production, marketing, finance and HR management within
many countries with headquarters in one country. 6

Yvonne Hitty L. Mier, Jan 2021

 • The rapid growth of MNCs and their control over production and
trade all over the world served as the catalyst for the
proliferation of multinational banks. These banks support MNCs
in their global manufacturing and trade activities.
• There are other factors that contributed to the expansion of the
international banking of global banking of the multinational
banks. For one, the growth of the Eurodollar market, where
banks accept US dollars for deposits and lend them to borrowers
outside the US. Later, other currencies were also traded.
• Another factor is the dependence of developing countries on
developed countries. The developing countries are exporters of
raw materials for the industries of highly industrialized countries.

International
Then they import finished products like machines or equipment
for their agriculture and small-scale industries. They also import
oil from oil-producing countries. Unfortunately, the prices of

Banking
Yvonne Hitty L. Mier, Jan 2021
their exports are very low while prices of their import are very
high. Being merely exporters of raw materials which are
abundant in the world market, the developing countries have a
very weak position in international trade – they cannot dictate 7
the prices of their products.
 • As such, developing countries always suffer balance of
payments difficulties. Consequently, they resort to borrowing
money from international financial institutions and the
governments of the rich countries to finance their
development programs. The IMF, the WB and the
governments of industrial countries were the lenders before
the 1970s.
• In recent years, however, multinational banks have been
among the creditors or the poor countries. Furthermore, the

International development of the information highway has accelerated the

expansion of international banking. The new technologies

Banking enable a faster and more efficient movement of capital

resources throughout the world.

Yvonne Hitty L. Mier, Jan 2021

The World
Bank 9

Yvonne Hitty L. Mier, Jan 2021

 1
0

o The World Bank (WB) was established when a

group of 45 allied nations convened the United
Nations Monetary and Financial Conference at
Bretton Woods, New Hampshire, USA. Initially,
the WB’s mission was to rebuild Europe after
World War II. Indeed, its first loan of $250 million
was granted to France in 1947 for the country’s
post-war reconstruction.
o Reconstruction has remained an important focus
of WB, considering the natural disasters,
humanitarian emergencies, and post-conflict
rehabilitation needs that affect developing and
transition economies.
o But the WB has sharpened its focus on poverty
The World Bank reduction as the overreaching goal of its entire
works. The WB has a diverse staff which include 10
economists, public policy experts, sectoral
experts and social scientists.
Yvonne Hitty L. Mier, Jan 2021
 1
1

o The World Bank is owned by more than 180

member-countries whose views and interests are
represented by a Board of Governors and a
Washington-based Board of Directors. Member
countries are shareholders who carry ultimate
decision-making power in the WB.
o The WB has become one of the world’s largest
sources of development assistance. The WB,
which provided US$ 17.3 billion in loans to its
client countries in fiscal year 2001, now works in
more than 100 developing countries, bringing a
mix of finance and ideas to improve living
standards and eliminate poverty. For each of its
clients, the WB works with government agencies,
The World Bank NGOs, and the private sector to formulate
assistance strategies. 11

Yvonne Hitty L. Mier, Jan 2021

 1
2

o The World Bank has become a Group, which

consists of five closely associated development
institutions. These are the International Bank for
Reconstruction and Development (IBRD), the
International Development Association (IDA), the
International Finance Corporation (IFC), the
Multilateral Investment Guarantee Agency (MIGA),
and the International Center for Settlement of
Investment Dispute (ICSID).

The World Bank

12

Yvonne Hitty L. Mier, Jan 2021


IBRD
Established in 1945, the
International Bank for
Reconstruction and Development
(IBRD) now has 189 member-
countries as of 2020. Between
1945-2019, the IBRD has a
cumulative lending of $727,539
million.
Yvonne Hitty L. Mier, Jan 2021
❖ The IBRD aims to reduce poverty in middle-income and
credit-worthy poorer countries by promoting sustainable
development through loans, guarantees, and non-lending –
including analytical and advisory – services.
❖ The IBRD does not maximize profits but has earned a net
income each year since 1948 on an operating basis.
❖ Its profits fund several developmental activities and ensure
financial strength, which enables low-cost borrowings in
capital markets, and good terms for borrowing clients.
❖ Owned by member countries, the IBRD links voting power
to members’ capital subscriptions – in turn, based on a
country’s relative economic strength.
13

IDA
Established in 1960, the
International Development
Association (IDA) today has 173
member-countries as of 2020, with
a cumulative lending of $391,476
million between 1945-2019.
Yvonne Hitty L. Mier, Jan 2021
❖ Contributions to the IDA allow the World Bank to provide
around $6 to $7 billion a year in interest-free credits to the
world’s 78 poorest countries, home to 2.4 billion people.
❖ This support is vital because these countries have little or no
capacity to borrow on market terms.
❖ In most of these countries, incomes average under just $500
a year per person and many people survive on much less.
❖ The IDA helps provide access to better basic services (such
as education, health care, and clean water and sanitation)
and supports reforms and investments aimed at
productivity growth and employment creation.
14

IFC
Established in 1956, the
International Finance
Corporation’s (IFC) membership
has reached 185 countries as of
2020.
Yvonne Hitty L. Mier, Jan 2021
❖ The IFC’s mandate is to further economic development
through the private sector working with business partners.
It invests in sustainable private enterprises in developing
countries and provides long-term loans, guarantees, and
risk management and advisory services to its clients.
❖ The IFC invests in projects in regions and sectors
underserved by private investment and finds new ways to
develop promising opportunities in markets deemed too
risky by commercial investors in the absence of the IFC
participation.
15
 MIGA
Established in 1988, the
Multinational Investment
Guarantee Agency (MIGA) has 181
member-countries as of 2020.
Yvonne Hitty L. Mier, Jan 2021
❖ The MIGA helps encourage foreign investment in
developing countries by providing guarantees to foreign
investors against losses caused by non-commercial risks,
such as expropriation, currency inconvertibility and transfer
restrictions, and civil disturbances.
❖ Furthermore, the MIGA provides technical assistance to
help countries disseminate information on investment
opportunities. The agency also offers investment dispute
mediation upon request.
16
 ICSID
The International Center for
Settlement of Investment
Disputes (ICSID) was established in
1966. It now has 163 member-
countries as of 2020.
Yvonne Hitty L. Mier, Jan 2021
❖ The ICSID helps to encourage foreign investment by
providing international facilities for conciliation and
arbitration of investment disputes.
❖ In this way, it helps to foster an atmosphere of mutual
confidence between starts and foreign investors.
❖ Many international agreements concerning investment
refer to ICSID’s arbitration facilities.
❖ The ICSID also has research and publishing activities in the
areas of arbitration law and foreign investment law.
17
 • In conjunction with the World Bank’s establishment,
the IMF was also conceived in July 1944 at a United
Nationals Monetary and Financial Conference held at
Bretton Woods, New Hampshire, USA. The same group
of 45 allied nations who drafted the Articles of
Agreements of the World Bank agreed on a framework
for economic cooperation. The said framework was
designed to avoid a repetition of the disastrous
economic policies that had contributed to the Great

IMF Depression of the 1930s.

18

Yvonne Hitty L. Mier, Jan 2021

 • Thus, the IMF was born for the following purposes:
1. Promoting international monetary cooperation;
2. Facilitating the expansion and balanced growth of
international trade;
3. Promoting exchange stability;
4. Assisting in the establishment of a multilateral system of
payments;
5. Making its resources available (under adequate
safeguards) to members experiencing balance of
payments difficulties; and

IMF 6. Ensuring the stability of the international financial

system.
19

Yvonne Hitty L. Mier, Jan 2021

 • The IMF is the central institution of the international
monetary system – the system of international
payments and exchange rates among national
currencies that enables business to take place between
countries.
• The IMF is owned by 190 member-countries as of 2020,
with headquarters in Washington, DC. The Board of
Governors, on which all member-countries are
represented, is the highest authority governing the
IMF.

IMF • It usually meets once a year, at the Annual Meeting of

the IMF and the World Bank.
20

Yvonne Hitty L. Mier, Jan 2021

 • The IMF’s resources come mainly from the quota (or
capital) subscriptions that countries pay when they join
the IMF, or following periodic reviews in which quotas
are increased. Countries pay 25% of their quota
subscription in Special Drawing Rights (an international
reserve asset , sometimes known as “paper gold”).
Although it has no physical form, it has been allocated
to member countries – as book-keeping entries – as a
percentage of their quotas), or major currencies, such
as US dollars or Japanese yen. The IMF can call on the
remainder, payable in the member’s own currency, to
be made available for lending as needed. Quota’s
IMF determine a country’s voting power, amount of
financing that it can receive from the IMF, and its share
in Special Drawing Right allocations. 21

Yvonne Hitty L. Mier, Jan 2021

 • Quotas reflect members’ relative size in the world
economy. The larger a country’s economy in terms of
output, and the larger and more variable its trade, the
higher its quota tends to be. The biggest contributor to
the IMF is the USA, the world’s largest economy, with a
quota of $118 billion as of 2016.
• The IMF’s operations have developed to meet the
changing needs of its member-countries in an evolving
world economy. These involve surveillance, financial

IMF assistance, and technical assistance.

22

Yvonne Hitty L. Mier, Jan 2021

 • Surveillance: The IMF maintains a policy dialogue with each
of its members through a process known as “surveillance”.
Each year, it appraises members’ exchange rate policies
within the overall framework of their economic policies in
what is known as an Article IV consultation. Surveillance is
based on the conviction that strong and consistent domestic
economic policies will lead to stable exchange rates and a
growing and prosperous world economy.
• Financial assistance: The IMF provides credits and loans to
member-countries with balance of payments problems to
support policies of adjustment and reform.
• Technical assistance: The IMF offers technical assistance and
training to help countries strengthen their human and

IMF institutional capacity, and design and implement effective

macroeconomic and structural policies. Technical assistance
is offered in several broad areas, including fiscal policy, 23
monetary policy, and statistics.
Yvonne Hitty L. Mier, Jan 2021
 BIS
The Bank for International
Settlements (BIS) is based in Basel,
Switzerland, and is the world’s
oldest international financial
institution. It was established in the
context of the Young Plan in 1930,
which dealt with the issue of the
reparation payments imposed on
Germany by the Treaty of Versailles.
24
 • Under the BIS statutes, the governance of the
bank is entrusted to the General Meeting and
the Board of Directors, which is responsible for
BIS the administration of the bank.
• The General Meeting is held annually. Fifty
The BIS to this day is the principal center central banks or monetary authorities have the
for international central bank rights of voting and representation at the
cooperation. The reparations issue had General Meeting.
faded into the background as the BIS has
been focusing its activities entirely on
• The BOD has 17 members. It has 6 ex-officio
cooperation among central banks, and directors, comprising the governor of the
increasingly, other agencies in pursuit of central banks of Belgium, Germany, Italy, and
monetary and financial stability. Hence, the UK and the chairman of the board of
the BIS now serves as a bank for central
banks.
governors of the US Federal Reserve System.
25
 1. The BIS provides a forum for central bank cooperation.
It acts as the prime forum for information exchange
and cooperation among central banks worldwide
through regular meetings. More recently, the thrust has
been to foster financial stability in the wake of

BIS
economic integration and globalization.
2. The BIS conducts research contributing to monetary
and financial stability, collects and publishes statistical
material on international finance and – through
The main tasks of the BIS, as they committees of national experts – formulates
have developed over the past 90 recommendations to the financial community aimed at
strengthening the international financial system.
years, may be summarized as
3. The BIS performs traditional banking functions, such as
follows: reserve management and gold transactions, for the
account of central bank customers and international
organizations.
4. Finally, the BIS has also provided or organized
emergency financing to support the international
monetary system when needed.
26
 • The Export-Import Bank of the United States (Eximbank)
is an independent US government agency established in
1934 to create jobs through exports, especially since in the
1930s export was viewed as a stimulus to economic
activity and employment. The primary aim of Eximbank
was to foster trade between the US and the Soviet Union.
During the post-WWII era, Eximbank helped US
companies participate in the reconstruction of Europe and
Asia.
• The Eximbank is a government held corporation managed
by a BOD consisting of a chairman, vice chairman and 3
additional board members. The bank provides guarantees
of working capital loans for US exporters, guarantees the

EXIMBANK repayment of loans or makes loans to foreign purchasers

of US goods and services, and provides credit insurance
against non-payment by foreign buyers for political or
commercial risk. 27

Yvonne Hitty L. Mier, Jan 2021

 28

o The Asian Development Bank (ADB) was

founded in 1966 by the United Nations
Economic Commission for Asia and the
Far East (ECAFE), now known as United
Nations Economic and Social
Commission for Asia and the Pacific
(ESCAP).
o It only had 31 member-countries. Over
the years, its membership has grown to
68 countries from within and outside Asia
and Pacific region as of 2019. Its
ADB headquarters is in Manila, and it has 31
other offices around the world. 28

Yvonne Hitty L. Mier, Jan 2021

 29

o The ADB is a multilateral development finance

institution dedicated to reducing poverty in Asia
and the Pacific. It is managed by a board of
governors, a BOD, a president, three VPs, and the
heads of departments and offices.
o The ADB’s main sources of funds are members’
contributions and bond issues on the world’s
capital markets. The Asian Development Fund
(ADF), the ADB’s “concessional” or “soft-loan”
window, is funded by its donor member-
countries.
o The major sectors covered by the ADB’s support
are agriculture, rural development, energy,

ADB
transport and communications, industry, finance,
social infrastructure which include health,
29
education, and water supply.

Yvonne Hitty L. Mier, Jan 2021

 30

o Although most lending is in the public sector and

to governments, the ADB also provides direct
assistance to private enterprises of developing
member-countries through equity investments
and loans.
o The ADB’s business and operations are premised
by its overarching goal which is poverty
reduction. It continues to carry out activities to
promote economic growth, develop human
resources, improve the status of women, and
protect the environment. These strategic
development objectives now serve its poverty
reduction agenda.

ADB
o Its other key development objectives are law and
policy reform, regional cooperation, private-
30
sector development, and social development.

Yvonne Hitty L. Mier, Jan 2021

 • The European Bank for Reconstruction and
Development (EBRD) was established in 1991 when
communism was crumbling in Central and Eastern
Europe and ex-Soviet countries needed support to
nurture a new private sector in a democratic
environment. It is owned by 69 member/shareholder
countries – these are European and non-European
countries which are members of the IMF – and the
European Investment Bank.
• The EBRD’s share capital is provided by its members.

EBRD
Voting power is in proportion to the number of shares.
It is managed by a board of governors, a BOD, a
president and one or more VPs.
31

Yvonne Hitty L. Mier, Jan 2021

 • The EBRD uses the tools of investment to help build market
economies and democracies in countries from Central Europe
to Central Asia. It provides project financing for banks,
industries and businesses, both new ventures and
investments in existing companies. It also works with publicly
owned companies, to support privatization, restructuring
state-owned firms and improvement of municipal services.
• The mandate of the EBRD stipulates that it must only work in
countries that are committed to democratic principles.
Respect for the environment is part of the strong corporate
governance attached to all EBRD investments.
• Through its investments, it promotes structural and sectoral
reforms; competition; privatization and entrepreneurship;

EBRD stronger financial institutions and legal system’ infrastructure

development needed to support the private sector; and
adoption of strong corporate governance, including 32
environmental sensitivity.
Yvonne Hitty L. Mier, Jan 2021
 o The Development Bank of Japan (DBJ) was created
under the provision of the Development Bank of Japan
Law in 1999.
o The DBJ is the successor to all rights and obligations of
the Japan Development Bank and the Hokkaido-Tohoku
Development Finance Public Corporation.
o The DBJ is wholly owned by the Japanese governments.
It is managed by a governor, who is appointed by the
prime minister; 2 deputy governors, who are appointed
by the governor with the approval of the prime minister;
12 senior executive directors, who are appointed by the
governor.
o The DBJ provides long-term financial and related
services to qualified projects as a supplement and
inducement to the lending and other services provided
by ordinary financial institutions. In so doing, it

DBJ promotes the energy and sustainable development of

the economy and society, the realization of enhanced
quality of life, and the creation of self-reliant regions.
33
 • The US Agency for International Development (USAID) was
established in 1961. Its history goes back to the Marshall Plan
reconstruction of Europe after World War II and the Truman
Administration’s Point Four Program.
• Since 1961, USAID has been the principal US agency to extend
assistance to countries recovering from disaster, trying to escape
poverty, and engaging in democratic reforms.
• It is an independent federal government agency that receives
overall foreign policy guidance from the Secretary of State. The
agency works to support long-term and equitable economic
growth and advancing US foreign policy objectives by
supporting: a) economic growth, and trade; b) global health; and
c) democracy, conflict prevention, and humanitarian assistance.

USAID • It has its headquarters in Washing, DC, but its strength is its
offices around the world. It provides assistance to 4 regions of
the world: sub-Saharan Africa, Asia and the Near East; Latin
34
America and the Caribbean; and Europe and Eurasia.

Yvonne Hitty L. Mier, Jan 2021

Reference • Chapter 16, pp. 183-195. Leuterio, M. &
Estepa, C. (2009). Banking: Theory and
Practice, Anvil Publishing.

35

Yvonne Hitty L. Mier, Jan 2021

 Thank you!

Questions?
36

Yvonne Hitty L. Mier, Jan 2021