International Financial Institutions (IFIs): IMF, World Bank, IBRD, IDA, IFC, MIGA, ICSID

What is International Financial Institutions?

International Financial Institutions (IFIs) play an important role in the social and economic development of developing or transitional economies in many parts of the world. This function includes providing advice on development projects, as well as funding and aiding with their implementation.

International financial institutions functions independently, with AAA credit ratings and a diverse membership of borrowing and donor countries. IFIs help national governments attain these goals by providing loans, credits and grants. Typically, such money is tied to specific projects that support economic and social sustainability IFIs also assist their borrowers with technical and advisory services and conduct substantial research on development concerns.

IFIs are increasingly lending directly to Non-Sovereign Guaranteed (NSG) players, in addition to these public procurement opportunities, in which multilateral finance is supplied to a national government for the implementation of a project or program. Sub-national government entities, as well as the commercial sector, are among them.

Roles of International Financial Institutions

Following are the roles of IFIs:

• To alleviate poverty across countries and bring an improvement in people’s living conditions
  
  
• To promote long-term economic, social and institutional growth
  
  
• To encourage regional integration and collaboration

Functions of International Financial Institutions

International financial institutions, are institutions of finance founded by two or more nations. International law is applicable to international financial institutions. Although occasionally acting as shareholders, other international institutions and other organizations, such institutions are owned and run by the national governments.

The following are the functions of IFIs:

Currency rate stability

IFIs are responsible for maintaining the stability of its member countries’ foreign exchange rates on adequate gold or dollar (US) par values for their various currencies (the connection with gold was severed in January 1976) in order to create a system of stable exchange rates.

Multinational convertibility of currencies

Within the established limitations of each member’s quota, IFIs arrange for multinational convertibility of currencies of member nations. As IFIs hold the currencies of all member countries, each member can purchase the currency it requires.

Short-term payments assistance

IFIs ensure that the foreign exchange resources are being used by its members, subject to appropriate safeguards, to help them meet short-term or medium-term payment challenges.

International trade promotion

IFIs aim to promote international trade by persuading member countries to avoid restrictive currency policies and trade barriers such as multiple exchange rates, exchange control and so on. Countries that maintain exchange controls must defend their actions.

Allocation of special drawing rights

IFIs replace the members’ existing reserve assets in the Special Drawing Account as and when needed and distribute funds from the account to member nations.

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International Monetary Fund (IMF)

The International Monetary Fund (IMF) is a worldwide institution that fosters international commerce, fights poverty and works to increase financial stability and global economic progress.

The voting power in IMF decisions is significantly influenced by the quotas of member nations. Votes consist of basic votes + one vote for every 100,000 Special Drawing Rights (SDR) of quota. The IMF introduced SDRs, an international kind of reserve currency, to augment member nations’ existing cash reserves.

The International Monetary Fund (IMF), which has its headquarters in Washington, D.C., now has 190 member nations, each of which is represented on the IMF’s executive board in accordance with the significance of its financial standing. The voting power in IMF decisions is significantly influenced by quotas. Votes consist of basic votes + one vote for every SDR 100,000 of quota (same for all members).

According to the IMF’s website, its goal is “to promote high employment and sustained economic development, ensure financial stability, facilitate international commerce and decrease poverty across the globe.”

The International Monetary Fund (IMF) is a specialised institution of the United

Functions of IMF

The International Monetary Fund (IMF) was established with the goal of reducing international business and economic volatility by fostering a climate of economic cooperation among countries.

Functions of IMF:

• Regulatory function: The Fund is responsible for enforcing a set of norms established by its (AOA — Articles of Agreement).
  
  
• Financial function: It serves as a clearinghouse for resources to address short-term and medium-term BOP imbalances experienced by member countries.
  
  
• Consultative function: It serves as a centre for international cooperation as well as a source of advice and technical help to its members.

IMF’s other important functions include:

• It is a short-term credit organisation, for starters.
  
  
• It has machinery in place to ensure that exchange rates are adjusted in a timely manner. ‰‰It is a pool of all member countries’ currencies from which a borrowing country can borrow the currencies of other countries.
  
  
• It is a type of foreign exchange lending institution. It does, however, only provide loans for current operations and not for capital transactions.
  
  
• It has also has the capability of changing the par value of a member country’s currency on occasion. In this manner, it strives to ensure that exchange rates adjust in a predictable manner, improving member nations’ long-term balance of payments situation.
  
  
• It also provides the necessary infrastructure for international dialogues.

Objectives of IMF

The IMF’s goals were as follows:

• Promoting international monetary cooperation
  
  
• Enabling balanced international trade growth
  
  
• Promoting the stability of exchange rate
  
  
• Supplying resources to members experiencing balance-of-payments issues
  
  
• Encouraging monetary cooperation among various governments of the world
  
  
• Replacing bilateral agreements with a multilateral payments and commerce system
  
  
• Making every effort to abolish any foreign exchange restrictions
  
  
• Encouraging trade consistency, maintaining negotiated exchange arrangements among members and avoiding aggressive devaluation

While these were the IMF’s broad aims when it was founded, the IMF has evolved to meet the changing global economic situation.

Some of the changes in the IMF’s objectives include:

• Improving lending facilities to newly developed market economies
  
  
• Assisting in the resolution of economic imbalances worldwide
  
• Continuously monitoring and assessing the financial sector’s vulnerabilities
  
  
• Assisting countries in achieving the Millennium Development Goals Collaborating closely with the World Trade Organisation (WTO) and other multilateral organisations to help LDCs integrate into the global trade system.

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World Bank

The World Bank is a global financial agency that lends and gives money to governments in less-income and middle-income nations to fund capital projects. The International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), two of the World Bank Group’s five international entities, are referred to as the World Bank.

At the 1944 Bretton Woods Conference, it was founded with the International Monetary Fund. It provided first loan to France in 1947, after a sluggish start. Its aim in the 1970s was to provide loan to developing countries, but it shifted away from that mission in the 1980s.

It has incorporated NGOs and environmental groups in its lending portfolio for the past 30 years. The Millennium Development Goals, as well as environmental and social protections, impact its credit approach.

The World Bank is led by a president, as well as 25 executive directors and 29 vice presidents. There are 189 and 174 member countries in the IBRD and IDA, respectively. The United States, Japan, China, Germany and the United Kingdom have the most votes. The bank provides loans to developing countries in order to alleviate poverty.

The bank is involved in a number of global partnerships and initiatives, as well as trying to combat climate change. The World Bank has several training wings and collaborates with the Clean Air Initiative and the United Nations Development Programme. It is affiliated with the Open Data Initiative and maintains an Open Knowledge Repository.

Functions of World Bank

To aid in the growth of national economies, the World Bank offers grants, low-interest loans and zero-interest credits to eligible governments. Global healthcare, governmental administration, infrastructure and private-sector growth are all aided by debt borrowings and financial infusions. Through technical help, research and analysis and policy advice, the World Bank also exchanges information with numerous organisations. For the public and private sectors, it provides guidance and instruction.

The following are the functions of the World Bank:

The World Bank currently performs a critical role in providing loans to member countries for development projects, particularly in developing countries. For various development projects, the bank offers loans with maturities ranging from 5 to 20 years.

• The Bank has the authority to lend up to 20% of its paid-up capital to member countries.
  
  
• The Bank also lends to private investors who are members on its own guarantee, although private investors must first obtain license from their own nation.
  
  
• The World Bank determines the amount of loan service, interest rate and terms and conditions.
  
  
• Generally, World Bank provides loans for a specific project that the member country has officially filed to the bank.
  
  
• Either reserve currencies or the currencies in which the loan was sanctioned must be used to repay the debtor nation.

Objectives of World Bank

The following are the objectives of the World Bank:

• To provide long-term financing to member states for economic recovery and development
  
  
• To promote long-term capital investment in order to keep the BOP balanced and international trade development balanced
  
  
• To encourage capital investment in member nations by implementing the following strategies
  
  
• To assist with private loans or capital investments by providing a guarantee
  
  
• To offer loans for productive operations under reasonable terms if capital is still unavailable following a guarantee
  
  
• To enable the implementation of development initiatives in order to ensure a smooth transition from a war-torn economy to a peaceful one.

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International Bank for Reconstruction and Development (IBRD)

The International Bank for Reconstruction and Development (IBRD) is an 189-member worldwide development cooperative. It serves the World Bank Group’s purpose by providing loans, guarantees, risk management instruments and advisory services to middle-income and creditworthy low-income nations, as well as coordinating solutions to regional and global issues as the world’s largest development bank.

IBRD was established in 1944 to assist Europe in its post-World War II reconstruction. It later merged with IDA, the fund for the poorest countries, to become the World Bank. They collaborate closely with all World Bank Group institutions, as well as the public and commercial sectors in developing countries, to alleviate poverty and promote shared prosperity.

The World Bank is primarily responsible for providing loans to member countries for development projects, particularly in developing countries. The World Bank offers long-term financing for projects ranging from 5 to 20 years in length.

Functions of IBRD

The following are the functions of IBRD:

• The World Bank provides member countries with a variety of technical services. The Bank has established “The Economic Development Institute” and a Staff College in Washington for this aim.
  
  
• The bank can lend up to 20% of a member country’s paid-up capital to that country.
  
  
• The Bank determines the amount of loans, the interest rate and the terms and circumstances.
  
  
• In general, the Bank grants loans for specific projects that the member country has officially presented to the Bank.
  
  
• Either reserve currencies or the currency in which the loan was sanctioned must be used to repay the debtor countries.
  
  
• The bank also lends to private investors from member nations on its own guarantee, although private investors must first obtain approval from the counties where the funds would be collected.

Objectives of IBRD

The following are the objectives of IBRD:

• Provide long-term financing to member countries for economic recovery and development
  
  
• Promote long-term capital investment in order to sustain the balance of payments (BOP) and a balanced international trade development
  
  
• Offer financial backing for loans to small and large businesses, as well as other projects in member countries
  
  
• Assist in the implementation of development initiatives in order to facilitate a smooth transition from a war economy to a peace economy
  
  
• Encourage capital investment in member countries using the following methods:
  • Assisting with private loans or capital investments
    
    
  • If private money is unavailable despite the guarantee, the IBRD provides loans for productive activities under reasonable terms

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International Development Association (IDA)

The IBRD has an associate, the International Development Association (IDA). It was founded in 1960 to provide ‘soft loans’ to financially sound initiatives that generate ‘social capital’ such as road and bridge construction, slum removal and urban development.

The IDA takes on projects that fall into the category of ‘high development priority’ because they promote the development of the area in question, but the project returns are insufficient to cover the high interest rates on borrowings.

The International Development Association (IDA) provides funding to high-priority initiatives in member countries. The money might be made accessible to member governments or private businesses. Advances to private businesses may be done without the involvement of the government. It also works with other international organisations and member countries to provide financial and technical support to developing nations.

Functions of IDA

The IDA’s financial aid has some unique functions:

• There is no interest on the credit. To compensate administration costs, a minor service charge of 3/4% per year is charged on the amount withdrawn and outstanding.
  
  
• The repayment period is lengthy, spanning 50 years. There is a ten-year moratorium, after which the amount borrowed must be repaid over the next 40 years.
  
  
• IDA not only pays for the foreign exchange component, but also for a portion of the domestic costs.
  
  
• The credit can also be repaid in the borrowing country’s local currency. As a result, the loan repayment does not put a strain on the country’s balance of payments.

Objectives of IDA

The following are the objectives of IDA:

• To make development funds available to those member nations who are on the path of development on favourable terms
  
  
• To encourage economic growth in impoverished areas by increasing production and, as a result, raising living standards

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International Finance Corporation (IFC)

The International Finance Corporation (IFC) is a multilateral financial agency that provides investment, consulting and asset management services to help developing countries build their private sector. The International Finance Corporation (IFC) is a member of the World Bank Group with headquarters in Washington, D.C.

It was founded in 1956 as the World Bank Group’s private-sector arm to promote economic development by investing in for-profit and commercial enterprises aimed at poverty reduction and development.

Functions and Objectives of IFC

Functions and objectives of IFC are as follows:

• In circumstances where adequate private money is unavailable on fair terms, investing in productive private firms in conjunction with private investors and without government assurances of repayment is one important function
  
  
• To act as a clearinghouse for investment possibilities, private cash (both local and international) and skilled management
  
  
• To aid in the stimulation of productive private capital investment, both domestic and international

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Multilateral Investment Guarantee Agency (MIGA)

The Multilateral Investment Guarantee Agency (MIGA) is an international organisation that encourages investment in developing nations by insuring against political and economic risk.

The agency’s goal is to assist economic growth, eliminate poverty and enhance people’s lives through encouraging foreign direct investment into developing nations.

The Multilateral Investment Guarantee Agency (MIGA) is based in Washington, D.C. and is a member of the World Bank Group. MIGA has 181 member states as of March 2020, with 156 poor countries and another 25 industrialised countries.

Functions and Objectives of MIGA

The Multilateral Investment Guarantee Agency specialises in political risk insurance, which protects investments from hazards such as political instability, civil wars and terrorism. It protects foreign direct investment projects in a variety of sectors, including agriculture, from non-commercial hazards.

Markets for Financial Services Financial markets, as the name implies, are a form of marketplace that allows you to sell and buy assets such as bonds, equities, foreign exchange and derivatives. They go by various names, such as “Wall Street” and “capital market,” but they all refer to the same thing, infrastructure, power and renewable energy, solid waste management, telecommunications, tourism and transportation.

It gives investors and lenders more confidence in the safety and return on their investments. MIGA, such as any other insurance company, charges investors an insurance premium.

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International Centre for Settlement of Investment Disputes (ICSID)

ICSID allows for dispute resolution through conciliation, arbitration or fact-finding. The ICSID process is made to take into account the unique peculiarities of international investment disputes and the other players that are involved, while maintaining a proper balance between investors’ and host countries’ interests.

Functions and Objectives of ICSID

The Secretariat’s main responsibilities include:

• Providing institutional help for the start and conduct of ICSID proceedings
  
  
• Assisting in the formation and operation of conciliation commissions, arbitral tribunals and ad hoc committees
  
  
• Administering the proceedings and finances of each case