Critical voices on the World Bank and IMF            

Financial intermediaries:

What’s the issue?

Peter Chowla

4 June 2013

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_EShttp://www.brettonwoodsproject.org

Overview• Financial Intermediaries what are they?

• FI lending – how it works

• Concerns

• Justifications for FI use

• CAO report on FIs

• Options for challenging FIs

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

What are they?

• Financial intermediaries are third-party financial entities such as banks, insurance companies, leasing companies, microfinance institutions, and private equity funds.

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

FI lending: how it works

• equity investments• guarantees• loans• trade finance• risk management products• syndications

IFC Financial Intermediary• private equity fund• investment bank• commercial and retail bank• non-banking microfinance institution• other (e.g. credit guarantee company, real estate fund)

Sub-project• Micro-enterprises• Small, medium and large companies• Specific projects• Individual household

• equity investments• lending to businesses, including microfinance• project finance (e.g. infrastructure projects)• trade finance• housing finance• leasing• consumer finance

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_EShttp://www.brettonwoodsproject.org

Financial Intermediary Stats - IFC

• 47% IFC operations are through financial intermediaries in FY2011

• Almost $4 billion committed in FY2012 categorised as FI risk category, 25% of FY2012 commitments (but excludes trade finance)

• But $10 billion in funds, trade finance & financial markets categories – more than 64% of FY2012 commitments

• Overall 45% of the portfolio in funds, trade finance and financial markets

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

IFC FI stats – by destination

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

IFC FI stats – by sector

Sectors (Consolidated)

Number of

Projects

Total IFC Investment

($m)Grand Total 416 16,811

Commercial Banking - General 100 5,621Private Equity / Venture Fund / Foreign Portfolio 78 2,219Commercial Banking - SME Finance 47 1,867Trade Finance 12 1800Insurance (Life and Non-life, General, Reinsurance) 17 740Consumer Banking - Microfinance / Microfinance and Small Business 35 730Commercial Banking - Short Term Finance 6 580Capital Markets / Exchanges 6 507Mortgage and Leasing Services 25 478Finance Companies (Consumer Finance, Commercial Banking - Consumer Finance) 16 475Microfinance and Small Business - Non Commercial Banking 47 426

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

IFC FI stats – by countryCountry

FY 2010-12 Total ($)

Russian Federation 1220.0

India 874.8

China 859.0

Turkey 631.0

Vietnam 493.3

Philippines 456.6

Indonesia 450.0

Nigeria 447.7

Brazil 417.6

Kenya 378.0

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

Concerns• FIs allow bypassing of strict performance

standards (social, environmental) as compliance is self-certified by IFC clients

• Who is leveraging whom?• Problems with transparency and

accountability• No clear measurement or prioritisation of

development impacts• Impact of these interventions on the

financial sector of developing countries• Being used as a way to

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

Justifications for FI use

• Small-scale projects/loans are too time intensive for IFC staff to get involved in

• More efficient to use the private sector

• FIs know the market/clients better

• Want to build the capacity of local financial institutions – financial inclusion, market development, financial deepening

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

CAO report on FIs

• Compliance Advisor/Ombudsman (CAO) finished an evaluation of IFC FI projects last year

• Evaluation report was critical – saying that the IFC “doesn’t know” impact or risks

• IFC likely to use this as opportunity to reach out to NGOs in the next months

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

@brettonwoodspr, @brettonwoods_ES

Options for challenging FIs

• General strategy – point to corporate welfare and lack of development impact

• Find bad projects (old strategy) that are funded by FI and make the link back to IFC (harder than before)

• Contest the financial sector model promoted by the IFC – involves challenging financialisation

• Work within the system to promote better development impact assessment and ESG monitoring

http://www.brettonwoodsproject.org

Critical voices on the World Bank and IMF            

Bretton Woods Projecthttp://www.brettonwoodsproject.

orgTwitter: @brettonwoodspr

Peter Chowla

pchowla@brettonwoodsproject.org