International Financial Institutions

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International Finance:

International Finance International Financial Institutions

Back Ground:

Back Ground The Second World War had left the international financial system in shambles. After the war was over, the Allies started working to rebuild a sound and stable global financial system with the objectives of – Removing the unnecessary restrictions on free trade, Ensuring free convertibility of currencies which was superseded during the interwar period, and Maintaining stability in exchange rates among the various currencies. In June 1944, representatives of 44 allied powers met at Bretton Woods, New Hampshire,USA to give a concrete shape to their ideas. The agreements reached at this meeting led to the establishment of IMF and World Bank.

Objectives Of IMF:

Objectives Of IMF The Articles of Agreement of the IMF set out the following as the objectives of the Fund – 1) To promote international monetary cooperation through a permanent institution which will provide a forum for consultation and collaboration on international monetary issues and problems. 2) To facilitate the expansion and balanced growth of international trade and to contribute thereby to promotion and maintenance of high levels of employment and income amongst all member countries, 3) To promote exchange stability, to maintain orderly exchange arrangements and to avoid competitive exchange devaluations, 4) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and to eliminate exchange controls which restrict the growth of international trade,

Objectives of IMF (continued):

Objectives of IMF (continued) 5) To instill confidence in members by making the general resources of the Fund temporarily available to them under adequate safeguards thus providing them opportunities to correct BOP imbalances without resorting to measures destructive to national or international prosperity, 6) In accordance with the above, to shorten the duration and lessen the disequilibrium in international BOP positions. Thus, the role of IMF is mainly two-fold : 1) It is an organization to monitor the proper coordination of the international monetary system, and 2) It is a source of liquidity to member countries in need of foreign exchange for correcting their temporary BOP deficits.

Functions of IMF:

Functions of IMF In order to fulfill its objectives, the IMF undertakes the following functions – Reviewing and monitoring national and global economic and financial developments and advising members on their economic and monetary policies, Lending hard currencies to members to correct their BOP deficits and to implement structural adjustments in the economies and to promote sustainable growth, Offering a wide range of technical assistance and training to government and central bank officials in its areas of expertise, Working with member countries, and with other international organizations to strengthen the international monetary and financial system, Along with World Bank, to assess the member countries’ financial sectors and to identify potential weaknesses, Working with BCBS to improve regulatory standards, Preparation of country reports on their observance of standards and codes focusing mainly on areas of concern to the IMF, and Publishing information on its own activities and policies and those of its member countries.

Organizational Structure of IMF:

Organizational Structure of IMF IMF has its HQ at Washington. It is an autonomous body affiliated to the UNO. The highest authority of IMF is its Board of Governors in which each member country is represented by a Governor and an Alternate Governor. It usually meets once a year at the AGM of IMF and IBRD. The Board of Governors is the main policy-making body of IMF , but the day to day operations are delegated to an Executive Board led by the CEO. The International Monetary & Financial Committee consists of 24 Governors representing groups of countries. It meets twice a year on the occasion of IMF and World Bank Annual and Spring meetings to discuss key policy issues concerning the international Monetary system. A Joint Committee of the IMF and the IBRD, the Development Committee advises and reports to the Governors on development policy and other matters of developing countries.

Resources of The IMF:

Resources of The IMF The major source of funds for the IMF is the “Quotas” contributed by the member countries. It can also borrow to supplement its resources. Quota represents the contribution of a member country to the capital fund of IMF. Quotas are fixed for each country based on the size of its economy. Quota of a country also decides its voting power, share in the SDRs and the extent to which it can borrow from IMF. Quotas are reviewed by IMF periodically, at least once in 5 years. Over the years, quotas have been increased. The initial quotas aggregated to USD 7 billion. The last review (the 11 th review) has come into force in January, 1999 increasing the SDR allocation to SDR 213.5 billion. If necessary, IMF can borrow to supplement its resources.

Agreements to Borrow:

Agreements to Borrow IMF entered into General Agreement to Borrow (GAB) in 1962. Under this agreement, 10 industrialized countries (G10 – Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK and USA) agreed to lend to IMF their own currencies up to certain limits. IMF can borrow under this arrangement only when the funds are needed by a participant in the arrangement. Similar to GAB, IMF entered into a New Arrangement to Borrow (NAB) in 1998 under which 25 countries have agreed to lend SDR 34 billion. The stipulation for IMF is that the borrowing under GAB and NAB can not exceed SDR 34 billion.

Trust Funds & Lending:

Trust Funds & Lending Trust Funds - IMF provides financial assistance to low-income countries through concessional lending under the Poverty Reduction & Growth Facility (PRGF) and debt relief under the Heavily Indebted Poor Countries(HIPC) initiative. These resources are financed through bilateral contributions and by the IMF itself. They are separated from the quota subscriptions and are administered under the PRGF and PRGF-HIPC Trusts, for which the IMF acts as Trustee. Lending – IMF provides temporary assistance to members to tide over BOP deficits. When a country requires foreign exchange, it tenders its own currency to IMF and gets the required foreign exchange. This is known as “Drawing from the Fund”. When the BOP position of the country improves, it repurchases its currency by tendering the foreign exchange.

Tranche Policies:

Tranche Policies The drawing of resources from the IMF by member countries is subject to the Fund’s tranche policies. Under this policy, the member’s right to draw from the fund is divided into five tranches. The borrowing that takes the IMF’s holding of the country’s currency up to 100% of its quota is called “Reserve Tranche”. Borrowing beyond the reserve tranche is divided into 4 tranches known as “Credit Tranches”, each equal to 25% of the country’s quota. Borrowing under the reserve tranche is without any restrictions. But borrowings under credit tranches come with increasingly stiff scrutiny by IMF and stringent conditions attached to them. The country has to demonstrate a credible action plan in the fields of fiscal, monetary and exchange management areas.

Types of Facilities Offered By IMF:

Types of Facilities Offered By IMF Over the years, the IMF has developed a number of facilities to address the specific needs of its diverse membership, like : Heavily Indebted Poor Countries ’ Initiative (HIPC), Poverty Reduction & Growth Facility (PRGF), Stand-by Arrangements, Extended Funds Facility (EFF), Supplemental Reserve Facility (SRF), Contingent Credit Lines (CCL), Compensatory Financing facility (CFF), Emergency Assistance.

Key Features of IMF lending:

Key Features of IMF lending IMF is neither an aid agency nor a development bank. It helps members to tackle their BOP problems and restore sustainable growth. Unlike the loans of development agencies, IMF funds are not provided for financing any particular projects or activities. IMF lending is conditional on policies –the borrowing country must adopt policies that promise to correct its BOP problems. The borrowing country and IMF must agree on the economic policy actions that are needed. IMF lending is temporary. Depending upon the type of facility used, disbursements made be made over periods as short as 6 months to as long as 4 years. In most cases, IMF lends only a portion of the country’s needs , but the support of IMF signals a credibility of the policy initiatives of the country which gives confidence to other lenders.

Special Drawing Rights:

Special Drawing Rights During the late sixties, the growth in world resources did not keep pace with the growth in world trade. During 1963-68, the monetary reserves including USD increased by about 16% while world trade grew by about 70%. The slackness in the growth of reserves was mainly due to dependence on the accretion of gold to monetary reserves. This naturally hampered smooth conduct of international trade and led to serious BOP problems for many countries. The need to increase the international liquidity (the resources to settle the international indebtedness) was felt, and after much thought on the subject, it led to the introduction of Special Drawing Rights (SDRs) in 1970.

Nature of SDRs:

Nature of SDRs SDRs are entitlements granted to member countries to enable them to draw from the IMF apart from their quotas. The arrangement is similar to a bank giving an Overdraft limit to its customer. When a country is faced with a need for foreign exchange, it can sell its SDR holding and acquire foreign exchange. SDR is not a currency and has no backing of any security, nor is the IMF liable on the SDRs allocated. It is merely an asset created out of book entries. It is an independent reserve asset, supplementing other reserve assets, the volume of which could be increased or decreased, according to the reserve needs of the international community. The real strength of the SDRs lies in the undertaking by member countries to abide by the Articles of Agreement of the IMF and exchange SDRs for currencies. Every member participating in the SDR scheme is bound to accept up to 200% of its allocation of SDRs when offered by other countries and exchange it for currency of its own or other currencies. On its own, a member country can hold SDRs above this statutory obligation.

Allocation of SDRs:

Allocation of SDRs Allocation of SDRs is made to member countries in proportion to their quotas. The decision to allocate SDRs is taken periodically by the Board of Governors of IMF taking into account the requirements of international liquidity. A majority of 85% of voting power is required for decisions involving allocation or cancellation of SDRs. The first allocation of SDR 9.3 billion was made in 1970-72. A second allocation of SDR 12.1 billion was made during 1980-81. A special one time allocation of SDR 27.4 billion was made during 1997. In addition to central banks of member countries who can hold and transact SDRs, the IMF has authorised 16 other institutions to hold SDRs. Despite best efforts and intentions of IMF, SDR has failed to become dominant part of reserve assets of countries.

Valuation And Interest:

Valuation And Interest SDR was introduced before the dollar crisis of August 1971. Keeping with the monetary environment prevalent then, the value of SDR was initially equal to a specific amount of gold, which was equal to the value of one USD. Hence SDR was known as Paper Gold. After the dollar debacle when the major currencies began to float, the gold link of SDR was snapped and it was linked to a basket of 16 currencies. In 1981, the 16 currencies in the basket were replaced by 5 major currencies. The currencies and their weightages revised wef 1.1.1991 was USD-40%, DEM-21%,JPY-17%,FFR-11%and GBP-11%.Since 1.1.1999, DEM and FFR have since been replaced by EUR. The IMF values the SDRs in terms of the basket and announces the value of SDR in terms of USD. When a member country utilizes SDRs, interest at 100% of the weighted average of the short term interest rates in these countries is charged. The interest rate is revised every quarter. Similarly, for additional holding of SDRs over and above the allotment, interest at the same rates is paid.

Utilization of SDRs:

Utilization of SDRs For the sake of convenience, after the introduction of SDRs, the accounts of a country with IMF are kept in two sets – a General account and a SDR account. Originally, SDRs were to be used only for meeting BOP deficits, with IMF approval. Due to some later developments and in an effort to make SDRs a unit of international reserves, their use has been liberalized. Now SDRs can be used by countries directly among themselves without the approval of IMF and without any restrictions relating to BOP deficit. A country can swap SDRs with another country to buy their currency or to settle their bilateral financial obligations. SDR has gained importance both as a reserve asset and as a means of settling international financial obligations. While SDRs can not be transferred among private individuals, some private parties do use SDR as a standard of value. Some banks also accept time deposits denominated in SDRs. 15 countries have pegged their currencies to SDR.

The World Bank Group:

The World Bank Group The World Bank Group consists of 5 closely associated institutions, each with a distinct role to play in the mission to fight poverty and improve the living standards of people in the less developed countries: International Bank for Reconstruction & Development (IBRD): that aims to reduce poverty in middle-income credit-worthy poorer countries by promoting sustainable development through loans, guarantees & advisory services. International Development Association (IDA): that provides highly concessional financing to the world’s poorest countries in the form of interest free credits and grants. International Finance Corporation (IFC): that aims to promote economic development through private sector. Multilateral Investment Guarantee Agency (MIGA): that helps promote FDI in developing countries by providing guarantees to investors against non-commercial risks. International Centre for Settlement of Investment Disputes (ICSID): that helps encourage foreign investment by providing international facilities for conciliation and arbitration of investment disputes.

Relationship Between IBRD, IDA & IFC.:

Relationship Between IBRD, IDA & IFC. Initially, IBRD was nicknamed “World Bank”. It has now become an official name for IBRD and IDA. They share the same staff and report to the same senior management and apply same standards while evaluating projects. Hence, when the term World Bank is used, it refers to both IBRD and IDA. When the term World Bank Group is used, it refers to all the five institutions. The three institutions IBRD, IDA and IFC are linked together by common Board of Governors. Separate Board of Governors exists for MIGA. ICSID has an Administrative Council. Heading all the five institutions is the President of the Group.

I B R D :

I B R D IBRD is an offshoot of the Breton Woods Conference of 1944. It is the first and original institution of the World Bank Group. It was set up mainly to provide long term capital assistance to its member countries for their reconstruction and development initially of the war shattered European countries and later of the less developed countries. Today, it plays an important role in poverty reduction in poor middle-income and creditworthy countries. As an inter-governmental agency for lending for development, the bank is mobilizing large-scale resources from private investors from the world’s capital markets for investment in less developed countries.

Objectives of IBRD:

Objectives of IBRD The main objectives of IBRD as per its Articles are – To assist in reconstruction and development of its member governments’ territories by providing necessary capital, To promote private foreign investment by guarantees of or through participation in loans and other investments, Where private capital is not available on reasonable terms, to make loans for productive purposes out of its own resources or out of the funds borrowed by it, To promote the long-term growth of international trade and the maintenance of equilibrium in the BOP positions of members by encouraging international investment for the development of the productive resources of members. The bank has adopted as its main objective lending to productive purposes to achieve sustained economic growth of less developed countries.

Organization of IBRD:

Organization of IBRD IBRD is an inter-governmental organization owned by its member countries. The members of IMF can become members of IBRD. The total membership of IBRD is 188 at present. The management of IBRD is on the same lines as that of IMF. It has a Board of Governors, a President and Exe. Directors. Of the 22 Executive Directors, 5 are nominated by the five biggest shareholders – USA, UK, France, Germany and Japan. The President is as the Chairman of the Board of Directors. The ultimate authority is the Board of Governors in which all member states are represented. Voting rights of the Governors and Executive Directors is proportional to the share capital of the member country they represent. Hence the policies of the Bank tend to be influenced by the opinions of the largest shareholders.

Resources of IBRD:

Resources of IBRD Resources of IBRD consist of its capital and borrowings. A) Capital – The initial authorized capital of the World Bank was USD 10000 Million divided into 100000 shares of USD 100000 each. Of the share capital, 2% is payable by the member country in gold or USD. This portion is freely available for lending. 18% is payable in members’ own currency. This portion is available for lending with the consent of the member country whose currency is involved. 80% is kept in reserve to be paid by the member when called. Thus, only 20% of each member’s subscription is available to the bank for lending. The balance 80% serves as guarantee resources backing up the bank’s borrowing operations in the international markets.

Borrowings of IBRD:

Borrowings of IBRD The IBRD raises almost all its money from the world financial markets. With AAA credit rating, it issues bonds and other debt instruments to pension funds, insurance companies, corporations, other banks and individuals around the globe. Unlike a financial institution, however, the bank does not operate for profit maximization – it uses the high credit rating to pass on the benefit of low interest rate to its borrowers who are mostly less developed countries.

Lending Activities of IBRD:

Lending Activities of IBRD The bank can make or facilitate loans in the following ways – By making or participating in direct loans out of its own funds, By making or participating in direct loans out of funds raised in the market of a member, or otherwise borrowed by the bank, and By guaranteeing in whole or in part loans made by private investors through the usual investment channels.

Direct Lending:

Direct Lending The Bank offers two basic types of loans – Investment Loans – These provide long-term funding for a range of activities aimed at creating physical and social infrastructure needed for poverty alleviation and sustainable development. Eligible projects would include urban poverty reduction, rural development, water & sanitation, natural resource management, education and health etc. Development Policy Loans – these provide quick-disbursing financing to support policy and institutional reforms. Eligible examples are promoting competitive market structures through legal & regulatory reforms, correcting distortions in incentive regimes through taxation and trade reforms, financial sector reforms, encouraging private sector activity and promoting good governance.

Features of IBRD Lending:

Features of IBRD Lending IBRD borrowers are usually low or middle income countries. IBRD provides loans at near market terms but with longer maturity periods and required initial moratorium periods. The funds borrowed have to be used for specific programs. IBRD loans are typically accompanied by non-lending advisory services to ensure the most effective use of funds. Once a borrower country prepares a borrowing proposal, the bank reviews its viability and during loan negotiations, the bank and borrower agree on the project objective and implementation etc. All loans are governed by the bank’s policies. The projects must be economically, financially, socially and environmentally sound and must do no harm to the people or environment. An independent Inspection Panel investigates any cases of complaint by any affected people.

Co-Financing & Guaranteeing:

Co-Financing & Guaranteeing Co-financing – IBRD often joins with governments, export credit agencies, commercial banks, multilateral institutions and private sector investors in financing projects. Official co-financing through either donor government agencies or multilateral financial institutions constitute the largest share of co-financing. Guaranteeing – In guaranteeing loans, IBRD helps link the donors and recipients of foreign aid for development. IBRD also involves in assessing the creditworthiness of recipients and convinces the donors that political and economic environment in the aided country is favorable. It coordinates the aid-giving activities of the western countries. It organizes consortia for aid flow so that the aided countries do not play one donor against another. At the same time, it also helps the less developed countries to identify appropriate projects for development which can be financed by the world investors.

Non-Lending Activities of IBRD:

Non-Lending Activities of IBRD Analytic & Advisory Services – The bank’s Development Economics group undertakes research that informs the bank’s work in areas like environment, poverty, trade and globalization. In each country, the bank undertakes economic analysis that forms the basis of its development planning. The bank’s advisory services provide information and knowledge on sustainable development, health, law and justice, financial sector, nutrition & population etc. Training – World Bank conducts training programs in less developed countries to impart skills needed by its personnel to carry out sustainable development programs. These take the form of courses, policy consultations, partnership with training and research institutions worldwide and the creation and support of knowledge networks related to international development. World Bank Institute (WBI) is the home of one of the world’s most extensive distance learning networks.

International Development Association:

International Development Association IDA is an affiliate of IBRD. It was set up in 1960 to provide soft loans to economically sound projects which create social capital such as construction of roads and bridges, slum clearance and urban development. The projects taken up by IDA are such that fall under the category of “High development Priority” due to their benefit on the development of the area concerned, but the returns from the project are not sufficient to pay the high rates of interest on the borrowings. IDA provides interest free loans for long periods for such projects. Hence IDA is often referred to as the “Soft Loan Window” of World Bank.

Organization & Resources of IDA:

Organization & Resources of IDA All the members of IBRD are eligible to be members of IDA. Currently, 164 countries are members of IDA. The Board of Governors and the Executive Directors of IBRD are also ex-officio Board of Governors and Executive Directors of IDA. The resources of IDA mainly come from the contributions made by the industrially developed countries. The donor countries meet every 3 years and decide on the quantum of their contributions to replenish the funds of IDA. Each such 3 year period is known by a number. For example, the IDA-13 replenishment covered the period from July 1, 2002 to June 30, 2005, for which the donors committed SDR 18 billion. Additional funds come from IBRD’s income and borrower’s repayments of earlier IDA credits.

Lending Activities of IDA:

Lending Activities of IDA IDA extends assistance to high priority projects in the member-countries. The finance may be made available to member-governments or to the private enterprises. Advances to private enterprises may be made with or without government guarantees. It also cooperates with other international institutions and member-countries in providing financial and technical assistance to the less developed countries.

Allocation of Resources By IDA:

Allocation of Resources By IDA IDA’s 81 eligible borrowers together have significant need for concessional funds. But since most of IDA’s resources are donated by member-governments, funds available for lending are fixed once donations are pledged. IDA, therefore, must allocate the resources among eligible borrowers equitably on the basis of borrower’s policy performance and institutional capacity in order to concentrate resources where they are likely to have the most impact.

Eligibility Criteria To Get IDA Loans:

Eligibility Criteria To Get IDA Loans Three criteria are used to determine the eligibility of countries to borrow IDA resources – Relative poverty, defined by GNP per capita below an established threshold (USD 965 as on July 1, 2005). Lack of creditworthiness to borrow on market terms and therefore a need for concessional resources to finance the country’s development programs, and Good policy performance, defined as the implementation of economic and social policies that promote growth and poverty reduction.

Allocation Criteria & Allocation Process:

Allocation Criteria & Allocation Process Allocation Criteria - The main factor that determines the allocation of IDA funds among eligible countries is each country’s performance in implementing policies that promote economic growth and poverty reduction. Per capita income is also a determinant with the poorest of the countries receiving higher allocations for a given level of performance. Allocation Process – The allocation of IDA funds is basically determined by each country’s rating in the annual country performance and institutional assessment. IDA-14 agreement recommends that because economic and social development of Sub-Saharan Africa remains the top priority of IDA, these countries must get priority in allocation. Individual country performance-based allocations serve as an anchor for formulation of Country Assessment Strategy (CAS) programs.

Performance Ratings:

Performance Ratings Every year, IDA assesses each borrower’s policy performance. The criteria and methodology of these assessments have evolved over time to incorporate lessons from experience as well as research findings. Beginning 1998, the country performance assessment was broadened to include an evaluation not only of the Government’s policies but also of the institutions in place to implement them. The 16 performance criteria are grouped into four main clusters – Economic Management, Structural Policies, Policies for Social Inclusion / Equity, and Public Sector Management & Institutions. Finally, the performance assessment also takes into account the performance of the country’s active project portfolio performance. The combined rating is scaled up or down depending on the strength of the country’s performance.

Features of Lending By IDA:

Features of Lending By IDA The financial assistance of IDA has some special features – The credit is interest free. Only a small service charge of 0.75% p.a. is levied on the amount withdrawn and outstanding to defray the administrative expenses. Repayment period is usually long, beyond 50 years, with an initial moratorium of 10 years. IDA finances not only the foreign exchange component but also a part of the domestic cost. The credit can also be repaid in the local currency of the borrowing countries. Thus the repayment of the loan does not burden the BOP of the country.

Lending & Performance Evaluation:

Lending & Performance Evaluation Lending – IDA management monitors actual lending to each country in relation to the planning allocations. As a result, actual lending on per capita basis is robustly correlated with performance levels. The strong link between lending and performance has resulted in an increasing concentration in lending to countries where policy performance is most conducive to effective use of resources. Evaluation – IDA has been a blessing for the developing countries to whom the credit from IDA has largely gone. In keeping with the objective, most of the assistance has gone to high priority development projects which could not get finance from other sources. India has immensely benefitted from the IDA. It has been receiving a series of loans, almost continuously.

International Finance Corporation (IFC):

International Finance Corporation (IFC) The IBRD loans are available only to member-country governments or with the guarantee of the governments. Also, IBRD can only give loans but can not participate in equity of the project finance. IFC was established in 1956 as an affiliate of IBRD for the purpose of financing private enterprises. Only members of IBRD can become members of IFC. IFC has 178 members at present who collectively decide its policies and approve investments. The Board of Governors of IBRD is also the Board of Governors of IFC. But it is a separate entity with its funds kept separate from those of IBRD. The powers of IFC are vested in the Board of Governors who normally meet once a year. The 24 Executive Directors of the World Bank constitute the Board of Directors of IFC, and are responsible for its day-to-day operations. The President of IBRD is also the Ex - Offcio Chairman of IFC.

Resources & Functions of IFC:

Resources & Functions of IFC Resources of IFC – The resources of IFC consist of capital contributed by members and accumulated reserves. Its authorized capital is USD 2.45 billion. It also borrows from the World Bank for the purpose of lending an amount equal to four times its unimpaired subscribed capital and surplus. Functions of IFC - The purpose of IFC is to further the economic development by encouraging growth of private enterprises in member-countries, to supplement the activities of IBRD. Thus IFC – Invests in private enterprises in member-countries, in association with private investors and without government guarantee, in cases where sufficient private capital is not available on reasonable terms, Seeks to bring together investment opportunities private capital of both foreign and domestic origin and experienced management , and Stimulates conditions conducive to the flow of private capital, domestic and foreign, into productive investments in member countries.

Financial Products of IFC:

Financial Products of IFC IFC offers a wide variety of products to private sector projects in developing countries. It offers – Loans for IFC’s own account : A-loans Equity Finance Quasi-equity finance – C-loans Syndicated Loans : B-loans Risk management Products Intermediary Finance IFC can provide a mix of financing that is tailored to meet the needs of each project. However the bulk of funding and the leadership / management responsibility lies with the private sector owners. IFC operates on a commercial basis. It invests primarily in profit oriented projects and charges market rates for its products and services.

Multilateral Investment Guarantee Agency:

Multilateral Investment Guarantee Agency The World Bank established the Multilateral Investment Guarantee Agency (MIGA) in 1988 as its affiliate to encourage foreign investment in developing countries by issuing guarantees against non-commercial risks. The membership is open to all World Bank members and the current membership is 164. MIGA provides guarantees to private investors against the risk of transfer restriction (including inconvertibility), war and civil unrest, expropriation and breach of contract. Generally, investors from member countries, other than the host country, are eligible for guarantees. However, MIGA may insure an investment made by a national of a host country if the funds to be invested come from outside the country and the application for coverage is made jointly by the investor and the host country. MIGA also insures investments made by state owned enterprises if they operate on a commercial basis. The periods of guarantee may extend up to 15 or even 20 years. The guarantee coverage requires the investors to adhere to social and environmental norms as per international standards.

Multilateral Investment Guarantee Agency (continued):

Multilateral Investment Guarantee Agency (continued) Since inception, MIGA has issued more than 1000 guarantees for projects in many developing countries. By providing guarantees to investors against non-commercial risks, MIGA helps promote FDI in developing countries. MIGA’s capacity to serve as an objective intermediary and to influence the resolution of potential disputes enhances the investors’ confidence that they will be duly protected. MIGA also provides technical assistance and advisory services to help countries attract / retain foreign investment and to disseminate information on investment opportunities to the international business community. MIGA uses its legal services to smooth possible impediments to investment. Through its dispute resolution program, it helps governments and investors to resolve their differences and ultimately improve the country’s investment climate. MIGA works with other investment insurers through its coinsurance and reinsurance programs to expand the income capacity of the political risk insurance industry.

Asian Development Bank:

Asian Development Bank Asian Development Bank (ADB) was started in 1966 under the aegis of ECAFE (United Nations Economic Commission for Asia & Far East). Its membership consists of countries from Asian region as well as other regions. Presently, there are 66 member countries of which 47 are from Asia and the rest from Europe and North America.

Organization & Resources of ADB:

Organization & Resources of ADB ADB’s highest policy making body is the Board of Governors which meets annually. The Board of Directors of the bank has 12 members, 8 representing countries from the region and 4 representing other countries. The President of the Bank, elected by the Board of Governors, is also the Chairperson of the Board of Directors. The resources of ADB comprise of subscribed capital, reserves and funds raised through borrowings, and special funds comprising contributions from member countries and amounts previously set aside from the paid-up capital. Loans from ordinary capital are made to member countries which have achieved some level of development while loans from special funds are exclusively made to the poorest of the borrowing countries on highly concessional terms.

Functions of ADB:

Functions of ADB The main purposes and functions of ADB are to – Promote investment in the ECAFE region of public and private capital for developmental activities, Ensure optimum utilization of available resources for financing development in the best interests of the region as a whole, To meet the requests from members in the region to assist them in coordination of their developmental plans and policies to achieve best results, To provide technical assistance for preparation, financing and execution of developmental plans and projects, To coordinate with UN and its organs and other institutions and entities in new initiatives and opportunities for investment and development, and To undertake such other activities and provide such other services as may help advance its purposes and objectives.


Evaluation ADB has become a major catalyst in promoting the development of the most populous and fastest growing region in the world today. With the growing need for larger and more diversified inflows of capital to the region, the Bank is actively expanding its co-financing activities with official as well as commercial and export credit sources. The Bank has also entered into equity investment operations. India is the second largest subscriber, after Japan, among the regional members and third largest among all members after Japan and USA.



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