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The World Bank Group 101: Encircling Risk Management and Investment Warranty

Foreword

This series of articles provides a detailed explanation of the work conducted by the World Bank, a well-known international financial institution, and its importance. The World Bank Group is one of the world’s largest providers of sources, knowledge, and funding for low and middle-income countries. Through issuing loans and grants the World Bank can facilitate the development of struggling nations in their fight to eradicate poverty, inspire prosperity, and promote sustainability. A detailed analysis of the past and present engagement of the five divisions of the World Bank Group will address the respective frameworks of the five organizations. Each article will focus thoroughly on the function and activity of each of the following organizations: The International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). As an institution dedicated to establishing long-term economic development, the World Bank is an organization whose continuous technical and financial support has successfully implemented projects and reforms on a global level. The World Bank Group 101 series aims to break down the function of the World Bank Group and its five member organizations. Every article in the series aims to offer an overview of the mission of the respective WBG institutions and their never-ending war against poverty and many other global issues concerning the majority of the countries of the world.

The World Bank Group 101 series consists of six articles:

  1. The World Bank Group 101: The Bank of All the World

  2. The World Bank Group 101: A Tale of Reconstruction and Development

  3. The World Bank Group 101: A Narrative on the Association of Development

  4. The World Bank Group 101: Encircling Risk Management and Investment Warranty

  5. The World Bank Group 101: A Story on International Arbitration

  6. The World Bank Group 101: The Global Resolution of Financial Disputes




The International Financial Corporation is the largest development institution in the world focused on the expansion of the private sector in operating in more than 100 middle-income and developing countries (International Finance Corporation, 2022.). As a key player on the world stage of economic and financial advancement through sustainable solutions, the work of the IFC centers around innovation, and positive progression of the private sector which in return aims to increase the overall performance and financial backing of developing and least developed countries. This article provides a detailed overview of what the IFC is, how it was established, what it stands for, how it operates, and what its key strategies and services entail.


The IFC provides financing for private-enterprise investment in developing countries around the world, through both loans and direct investments (International Finance Corporation, 2022.). As an affiliate and member of the World Bank, it also provides advisory services to encourage the development of private enterprises in nations that might be lacking the necessary infrastructure or the liquidity for businesses to secure financing (International Finance Corporation, 2022.).


Figure 1: An illustration of the current logo of the IFC under WBG.

Mission and Values

Abbreviated as the IFC, it is a member of the World Bank Group with a mission to advance the development and improve the lives of global citizens through supporting growth in the private sector (International Finance Corporation & World Bank Group, 2022a). The aforementioned growth is achieved through establishing and aiding new and emerging markets, mobilizing investors, and sharing expertise. These achievements generate new job vacancies and job positions, raise living standards, and improve the living conditions of the poor and vulnerable. The IFC shares the World Bank Group`s twin goals of ending extreme poverty and boosting shared and sustainable prosperity (International Finance Corporation & World Bank Group, 2022a).


The core values of the IFC as a developing financial institution are impact, integrity, respect, cooperation, and bringing forth innovation alongside steady growth (International Finance Corporation & World Bank Group, 2022a). IFC provides comprehensive solutions to developing countries and helps to address today's greatest development challenges in every project undertaken (International Finance Corporation & World Bank Group, 2022a).


The IFC guards and utilizes its data by adapting the lessons of improvement gained from activity in one region to another project (International Finance Corporation & World Bank Group, 2022a). The data allows local enterprises to make better use of their existing knowledge and expertise by matching it to opportunities in other developed countries in similar situations.


Figure 2: A photograph of the IFC headquarters in Washington DC, USA.

Establishment

The International Finance Corporation was founded in 1956 as a member of the World Bank Group on the bold idea of transforming the private sector to reach the potential of developing countries (IFC - International Finance Corporation, n.d.-b). The focus of the organization was economic development and its premises of growth. Since then, the IFC has expanded to over 100 countries coining emerging markets and pioneering new ones (International Finance Corporation (IFC), 2022). It serves as the world's largest global development organization with a focus on the private sector of developing countries which seeks to ensure private enterprises have access to all markets and finances.


Long-term goals of the organization since its establishment include the development of sustainable agriculture, expansion of microfinance, support of infrastructure of improvements, and promotion of climate, health, and education policies. The IFC is governed by its 184 member countries and is headquartered in Washington, D.C (International Finance Corporation (IFC), 2022). In order to enlarge its funds, the IFC issues bonds in markets around the world (IFC - International Finance Corporation, n.d.-b). As of 2021, the IFC has issued $10.553 billion worth of 178 bonds in 20 currencies. In the fiscal year 2021, the IFC invested $31.5 billion in long-term and short-term finance, including $10.8 billion mobilized from other investors.


Figure 3: An image of the inside of the IFC HQ in Washington DC, USA.

The Board

Established in 1956, IFC is owned by 186 members who serve as a group of policymakers. The Board of Governors and the Board of Directors are made up of the member countries responsible for guiding IFC's programs and activities (International Finance Corporation (IFC), 2022)


Each of the member countries has the right to appoint one governor and one alternate. Corporate powers are vested in the Board of Governors, which delegates most powers to a board of 25 directors (International Finance Corporation (IFC), 2022). Voting power on issues brought before the Board is weighted according to the share capital that each director of each member country, represents. The directors meet regularly at World Bank Group headquarters in Washington, D.C., in the United States of America where they review and decide on investments and provide strategic guidance to IFC management (International Finance Corporation (IFC), 2022).


Figure 4: An image of the current managing director of the IFC, Makhtar Diop.

Products and Services

The IFC refers to their expertise as products and services and refers to the countries they operate in as clients. The products and services provided by the IFC meet the needs of clients in a plethora of industries including infrastructure, manufacturing, agriculture, agribusiness, and financial markets, among others (IFC - International Finance Corporation, n.d.-b). The goal of the financial services of the IFC is to manage risk and enlarge access to foreign and domestic capital markets (IFC - International Finance Corporation, n.d.-b). The investment services provided include a wide range such as the following: loans, equity, investments, trade and commodity finance, derivatives and structured finance, and blended finance (IFC - International Finance Corporation, n.d.-b).


The IFC plays a catalytical role in mobilizing funding through parallel loans, loan participation, partial credit guarantees, securitizations, loan sales, risk sharking, and fund investments but not only (IFC - International Finance Corporation, n.d.-b). Through attracting investors, clients are introduced to new business strategies and new sources of capital and funding.


Figure 5: An illustration of funding allocation.

IFC Strategy

The IFC has followed a series of strategies since its establishment. The first pillar of the current strategy titled IFC 3.0 is creating new markets (IFC - International Finance Corporation, n.d.-b). This provides early development and involvement to seed investment opportunities by unleashing markets that no one envisioned prior to their launch. The earlier the involvement, the greater the opportunities that come with it (Solutions, n.d.).


However, as fruitful as it may be, this approach carries great obstacles in nurturing the private sector of developing countries due to two simple but crucial reasons: financial research and financial resources (Solutions, n.d.). The lack of prior projects in a certain field leads to an unavoidable lack of financial research in that same field making it a risky investment for many countries whose resources are scarce and hard-earned. Leading to the second point which is the lack of investment, and financial backing for a business promise. International and national investors continually flounder to decide whether they should dive in headfirst into promising projects, as opposed to intervening at a later time when the conditions have been tested but the turnover is inevitably lower.


Figure 7: An illustration of financial anaylsis.

The second pillar of the current IFC strategy is the mobilization of private capital for the development of fragile and conflicted low-income countries (IFC - International Finance Corporation, n.d.-b). The establishment of the Operating Principles for Impact Management, an approach dedicated to measuring the positive social, environmental, economic, and sustainable impacts, is a helping force in reaching a common investment standard that targets financial returns (Solutions, n.d.). This strategy is an active investment in itself designed to encourage sustainable development alongside green and social bonds (Solutions, n.d.).


Funding

The IFC raises capital through numerous ways, a key of which is bond issuance to international capital markets to fund loans to clients and maintain financial strength. It has maintained a consistent triple-A credit rating, which indicates excellent creditworthiness, based on outstanding financial performance (International Finance Corporation & World Bank Group, 2022a). The Standard and Poor`s and Moody`s have rated the IFC as a triple-A every year since first receiving a rating in 1989 (International Finance Corporation & World Bank Group, 2022a). This high rating has been proven essential for maintaining market accessibility globally and low cost of funding.


Figure 8: An illustration of funding ideas.

IFC engages in socially responsible investments known as ESG bonds (International Finance Corporation & World Bank Group, 2022a). A subset of its loan portfolio is funded through the Green Bond program, a program that finances climate-friendly projects alongside another project which aims to provide a solution to social issues called the Social Bond program. Both programs are aligned to the capital markets` reference frameworks and principles of the Green Bond and the Social Bond respectively (International Finance Corporation & World Bank Group, 2022a).


All IFC-financed projects adhere to the strict ESG standards and the organization’s sustainability frameworks, which facilitate the green way of conducting business (International Finance Corporation & World Bank Group, 2022a). IFC issues bonds in a variety of markets, formats, and currencies. Besides raising capital through bond issuance, it also invests liquid assets globally and manages them versus recognized industry benchmarks, to outperform targets while preserving capital and ensuring funds are available as needed for private sector investments in developing countries (International Finance Corporation & World Bank Group, 2022a).


The IFC tailors risk management and loan products to the needs of its clients, while hedging the resulting market risks through managing currency and interest rate risks of assets and liabilities founded on the IFC's funded balance sheet within prudent risk limits (International Finance Corporation & World Bank Group, 2022a).


Figure 9:An illustration of strategic funding.

Partnerships

Partnerships are the key behind the funding needed to conduct the IFC`s work, generate ideas, campaigns, projects, and advance solutions. Through partnerships, knowledge is easily transferred by allowing businesses to expand their institutional capacity. The impact is strengthened by channeling resources to initiatives that scale up when cooperating to improve the lives of the poor, less fortunate, or discriminated groups and minorities. IFC partners with more than 30 governments as well as several foundations, and corporations that jointly promote sustainable growth of the private sector development (International Finance Corporation & World Bank Group, 2022). The three central ways of developing the private sector of IFC clients are through investing, mobilizing, and advising (International Finance Corporation & World Bank Group, 2022).


Figure 9: An illustration of partnership.

Investing is conducted in companies through loans equity investments, debt securities, and guarantees. Mobilizing refers to the mobilization of capital from lenders and investors through loan participation, parallel loans, and other means. Advising regards the advice given to businesses and governments by the IFC experts that aim to encourage private investment and improve the investment climate based on institutional data (International Finance Corporation & World Bank Group, 2022).


Sustainability in Finance

The key to remaining financially sustainable and maximizing the development impact is through managing risks and effectively using financial resources, according to the IFC. Sound risk management plays a crucial role in ensuring IFC’s ability to fulfill its sustainable development mandate. The very nature of IFC’s business, as a long-term investor in dynamic yet volatile emerging markets, exposes the institution to financial and operational risks. Prudent risk management and a solid capital position enable IFC to preserve financial strength and play a countercyclical role during times of economic and financial turmoil. In addition, IFC’s financial strength results in low borrowing costs, allowing the organisation to provide affordable and sustainable financing to their clients.


The IFC has a detailed approach to risk management which includes rigorous and conservative capital adequacy, using more demanding standards than are required to maintain a triple-A credit rating; conservative portfolio diversification guidelines by company, sector, and region; and credit risk assessments and integrity due diligence for all investments.


Figure 10: An illustration of sustainability.

Fostering Sustainable Development

In order to provide sound risk-management practices is also crucial for IFC clients across emerging markets, to ensure their long-term viability and competitiveness. Sustainable businesses generate jobs and create long-term opportunities for millions to escape poverty and improve their lives. As the most pressing global concern of the past decade, fostering development in a sustainable way is a key mission of the IFC, the entire World Bank Group, and many other institutions.


In addition to evaluating the environmental, social, and governance practices of its clients, the IFC also evaluates financial risk management capabilities, products, and derivatives, to enable clients to hedge their interest rate, currency, or commodity price exposures backed up by sustainability.


Figure 11: An illustration of sustainable finance.

Criticism of the IFC

The IFC, similarly to many organizations and institutions, has faced criticism as its size and influence have grown. Critics claim that the IFC acts like a private investment bank focused on corporate profit instead of demonstrating dedication to the joint mission of ending extreme poverty and promoting sustainable growth alongside the World Bank group, as well as the personal mission of the IFC to help the private sector advance itself (International Finance Corporation, 2022). The work of the IFC speaks for itself by effectively demonstrating the numerous affluent and important projects that have been successfully conducted by the organization.


Figure 12: An illustration of criticism.

IFC Investment

The IFC funded $145 million in financing to aid a large dairy producer, Friesland Campina, in acquiring a controlling stake of 51% of Engro Foods, Pakistan’s leading dairy processor (International Finance Corporation (IFC), 2022). Pakistan is the fourth-largest milk-producing country in the world, however the demand present in the country has consistently outpaced the supply due to a lack of infrastructure and an outdated supply chain presently active (International Finance Corporation, 2022). As part of the contract with the IFC to receive the necessary funds, Friesland Campina promised to share its experience and best practices with the smaller farmers who supply Engro Foods, along with most of the dairy processors in Pakistan (International Finance Corporation, 2022).