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Introduction
1.1 Origin of the Report
Our course instructor Quazi Sagota Samina has authorized us the report as the partial
fulfilment of International Financial Management course requirements. We are assigned to
make a report on International Finance Corporation (IFC) and complete a study that
covers all important factors.
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Chapter-2
IFC, a member of the World Bank Group, is the largest global development institution
focused exclusively on the private sector in developing countries.
They utilize and leverage their products and servicesas well as products and services of
other institutions in the World Bank Groupto provide development solutions customized to
meet clients needs. They apply their financial resources, technical expertise, global
experience, and innovative thinking to help their partners overcome financial, operational,
and political challenges.
The IFC considers only such investment proposals whose objective is the establishment,
expansion or improvement of productive private enterprises which will contribute to the
development of the economy of the country concerned. Industrial, agricultural, financial,
commercial, and other private enterprises are eligible for IFC financing, provided their
operations are productive in character.
IFC is authorised to invest its funds in many forms it seems appropriate, with the exception of
capital stocks and shares. It does not have a policy of uniform interest rates for its
investments. The interest rate is to be negotiated in each case in the light of all relevant
factors, including the risks involved and any right to participation in profits, etc. IFC makes
investments only when it is satisfied that the enterprise has or will have experience and
competent management and it looks to that management to conduct the business of the
enterprise.
Clients view IFC as a provider and mobilizer of scarce capital, knowledge, and long-term
partnerships that can help address critical constraints in areas such as finance, infrastructure,
employee skills, and the regulatory environment.
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IFC is also a leading mobilizer of third-party resources for its projects. Their willingness to
engage in difficult environments and their leadership in crowding-in private finance enable
them to extend their footprint and have a development impact well beyond their direct
resources.
The IFC is a member of the World Bank Group and is headquartered in Washington,
D.C., United States. It was established in July 1956 with the specific subject of providing
finance to the private sector.
Robert L. Garner, a New York financier joined the World Bank in 1947 as a senior executive
and expressed his view that private business could play an important role in international
development. In 1950, Garner and his colleagues proposed establishing a new institution for
the purpose of making private investments in the developing countries served by the Bank.
The U.S. government encouraged the idea of an international corporation working in tandem
with the World Bank to invest in private enterprises without accepting guarantees from
governments, without managing those enterprises, and by collaborating with third party
investors. When describing the IFC in 1955, World Bank President Eugene R. Black said that
the IFC would only invest in private firms, rather than make loans to governments, and it
would not manage the projects in which it invests. In 1956 the International Finance
Corporation became operational under the leadership of Garner. It initially had 12 staff
members and $100 million in capital. The corporation made its inaugural investment in 1957
by making a $2 million loan to a Brazil-based affiliate of Siemens & Halske.
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IFCs objective is to assist economic development by encouraging the growth of productive
private enterprise in its member nations, particularly in the underdeveloped areas. Thus, it
laid down the following objectives:
2.4 Governance
The World Bank Group is a vital source of financial and technical assistance to developing
countries. Established in 1944, its mission is to fight poverty with passion and
professionalism.
The World Bank Group consists of five distinct yet complementary organizations:
Although part of the Bank Group, IFC is a separate legal entity with separate Articles of
Agreement, share capital, financial structure, management, and staff. Membership in IFC is
open only to member countries of the World Bank. The President of the World Bank Group is
also the President of IFC.
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2.5 Organizational Structure
Established in 1956, IFC is owned by 184 member countries, a group that collectively
determines their policies. Through a Board of Governors and a Board of Directors, member
countries guide IFC's programs and activities.
Each of the member countries appoints one governor and one alternate. Corporate powers are
vested in the Board of Governors, which delegates most powers to a board of 25 directors.
Voting power on issues brought before them is weighted according to the share capital each
director represents.
The directors meet regularly at World Bank Group headquarters in Washington, D.C., where
they review and decide on investments and provide overall strategic guidance to IFC
management.
They apply lessons learned in one region to solve problems in another. They help local
companies make better use of their own knowledge, by matching it to opportunities in other
developing countries.
2.7 Funding
IFC raises virtually all funds for lending activities through the issuance of debt obligations in
international capital markets. Their borrowings are diversified by country, currency, source,
and maturity in order to provide flexibility and cost effectiveness.
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A consistent triple-A credit rating based on conservative policies and excellent financial
performance has assisted in building significant and distinct name recognition in the market
place for IFC. Since first being rated in 1989, IFC has been rated triple-A every year by
Standard and Poor's and by Moody's. Their high credit rating is essential for maintaining their
ability to access markets globally and to maintain their low cost of funding.
Under their funding program, IFC issues bonds in a variety of markets and formats, including
U.S. dollar benchmarks bonds, themed bonds that support a specific program such as green
bonds; uridashi notes; private placements; and discount notes. In addition, IFC issues local-
currency bonds to develop domestic capital markets and facilitate local-currency lending. In
fiscal year 2014, IFC borrowed the equivalent to $16 billion in 17 different currencies.
Besides raising capital through bond issuance, they invest their liquid assets globally and
manage them versus recognized industry benchmarks. They aim to outperform those targets
while preserving capital and ensuring funds are available as needed for their private sector
investments in developing countries.
They also manage currency and interest rate risks of assets and liabilities on IFC's funded
balance sheet within prudent risk limits. This allows them to tailor risk management and loan
products to the needs of IFC's clients while hedging the resulting market risks.
Investment services:
The IFC's investment services consist of loans, equity, trade finance, syndicated
loans, structured and securitized finance, client risk management services, treasury
services, and liquidity management.
In its fiscal year 2010, the IFC invested $12.7 billion in 528 projects across 103 countries.
Of that total investment commitment, approximately 39% ($4.9 billion) was invested into
255 projects across 58 member nations of the World Bank's International Development
Association (IDA).
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The IFC makes loans to businesses and private projects generally with maturities of seven
to twelve years. It determines a suitable repayment schedule and grace period for each
loan individually to meet borrowers' currency and cash flow requirements. The IFC may
provide longer-term loans or extend grace periods if a project is deemed to warrant it.
Leasing companies and financial intermediaries may also receive loans from the IFC.
Local financial markets development is one of IFCs strategic focus areas. In line with its
AAA rating, it has strict concentration, liquidity, asset-liability and other policies. The
IFC committed to approximately $5.7 billion in new loans in 2010, and $5 billion in
2011.
Although the IFC's shareholders initially only allowed it to make loans, the IFC was
authorized in 1961 to make equity investments, the first of which was made in 1962 by
taking a stake in FEMSA, a former manufacturer of auto parts in Spain that is now part
of Bosch Spain. IFCs private equity portfolio currently stands at roughly $3.0 billion
committed to about 180 funds. The portfolio is widely distributed across all regions
including Africa, East Asia, South Asia, Eastern Europe, Latin America and the Middle
East, and recently has invested in Small Enterprise Assistance Funds'
(SEAF) Caucasus Growth Fund, Aurous Capital's Kula Fund II (Papua New
Guinea, Fiji, Pacific Islands)and Leopard Capitals Haiti Fund.
The Global Trade Finance Program provides guarantees to cover payment risks for
emerging market banks regarding promissory notes, bills of exchange, letters of credit,
bid and performance bonds, supplier credit for capital goods imports, and advance
payments.
In 2009, the IFC launched a separate program for crisis response, known as its Global
Trade Liquidity Program, which provides liquidity for international trade among
developing countries.
The IFC operates a Syndicated Loan Program in an effort to mobilize capital for
development goals. The program was created in 1957 and as of 2011 has channelled
approximately $38 billion from over 550 financial institutions toward development
projects in over 100 different emerging markets.
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Financial derivative products are made available to the IFC's clients strictly
for hedging interest rate risk, exchange rate risk, and commodity risk exposure. It serves
as an intermediary between emerging market businesses and international
derivatives market makers to increase access to risk management instruments.
Advisory services:
In addition to its investment activities the IFC provides a range of advisory services to
support corporate decision-making regarding business, environment, social impact, and
sustainability. The IFC's corporate advice targets governance, managerial capacity,
scalability, and corporate responsibility. It prioritizes the encouragement of reforms that
improve the trade friendliness and ease of doing business in an effort to advise countries
on fostering a suitable investment climate. It also offers advice to governments on
infrastructure development and public-private partnerships.
The IFC attempts to guide businesses toward more sustainable practices particularly with
regards to having good governance, supporting women in business, and proactively
combating climate change.
The IFC reported a net income of $1.58 billion in fiscal year 2011. In previous years, the IFC
had reported a net loss of $151 million in fiscal 2009 and $1.75 billion in fiscal 2010. The
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IFC's total capital amounted to $20.3 billion in 2011, of which $2.4 billion was paid-in capital
from member countries, $16.4 billion was retained earnings, and $1.5 billion
was accumulated other comprehensive income. The IFC held $68.49 billion in total assets in
2011.
The IFC's return on average assets (GAAP basis) decreased from 3.1% in 2010 to 2.4% in
2011. Its return on average capital (GAAP basis) decreased from 10.1% in 2010 to 8.2% in
2011. The IFC's cash and liquid investments accounted for 83% of its estimated
net cash requirements for fiscal years 2012 through 2014. Its external funding liquidity level
grew from 190% in 2010 to 266% in 2011. It has a 2.6:1 debt-to-equity ratio and holds 6.6%
in reserves against losses on loans to its disbursement portfolio. The IFC's deployable
strategic capital decreased from 14% in 2010 to 10% in 2011 as a share of its total resources
available, which grew from $16.8 billion in 2010 to $17.9 billion in 2011.
In 2011, the IFC reported total funding commitments (consisting of loans, equity, guarantees,
and client risk management) of $12.18 billion, slightly lower than its $12.66 billion in
commitments in 2010. Its core mobilization, which consists of participation and parallel
loans, structured finance, its Asset Management Company funds, and other initiatives, grew
from $5.38 billion in 2010 to $6.47 billion in 2011. The IFC's total investment program was
reported at a value of $18.66 billion for fiscal year 2011. Its advisory services portfolio
included 642 projects valued at $820 million in 2011, compared to 736 projects at $859
million in 2010. The IFC held $24.5 billion in liquid assets in 2011, up from $21 billion in
2010.
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IFC Satellite Seminar on Big Data (21 March - draft
programme);
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Huey and Daniel Chin Shen Li (Bank Negara Malaysia)
received the IFC award for the best paper
presented by a young statistician "Measuring bank
risk-taking behavior: The risk-taking channel of
Monetary Policy in Malaysia".
In FY 14, IFC invested $428 million in 13 projects in Bangladesh. IFC has a large advisory
program in Bangladesh, with support from the UK Government, European Union, Norwegian
Agency for Development Cooperation, Dutch and other donor financiers. IFC works in areas
that are important for the Bangladesh economy such as agriculture, infrastructure, financial
markets, and energy efficiency. Their work in the country is aligned toward the priorities of:
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employment opportunities, fuel growth and spur innovation. IFC works with financial
intermediaries to help increase access to finance for small enterprises; supports
product standardization and new product development; and promotes environmentally
friendly financing.
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reduce environmental and related social impacts that result from prevailing practices
in textile wet processing, particularly excessive groundwater extraction and surface
water pollution. Program results will improve the global and local license to operate
of the textiles sector in Bangladesh and strengthen its long-term competitiveness.
Improving worker safety: IFC is promoting safety in the readymade garments sector
through improvements in emergency preparedness and regulatory regime; and
alternative dispute resolution. In doing so, the project expects to make a significant
contribution to safeguarding 4.2 million jobs. IFC will also work on a Better Work
program jointly with ILO to improve labour standards.
Bangladesh is a priority country for IFC. In FY13 IFC committed 12 projects for a
record investment volume of $774 million in the country, more than doubling their
investment commitment of over $250 million in FY11-12. Thus far in FY14, IFC has
committed 8 projects for $237 million. Bangladesh is one of IFCs largest country-
specific advisory programs worldwide, with annual spending of approximately $12
million for approximately 30 advisory projects.
IFC is proud of its talented team in Bangladesh and continues to bring in appropriate
resources based on specialization, experience and skills needed in line with strategic
and business requirements to partner appropriately in Bangladesh's development
agenda. Their advisory work, most of which has in the past been fully or partly
funded by donors, is similarly driven by strategic imperatives. So, for example, South
Asia Enterprise Development Facility is ending having completed its deliverables.
Instead, momentum is now gathering towards designing and implementing new
programs like Partnership for Cleaner Textiles (PaCT), Better Work (BW), and South
Asia Regional Trade & Investment (SARTI), along with partner institutions.
Chapter-3
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3.0 Criticisms of IFC
FC comes under frequent criticism from NGOs that it is not able to track its money because
of its use of financial intermediaries. For example, a report by Oxfam International and other
NGOs in 2015 called "The Suffering of Others" found the IFC was not performing enough
due diligence and managing risk in many of its investments in third party lenders. Other
criticism focuses on IFC working excessively with large companies or wealthy individuals
who should be able to finance their investments without help from public institutions such as
IFC, and those investments do not have an adequate positive development impact. An
example often cited by NGOs and critical journalists is IFC granting financing to a Saudi
prince for a five star hotel in Ghana.
Chapter-4
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4.0 Conclusion
As mentioned earlier IFC, considered to be the largest global development institution, focuses
exclusively on the private sectors of developing countries. It is an institution comprising of
184 member countries and is made with the assistance of five distinct yet complementary
organizations. They raise their funds from what they earn from the lending activities in the
international financial market. It is largely known for its investing and advising services that
they provide to their member countries. For the fiscal year of 2014-2015 IFC has invested
$428 million in 13 projects in Bangladesh with five very important goals in view. Despite the
popularity amongst countries, it has been widely criticised for its lacking in keeping records
of their transactions or investments due to their financial intermediaries and has also been
criticized for investing in financially stable institutions. Regardless of these criticisms, IFC is
still growing strong and is still working its way in establishing its main goals.
As part of its commitment to achieve financial sustainability and greater development impact,
IFC is working to enhance its poverty focus and emphasize a shift from a volume culture to
development impact and financial sustainability and the measurement of development results.
This focus is coalescing around the IFC Development Goals, a new set of goals that is being
piloted in selected investment operations and advisory services and the creation of the
Development Impact Department. The newly created Inclusive Business Models Group aims
to enable IFC to expand its investment and advisory services support to companies with
business models that provide goods, services, and livelihoods to populations at the base of the
pyramid. Most recent regional and sectorial strategies reflect an increasing focus on reaching
the poor and linking with development objectives. They hope that with these new
developments, they can reach a step further in reaching to their ultimate goals.
References
http://www.expertsmind.com/questions/functions-of-the-ifc-30123186.aspx
http://www.yourarticlelibrary.com/organization/international-finance-
corporation-i-f-c-objectives-and-working/26265/
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http://www.economywatch.com/international-organizations/ifc-member-
countries.html
http://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporat
e_site/about+ifc_new
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