International Financial Organizations

 

1.0. INTRODUCTION

The three International Financial Organizations that you will study in this note are the World

Bank- the International Bank for Reconstruction and Development (IBRD); the International

Monetary Fund (IMF); and the African Development Bank (ADB).

 The World War II had disastrous impact on most European countries. Most of the industrial

centers in Europe were damaged and excessive imports and borrowings to prosecute the war led

to prolong deficits in the balance of payment accounts of most countries. A meeting then was

held in Breton Wood, U.S.A in 1944 to find solution to these problems and at the end of this

meeting, two institutions emerged. These were the International Bank for Reconstruction and

Development (IBRD) World Bank; and the International Monetary Fund (IMF). In this Note,

you shall learn about the objectives, functions and the sources of funds of these international

financial institutions, and also the functions and sources of funds of the African Development

Bank (ADB).

2.0. OBJECTIVES

At the end of this note, you should be able to;

· Describe how the World Bank Originated;

· Discuss the Functions/ purpose of the World Bank;

· Explain the main sources of funds of the world Bank;

· Describe the IMF

· Discuss the objectives and functions of the IMF

· Discuss the functions and sources of funds of the ADB

3.0. INTERNATIONAL FINANCIAL ORGANIZATIONS

3.1. The World Bank -The International Bank for Reconstruction and

Development (IBRD)

The Bank came into existence in 1945, following the deliberations of the representatives of the

44 nations assembled at Breton Woods, New Hampshire, and U.S.A. in 1944. The participants at

the Breton Woods conference realized that at the end of the World War II, there was a pressing

need for international capital to finance the reconstruction of productive facilities destroyed by

the war and to increase productivity and living standard of the underdeveloped countries of the

world in accelerating the pace of economic growth. By 2009, the banks membership stood at

over 151 countries with Headquarters still at Washington D. C, U.S.A.

3.1.1. Functions /purpose of the World Bank

The major functions or purpose of establishing the World Bank are enumerated below:

i. Reconstruction of the war-devastated economies and development of economically

backward countries through investment and capital accumulation and through the use

of productive capacity for production of goods and services.

ii. To promote long-term balanced growth of international trade and maintenance of

equilibrium in the balance of payments by encouraging international investment for

the development of productive resources of the members, thereby assisting in raising

the standard of living.

iii. To assist in bringing out a smooth transaction from a war – time to a peaceful time

economy.

iv. To underwrite loans to developing nations who are members.

v. Renders technical assistance to less developed countries who are members.

vi. It can also borrow money from member-nations (advanced, rich nations) to finance its

own loans.

vii. It also comments on the financial buoyancy and credit – worthiness of a borrowing

nation through its expertise and understanding of financial matters. It issues

certificates of credit worthiness and those are acceptable and respectable the world over.

3.1.2. The main sources of funds of the World Bank

The World Bank has three main sources of funds. These are outlined and explained

below:

Its own capital: This refers to its authorized capital. This is made up of subscribed capital, paidin

capital and amounts subject to call.

Retained Earnings: A proportion of the Bank’s retained earnings (net) are transferred in the

form of grants to one of its affiliates, International Development Association (IDA), and the

balance transferred to the general special resources.

Borrowings: This forms the largest sources of the Banks funds for lending and the major

sources of borrowing are the international capital markets of the capital-rich members.

3.1.3 The General Provisions regarding Loans and Guarantees by the World Bank

The banks provisions regarding loans and guarantees are outlined below. That is, the

bank can make loans or guarantee subject to the following conditions.

i. The World Bank ensures that the borrowers and the guarantor have the paying

capacity.

ii. With the exception of loans given to the International Finance Corporation (IFC),

every loan must be made to or guaranteed by the member-government (Or other

competent authority) on its behalf acceptable to the World Bank, in whose territory

the project to be finance is located.

iii. It lends only for productive purposes and in non- military projects.

iv. It must ensure that the project to be financial will be able to provide a return

commensurate with the amount of investments, that is, return must be enough to

service its debt obligations and show a surplus thereafter.

v. Except in special circumstances, the World Bank Loans are for specific projects.

vi. A loan made for a project cannot be diverted to any other use.

vii. Only economic considerations inform the bank’s decision to give loans.

viii. There must be a written report, prepared by a competent committee after careful study

of the merits of the proposal, recommending the project.

ix. The World Bank deals only with member governments, their Central Banks or some

other component agencies.

x. A project slated for financing must be able to contribute to the economic development

of the borrowing member nation.

xi. The bank has the right to determine the loan amount and conditions though it has to

satisfy itself that the interest rate and other charges are reasonable and appropriate to

the project.

xii. The loan amount or guarantee is not limited by the members subscribed capital.

xiii. The interest on the loan must be paid in currencies in which the loan was made.

3.2. The International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an intergovernmental monetary and financial

organization. The IMF, as a Breton Woods institution, is an intergovernmental pillar supporting

the structure of the World’s economic and financial order. The IMF was formed in reaction to

the unresolved financial problems instrumental in initiating and protracting the Great Depression

of the 1930: Sudden, unpredictable variations in the exchange values of national currencies and a

widespread-disinclination among governments to allow their national currency to be exchanged

for foreign currency. The IMF came into existence on 27 December, 1945 when 29 countries

signed the articles of agreement. The inaugural meeting of the Board of Governors was held in

Savannah, Georgia, U.S.A on 8 March, 1946, and the first meeting of the executive Board took

place at the funds headquarters in Washington D.C. on 6 May, 1946. The fund them started

financial operations on 1st March, 1947 with 39 members but have over 151 members by 2009.

Its policies and activities are guided by its charter known as the “Article of agreement”.

3.2.5. Objectives of IMF

Articles of the IMF charter set out its aims as follows:

i. Promotion of international monetary corporation.

ii. The expansion and balanced growth of international trade, i.e. to ensure that payment

does not constitute an impediment of trade.

iii. The promotion of exchange rate stability.

iv. Maintenance of high levels of employment and real income in member countries

through gains from trade and necessary assistance.

v. The encouragements of friction – free exchange arrangement through assisting in

ensuring easy convertibility of currency.

vi. The avoidance of retaliatory or competitive devaluation of currency.

vii. Providing assistance to a country in solving balance of payment problems, e.g.

through provision of advice on fundamental re – structuring of the economy.

viii. Reduction in balance of payment problems.

ix. Maintenance of surveillance over exchange rate policies.

x. Creating a reserve base for members.

xi. Establishment of multi-lateral payment system.

3.2.6. Functions of the IMF

The functions of the IMF are discussed under three main headings; regulatory functions,

financial assistance, and services.

3.2.6.1.Regulatory Functions

Exchange arrangements: Members have a general obligation to collaborate with IMF and with

other members to promote orderly exchange arrangements and a stable system of exchange rates.

They indeed, have the more specific obligations to pursue economic and financial policies that

promote orderly economic growth with reasonable price stability and to foster orderly underlying

economic and financial conditions. Members are also required to avoid exchange rate and other

policies that prevent effective balance of payments adjustment or provide an unfair competitive

advantage over other members.

Surveillance: The IMF is required to oversee both the International Monetary System, to ensure

its effective operation, and the observance of by each member of its obligations and to

accomplish the later, the fund exercises firm surveillance over the exchange rate policies of

members who are required to provide it with the necessary information and to consult with it on

their exchange rate policies when the fund requests them to do so. It is also the principle of the

fund that members should refrain from manipulating exchange rates or from gaining unfair

competitive advantages over other members. Also, the IMF calls on members to intervene in

their exchange markets if necessary to counter disorder conditions that may be characterised by

among other things disruptive short-term movements in the exchange rate of their currencies.

The members, in their intervention policies should take into cognizance the interest of other

members, including those countries in whose currencies they intervene.

Exchange rate restriction: Members are to avoid discriminatory currency practices and

restrictions on currency payments as well as multiple currency practices. These are meant to

foster a multilateral system of payments for current transactions between members and to

contribute to the balance growth of world trade. The IMF is required to prepare annual report on

restrictions maintained by members that subscribed to the Article prohibiting same, for

publication in the Annual Report on Exchange Arrangements and Exchange Restrictions.

Consultations: The IMF is required to hold regular consultations with each member in order for

the fund to obtain the data needed to exercise surveillance over the exchange rate policies of

members, and give prompt consideration to request for use of its resources and to changes in

exchange practices. Apart from general annual consultations, (e.g. with respect to periodic

review of the world economic situation and forecast of anticipated economic developments), and

supplemental surveillance (e.g. in case of unanticipated changes in economic policies or

conditions.

3.2.6.2.Financial Assistance

The IMF’s transactions (exchanges of monetary assets for other monetary assets) and financial

operations (other uses or receipts of monetary assets) are carried out through the General

Department and the Special Drawing Right (SDR) Department.

The fund provides financial assistance to members by selling to them securities or SDRs

in exchange for their own currencies, except for the subsidy account in which assistance is made

available in the form of grants. The currencies sold to members are generally those of countries

with satisfactory payments and reserve positions. The sources of the Funds general resources are

quota subscriptions and borrowing.

The IMF provides balance of payments assistance to members in exchange for their own

currency the currencies for other members or SDRs (“Purchases” or “drawings”). Members that

purchase from the IMF must subsequently buy back their currencies from the fund with other

currencies or SDRs (Re-purchase) (Anyanwu, 1993:380).

3.2.6.3.Services

The IMF, apart from supervising the international monetary system and providing financial

support to member countries, also assists its membership by running an educational institution in

Washington D. C, by making technical assistance available in member countries in certain

specialized areas of its competence and by issuing a wide variety of publications relating to

international monetary matters.

In the area of training, the IMF institute since 1964 has offered courses to nearly 6,000

officials (employees of finance ministries, central banks, and other official agencies) from 150

member countries whose work is closely related to the work of the IMF (Anyanwu, 1993: 380).

Such training has helped to standardized throughout the world the methods of gathering and

presenting BOPs, monetary and financial statistics to the benefit of the entire membership.

Also, in the area of publication access to each member’s fiscal policy, monetary and

external debt data has made the IMF a unique conduit of such information to the entire

membership. Its publication (e.g. international financial statistics) not only keep members

countries informed of financial position of their fellow members but also constitute an

unrivalled source of statistical information for universities, research institutions, banks and the

media.

In summary, therefore, the IMF oversees the international monetary system, promotes

exchange stability and orderly exchange relations among its member countries, assists all

members (both industrial and developing countries that find themselves in temporary balance of

payments difficulties, by providing short – to medium-term credits, supplements the currency

reserves of its members through the allocation of SDRs, draws its financial resources principally

from the quota subscription of its members.

3.3. The African Development Bank (ADB)

The move to establish the ADB was conceived in 1960. ADB became fully operational in

1966 but was established in 1963 at a meeting of 33 African Heads of state in Chartain, Sudan.

By 1965, 20 out of the 33 member countries had contributed 65% of the bank’s take of capital

(Okoji-Ibiayo, 2004: 438).

In order to make the bank to a large extent African in nature, two third of (2/3) of the

bank shareholding is reserved for African countries and the Headquarters of the Bank must be in

African permanently. Also, the position of chairman of the bank is to be for Africans, and at least

two – third (2/3) of members to ratify important decisions of the bank.

3.3.1. Functions of ADB

i. Mobilising, within and outside, resources for financing development projects

in African, in agriculture, infrastructural, manufacturing and water supply etc.

ii. Financing joint venture projects that relate to the economic and social

development of its members. Such projects are usually designed to positively

affect the economies of member countries and expand foreign and regional

trade.

iii. Participating in the selection and research and preparation of projects that

contribute to the economic development and create large markets for African

countries.

iv. Promoting foreign and local investment in public and private capital projects.

3.3.2. Source of ADBs Funds

The African Development Bank obtains its funds from the following sources;

i. Subscriptions by member-countries especially the rich industrialized non-African

member nations.

ii. Borrowing from international organizations and financial markets.

iii. Operational funds generated from loan repayments and guarantees.

iv. Operational income.

4.0. CONCLUSION

While the World Bank and the International Monetary Fund are international financial

institutions that enhance the economic development of member countries of the world. The

African Development Bank on the other hand, plays a restricted role of facilitating the economic

development of African member countries. This note discusses the functions and sources of funds

the examined international financial institutions.

5.0. SUMMARY

In this note, you have learned about;

i. The World Bank and its functions,

ii. The sources of funds of the World Bank,

iii. The IMF and its objectives,

iv. The functions of the IMF,

v. The African Development Bank and its functions

THE END

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