Friday, August 28, 2009

International Finance Corporation (IFC)

International Finance Corporation (I.F.C) is an institution of the World Bank Family. It was established in 1950. It is the major multilateral agency promoting productive private investment in developing countries by providing long-term loans and risk capital at commercial rates for maturity of 7 to 12 years. Its membership is open to all members of IBRD.

The purpose for which IFC was setup has been laid down in Article 1 of Articles of Agreement as “the purpose of the corporation is to further economic development by encouraging the growth of productive private enterprise in member countries, particularly in the less developed areas, thus supplementing the activities of IBRD. In carrying out this purpose, the corporation shall:

(i) in association with private investors, assist in financing the establishment, improvement and expansion of productive private enterprise which would contribute to the development of its member countries by making investments, without guarantee of repayment by member Government concerned, in cases where sufficient private investment is not available on reasonable terms;

(ii) Seek to bring together investment opportunities, domestic and foreign private capital and experienced management; and

(iii) Seek to stimulate and help to create conditions conductive to the flow of private capital, domestic and foreign into productive investment in member countries.

Organization of the I.F.C:

The I.F.C is the sister organization of the World Bank but it is separate from the World Bank, except for the fact that only a member of the Bank can be its member. It has its own staff but draws upon the Bank for administrative services. Its organizational structure regarding the President, the Chairman, the Board of Governors and Executive Directors in one the pattern of the World Bank. The World Bank President is the ex-officio Chairman of the Board of Directors of the IFC. But all the administrative powers of the IFC are vested in the Vice President of the IFC. The corporation has eight departments of these four relate to investment which function on geographical basis. The remaining four departments relate to capital markets, finance and management, legal matters and engineering which operates on functional basis.

The Types of Assistance Rendered by IFC:

The following types of assistance are rendered by IFC to private enterprises.

1. Investment: The IFC promotes productive private investment in developing countries in three ways (i) by direct investment (ii) by securing foreign and local capital, and (iii) by providing guidance and technical assistance. It provides long term loans and risk capital at commercial rates for maturity of 7 to 12 years. It invests in partnership with private investors from the capital exporting country or from the country in which the enterprise is located. But its investments will not be more than half of the capital requirements of the enterprise. The minimum investment by the Corporation in an enterprise is $1 million, but there is no upper limit. The enterprise seeking loans from IFC should be industrial, located in a developing country and should satisfy the criteria of both economic development and reasonable commercial return. The corporation’s assistance is not lied to expenditure in any particular country, but must be spent in the member country. It is used to buy machines and other equipments and to meet foreign exchange, local costs, working capital and any other legitimate business expenses. It does not seek or accept any type of government guarantee for making investments and repayment of loans, except when it is required by law in a country.

2. Secure Foreign and Local Capital: The IFC participates in promoting productive private investment in developing countries by way of equity and loan investment. It under writes equity capital, helps in sponsoring and bringing together investors for new enterprises. Thus it secures the cooperation of both foreign and local enterprises. It helps them in making feasibility studies of proposed projects.

3. Technical Assistance: The IFC provides project sponsors with the necessary technical assistance so that their enterprises are potentially productive and financially sound. For this purpose it undertakes financial studies and analysis. It also provides policy assistance to member governments so that they may develop the necessary investment climate to attract foreign and local private enterprise.

4. Capital Markets Development: The Corporation has a Capital Markets Development which provides specialised resources for studying the problems and needs of the financial markets of developing countries. It provides financial support and advice for the development of financial institutions and helps in developing a legal financial and institutional frame work which may encourage local and foreign capital in developing countries. The Corporation has been instrumental in the promotion of financial institutions development finance companies, leasing and venture capital companies, mutual fund etc by giving technical assistance to developing countries.

Over the years IFC has played an important role in promoting productive private investment in developing countries by providing loans and equity capital by rendering technical advice in the promotion of capital and money markets by bringing foreign and local enterprise to cooperate in joint ventures in starting new industrial projects. But its developing economies and very little to the less developing economies.

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