45 INTERNATIONAL
FINANCIAL
INSTITUTIONS
1. THE WORLD BANK
The International Bank for Reconstruction and
Development (IBRD), better known as the World Bank,
was established at the same time as the International
Monetary Fund to tackle the problem of international
investment.. Since the IMF was designed to provide
temporary assistance in correcting the balance of payments
difficulties, an institution was also needed to assist long
term investment purposes. Thus, IBRD was established
for promoting long-term investment loans on reasonable
terms.
TheWorld Bank (BRD) is an inter-governmental
institution, corporate in form, whose capital stock is
entirely owned by its member-governments. Initially,
only nations that were members of the IMF could be
members of the World Bank; this restriction on membership
was subsequently relaxed.
Functions
The principal functions of the IBRD are set forth
in Article I of the agreement as follows:
1. To assist in the reconstru ction and development
of the territories of its members by facilitating
the investment of capital for productive purposes.
2. To promote private foreign investment by means
of guarantee of participation in loans and other
investments made by private investors and when
private capital is not available on reasonable
terms, to make loans for productive purposes
out of its own resources or from funds borrowed
by it.
3. To promote the long-term balanced growth of
international trade and the maintenance of
equilibrium in balance of payments by encouraging
580
international investment for the development
of the productive resources of members.
4. To arrange loans mnade or guaranteed by it
in relation to international loans through other
channels so that more useful and urgent projects,
large and small alike, will be dealt with first.
It appears that the World Bank was created
to promote and not to replace private foreign
investment. The Bank considers its role to be
amarginal one, to supplement and assist foreign
investment in the member countries.
Alittle consideration will show that the objectives
of the IMF and IBRD are complementary. Both ain
at increasing the level of national income and standard
of living of the member nations. Both serve as lending
institutions, the IMF for short-term and the IBRD for
long-term capital. Both aim at promoting the balanced
growth of international trade.
Organisation
Like the Fund, the Bank's structure is organised
on a three-tier basis: aBoard of Governors, Execuve
Directors and a President. The Board of Governors 15
the supreme governing authority. It consists o
governor (usually the Finance Minister) and one alterna
governor (usue ly the governor of a central bank), appointed
for five years by each member. The Board is required
to meet once every year. It reserves to itselfadmissions,
the po
to decide important matters such as new
changes in the bank's stock of capital, ways and me
of distributing the net income, its ultimate liquidation,
Board
etc. For all technical purposes, however, the the
in
delegates its powers to the Executive Directors
day-to-day administration.
 INTEHI FINANCIAL INSTITUTIONS 5e1

At present, the Executive Directors are 19 in number. and surplus. The interest rate charged by the Bank
of which five are nominated by the five largest shareholders on its loans is the estimated cost to the Bank of
- the USA, the UK, Germany, France and India. The borrowing
rest are elected by the other members. money for a comparable term in the market and is
The Executive Directors elect the
uniform without distinction among borrowers. In addition
President who to the rate of interest, the Bank
charges on all loans
becomes their Ex-officio
their presence. He is theChairman
chief of
holding office during
the operating staff
a commission of 1 per cent for the purpose of
creating
of the Bank and is subject to the a special reserve against losses and ½ per cent for
Directors on questions of policydirection
of the Executive
and is administrative expenses.
the conduct of the ordinary
business of
responsible for In recent years, the Bank has made loans
mainly
its organisation. the Bank and for specific development projects in the field of
power, transport and industry. Most of the loans agriculture,
have
Capital Resources been made to the underdeveloped countries. India is
The World Bank, like the Bank's largest individual borrower.
an authorised capital of $ 21 any other corporation, has
shares, each having a par value billion divided into 210,000 Technical and Advisory Assistance
$ In
however, its authorised capital was1,00,000. Initially,
$ 10 billion. Of
addition to providing financial
member countries, the Bank has been assistance to
the present authorised capital, $
by the issue of 20.48 billion are subscribed service to its members by providing them rendering signal
204,848 shares. assistance suitable technical
cent of the par value, viz., $ However, only 10per to assess their total
economic
priorities to be followed in theirresources
2.04 billion, have so far to set up and
been called in as paid-up capital. development
the Bank can be The capital stock of programmes. Technical assistance on a boarder scale
increased if a
of the total voting power is castthree-fourths majority has also been provided, for
in its
paid-up capital, 2per cent has to be favour. Of the programming through Surveyinstance, in development
Missions, which make
gold or US dollars, the subscribed in intensive studies of national resources and
remaining 98 per cent to be recommendations to serve as the basis of formulate
paid in the currency of the long-term
member. development programmes.
In addition to the
Lending Operations with financial assistancetraining
from theprogramme,
the Bank,
Loans are granted to Rockefeller
Foundations, has set up in Washington an and Ford
the Bank is fully satisfied member countries only after
about
of the borrowing country as wellthe economic position Development Institute to
groups of senior officials provide an opportunity Economic
to selected
as the soundness of from the less
the specified projects for which to participate developed
countries
In granting loans, the Bank is assistance is sought.
prepared to take reasonable studies designedannually in an
international
to give them a course of
risks but insists that funds obtained from the problems of broad perspective of
their efficiency. economic development and to
it
Used for purposes which are constructive andshould be increase
Ine Bank has powers of supervision and practical.to
ensure that funds are used for the purposes control
for which
Criticism
the loan is granted. Normally, the Bank makes The modus operandi of the
or long-term loans, the term being related to the medium on various counts Bank has been criticised
from different quarters:
useful life of the equipment or plant being estimated 1. It is alleged that the
financed. rate of interest on Bank charges a very high
The Bank makes or facilitates loans in any
Or more out of its own one of the loans which loans. For example, some
following ways: India has received in
(a) by making or participating in direct loans out
years bear an interest of 53.4 recent
per cent including
the commission at l per
of its own funds; or to the Bank's cent which is credited
(6) out of the funds raised in the market of a member, special reserves.
2. The Bank's
or otherwise borrOwed by the Bank; or of loan, on insistence, prior to the actual grant
the country having the
C) by guaranteeing, in whole or in part, loans to transfer or capacity
repay, is open to criticism.
made by private investors through the investment Bank should not apply The
channels. orthodox
judge the transfer capacity of anystandards to
The total outstanding amount of the loans made country. Transfer capacity follows rather borrowing
than
precedes the loan.
entQuaranteed
of its total
by the Bank is not to exceed 100 per
unimpairedsubscribed capital resources
3. The financial help
given by the
amount to more than a drop in Bank does not
the big ocear
 582 MONEY, BANKING, INTERNATIONAL TRADE AND PUBLIC FINANCE
of financial requirement so essential for various
development projects.
Conclusion
It may be said that the World Bank has not come
up to the expectations of many nations. Nevertheless,
it has been instrumental to avery large extent in initiating
and accelerating the work of economic reconstruction
and development in different countries. No doubt, India
has derived immense benefit from the World Bank.
The Bank may have failed to finance most of the development
projects, but it should be remembered that it has financed
quite a large number of them which have proved a
notable success. The Bank has also playeda significant
role outside financial matters by serving as a mediator
between different countries on major economic and
political issues. For instance, its help in the solution
of the Indus Waters between India and Pakistan and
theSuez Canal dispute between the U.K. and the U.A.R.
has been invaluable.
2. INTERNATIONAL FINANCE
CORPORATION (.F.C.)
The Intermational Finance Corporation was established
in July 1956, with the specific subject of providing
finance to the private sector. Though it is affiliated to
the World Bank, it is a separate legal entity with separate
fund and functions. Members of the World Bank are
eligible for its membership.
Objectives
IFC's objective is to assist economic development
by encouraging the growth of productive private enterprise
inits member nations, particularly in the underdeveloped
areas. Thus, it laid down the following objectives:
1. To invest in productive private enterprises, in
association with private investors, and without
government guarantee of repayment, in cases
where sufficient private capital is not available
on reasonable terms.
2. To serve as a clearing house to bring together
investment opportunities, private capital (both
foreign and domestic) and experienced
management.
3. To help in stimulating the productive investment
of private capital, both domestic and foreign.
Working
The IFC considers onlysuch investment proposals
whose objective is the establishment, expansion or
improvement of productive private enterprises which
will contribute to the development of the
the country concerned. Industrial, agricultural, economy of
commercial, and other private enterprises are ,financial,
eligible
for IFC financing, provided their operations are product
in character.
The IFC is authorised to invest its funds in m2n.
forms it deems 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 ie
tobe negotiated in each case in the light ofall 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. It does not
itself assume responsibility of managing the enterprise.
In India the IFC has so far made six investment
commitments totalling over $ 7 million.
However, the actual working of the IFC has ben
rather slow. That there is great scope for its work is
quite evident from its resources and investment portfolios.
It is hoped that IFC will in future be more fully able
to play a dynamic investor's role in the.economic development
of the poor nations.
3. INTERNATIONAL DEVELOPMENT
ASSOCIATION (|.D.A.)
The International Development Association (|DA)
was established in 1960. affiliated to the World Bank.
It was started to provide finance to less developed members
on a "soft" loan basis, that is, on terms imposng
lower servicing charge on loans than what the conventional
bank charges.
Objectives
of the
The following are the principal objectives
IDA:
I. To provide development finance on easy te
to less developed member countries.
2. To promote economic development, increa
standards
productivity and thus, raise the
living in the underdeveloped areas.
Working furthering
Thus, IDAis looked a means of
upon as Bankandas
the development activities of the World charter,
a supplementary to the Bank's activities. Under its
calculatedto
which are concerned
the IDA is to support projects
contribute to the development of the country not. The
IDA
whether they are directly productive or
 INTERNATIONAL FINANCIAL INSTITUTIONS 583

credits would be called development credits to distinguish

them from conventional loans, and these would be repayable II. OBJECTIVE TEST
mostly in the currency lent rather than in the currency 1. World Bank is also called:
of the borrower. Since IDA charges nominal rates of
(a) International Finance Bank.
interest on its loans, it has also been nicknamed the (b) Intermational Bank for Reconstruction and Development.
"Soft-Loan Window." (c) World's Central Bank.
IDA has granted a number of credits to India for (d) Inter-governmental Bank.
her development schemes. The grant of credits for 2. Which is not the function of the World Bank:
development projects given by IDA to India has been (a) to arrange loans for urgent projects.
in the nature of a continuous flow. But for the funds (b) to assist in reconstruction and development.
that have been made available by IDA to India, our (c) to promote the long-term balanced growth of regions
development pace would have been considerably slower. of a country.
(d) to encourage international investment.
In fine, it may be said that the IDA is expected
to make a distinct contribution to the economic development 3. The major difference between IMF and IBRD is:
of backward nations, furthering their development projects (a) Locational.
Bank.
and supplementing the activities of the World (b) Short-term and long-term lending.
Moreover, unlike the World Bank loans which are meant (c) Promotional.
the IDA loans (d) None of the above.
to cover onlythe foreign exchange costs, exchange and
can be utilised to finance both foreign 4. International Finance Corporation aims at:
local currency costs. (a) encouraging the growth of productive private enterprise.
(b) encouraging state enterprise.
DISCUSSION (c) encouraging the flow of capital in the world.
I. QUESTIONS FOR (d) All of the above.
World Bank. 5. International Development Association is affiliated to:
functions and working of the
1. Examine the (a) the IMF.
2. Write notes on:
(b) the IFC.
Finance Corporation.
(i) International (c) the IBRD.
Development Association.
(ii International facilitating and (d) None of the above.
the usefulness of the IBRD in 6. IDA is known as:
3. Discuss
promoting long-term investment.
(a) the World Bank.
(b) the Soft-loan window.
(c) the term-lending institution.
(d) the pocket-edition of IMF.