BCom 3rd Year World Bank International Financial Institutions Study Material notes

BCom 3rd Year World Bank International Financial Institutions Study Material notes Objectives of the World bank Membership of World Bank Capital of the World bank Management  and Organisation of World bank Functions of World bank Stages of Providing Loans Criticisms of the world bank India and the world bank International Finance Corporation IFC New Development Bank Bricks Development Bank Exercise Questions Long Answer Questions Short Answer Question Correct Options Following Statement True False :

BCom 3rd Year Nature Importance Financial Money Study Material notes in Hindi

WORLD BANK AND OTHER INTERNATIONAL FINANCIAL INSTITUTIONS

Representatives of 44 Countries met and discussed at Brettonwoods Conference in 1944 and decided to set up two International Monetary Institutions. The first was the International Monetary Fund (IMF) and the Second was the International Bank for Reconstruction and Development (IBRD). International Development Association (IDA) is an associate Organisation of IBRD. IBRD and IDA together constitute the World Bank. After including Multilateral Investment Guarantee Agency (MIGA) and International Finance Corporation (IFC) with it, it is called World Bank Group.

In Common terms, [IBRD) is referred to as the World Bank. It was founded on 27th December, 1945 as a Supplementary Organisation of IMF and it started its operation on 25th June, 1946.

OBJECTIVES OF THE WORLD BANK

According to the article 1 of the IBRD agreement, the main objectives of the World Bank are as follows:

(1) Reconstruction and Development : The most prominent objective of the World Bank is to give economic help in the reconstruction and development of those countries which had got their economy very badly damaged during war. More ever, the World Bank encourages the underworld countries by giving them economic assistance. The World Bank promotes the long term investment for such assistance.

(2) Promotion to Foreign Investment : Generally foreign investment plays crucial roles in the economic development of underdeveloped and developing countries. But the foreign private investors don’t show interest in the capital investment in these countries because they don’t feel sufficient security. The World Bank gives those investors the guarantee of safety of their capital. The World Bank also gives financial assistance to these investors in the hours of need. Consequently this provides an encouragement for foreign investment.

(3) Promotion to Long term International Trade : The World Bank encourages the International investors to encourage the long term international trade. The objective of the World Bank behind this is to balance international trade by raising the production ability, standard of living and employment and reforming the labour conditions.

(4) Peace-time Economy : It is also an objective of the World Bank that it should create a suitable atmosphere among the member nations so that wartime economy should be adopted as the peace time economy.

(5) Arrangement of Capital : The World Bank supplies capital for the development of productive resources. It also makes the capitalists invest for this purpose it  also advised its member countries  for t he proper use of Capital .

Thus the Objective of  the world bank is to do all those works and helps in those activities  which lead to economic and social development of the member  nations

MEMBERSHIP OF WORLD BANK

All those countries which are the members of International Monetar are automatically the members of the World Bank. In this way, to be member of the World Bank, a country has to become a member of IME country abandons the membership of IMF, its membership of World terminates automatically. But it can retain its membership of World Balank in this condition if 75 percent or more voting strength of the World 10 bank approves the continuance of its membership. 184 countries were the members of World Bank in 2002. At present this number is 186.

When a country wants to abandon its membership of the World Bank it be to give a written application for this purpose and at the same time pay its total liabilities. The World Bank also retains the right to terminate the membershin of a country if it doesn’t follow the rules and regulations of the World Bank on creates a disturbance in this regard.

CAPITAL OF THE WORLD BANK

The authorised Capital of the World Bank at the time of its foundation was 10.000 million dollars which was divided into 1 lakh shares of 1 lakh dollar each The Paid up Capital by the member countries was 9,400 million dollar. The member countries had taken shares according to their quotas. According to the agreement of the World Bank the number of shares to be purchased by the member countries is decided by the agreement of every member. The payment of share money by its member countries is done as follows:

(i) 2 percent of the total amount has to be paid in gold, American Dollar or SDR.

(ii) 18 percent of the total amount can be paid in the currency of the member country

(iii) The remaining 80 percent can be demanded by the World Bank at its will and the member countries are compelled to deposit it.

The Capital of the World Bank can be increased from time to time by the three-fourth majority of the member countries. The Total Capital of the World Bank on 30th April, 2003 was 218.4 million SDR.

MANAGEMENT AND ORGANISATION OF WORLD BANK.

The organisation of the World Bank is also like the organisation of International Monetary Fund. There are Board of Governors. Board of Executive Directors, Advisory Council, Loan Committees and other comittees.

(1) Board of Governors : Every member country appoints a governor in the Board of Governors. His term of office is five years, but can be changed before this also. Every member country also appoints an alternative governor who retains the voting right in the absence of the governor. The alternative governor can take part in the meeting in the presence of governor also. The meeting of the Board of Governors takes place at least once in a year which 15 generally considered with the meeting of International Monetary Fund. Board of Governors appoints a chairperson among its members who chairs the annual meeting.

(2) Board of Executive Directors: There is a Board of Executive Directors to manage the day to day activities of the World Bank. There are 21 members in this board. At present there are 24 members in it. Out of these 6 members are from those countries which have the maximum quota. The remaining members are from other countries. Every director has a tenure of 2 years. A chairperson is elected by the Board of Executive Directors. He is called the Chairman of the World Bank. The Chairman of the World Bank is the head of the Executive employees. He performs the general tasks under the directors of Board 01 Executive Directors.

(3) Advisory Council : An Advisory Council ternational Financial Institutions Executive Directors of the World Bank. It has at least 7 members il: An Advisory Council is organised by the Board of are specialists from different fields such as-banking, commerce it has at least 7 members. These members agriculture, Labour etc. The committee is organised in is such as-banking, commerce, industries, representation of at least one meeting of this council during a The committee is organised in such a way that it has

(4) Loan Committee : A loan Committee is also Directors of the World Bank. This Committee does the A loan Committee is also organised by the Board of ship of a country applying for a loan wit World Bank. This Committee does the Scrutiny of the candidature  ship of a country applying for a loan with the world Bank .Grants loan to a country only on the recommendation off the loan Committees .

 (5) Various Other Committees : Various other committees are organised by the Board of Executive Directors to perform different tasks properly. include-Development Committee, Joint Audit Committee, Cost and bud Committee, Committee on Directors Administrative Mattters etc.

FUNCTIONS OF WORLD BANK

The main functions of World Bank are as follows:

(1) To Provide Loans : The main function of World Bank is to provide loans to member countries particularly to the underdeveloped countries for reconstruction and development. This laon is generally granted for completing the long-term projects. The period of loans is generally from 5 to 20 years. The main points of loan activities of the World Bank are as follows:

(i) The Bank can grant up to 20 percent of its paid up capital as loan to member countries from its funds.

(ii) Generally loans are granted for specific projects.

(iii) It grants loans from its own funds.

(iv) The Bank grants loans to member countries even after taking loans from the money market.

(v) The World Bank also grants loans to private investors of member countries on the personal guarantee. It collects service tax from the member countries in return.

Stages of Providing Loans : While providing loans to member countries, the World Bank goes through different stages which are called the process of providing loans.

(i) From the given table it is clear that the World Bank takes application from those member countries which want to take loans.

(ii) Bank makes a minute checking of the ability of repayment of the country demanding loan. In this inspection the solvency ability, the ability of paying interest and the ability of using loan are checked.

STAGES OF PROVIDING LOANS

Accepting Application

Checking of Repayment Ability

Checking the Project

Determining the Term of Loan

Accepting Loan

Keeping an Eye on the use of Loan

 (iii) As mentioned earlier, the World Bank generally provides loan for en projects only. Thus, before granting loan the specialist of the World Bank that specific country and inspect the concerning project.

(iv) After being satisfied with the project, the World Bank informs the taking country about the terms of credit which include the interest repayment plan etc. The country taking loan has to repay the loan in gold that very currency in which the loan is taken.

(v) After Undergoing through these stages, the loan is accepted for sand

(vi) After granting loan, the World Bank also keeps an eye on its use even gives proper guidelines if needed.

(2) Giving Guarantee : The World Bank makes arrangement to get th member countries provided with loans by banks and other financial instituti and takes guarantee of the timely repayment of such loans. For Such Guarnta The word Bank takes 1 to 2 percent service tax from the member country.

(3) Technical Assistance : The World Bank makes arrangement for the economic survey of member countries and studies the economy of these countries and gives economic, scientific and technical advice accordingly.

(4) Training Facilities : There is a need of trained officials and staff for the successful implementations of the projects sponsored by the World Bank The World Bank makes arrangements for the official training for the member countries. The Economic Development Institute and a Staff College have been set up at Washington for this purpose.

(5) Settlement of International Disputes : For Being an International and Unbiased Institution the World Bank performs the task of mediating in the disputes among the member countries and settling these disputes. For example, the credit to settle Indo-Pak Canal Water Dispute, The Suez Canal Dispute etc goes to the World Bank.

Besides, the above mentioned Work the World Bank has launched Schemes like The World Environment Facility in 1992 for the environmental Conservation. According to this scheme the World Bank grants aid for the environmental improvement to such countries which have per capital income less than 4 thousand dollars.

CRITICISMS OF THE WORLD BANK

Although, the World Bank has been successful in fulfilling its objectives, but the critics have criticized it on various grounds. The main criticisms of the World Bank are as follows:

(1) High Rates of Interest and commission : The Critics held that the World Bank is a non-profit earning institution. Despite this it takes interest on high rates from the member countries. It charges 7.6 percent interest on loans and 1 to 2 percent service tax, which is very high for the underdeveloped countries.

(2) Insufficient Financial Assistance : This has been a continuous charge against the World Bank that its financial resources are not sufficient to fulfill the needs of member countries due to which the Bank is unable to give sufficient help to developing countries. But now there is no ground for this criticism because, the Bank has increased its capital limit by increasing the quota of the member countries.

(3) Discriminating Behaviour : The critics say that the World Bank discriminates against the countries of Asia and Africa. The Bank is under heavy influence of some developed countries like America and Britain. About 43 percent of the total voting strength of the World Bank lies with five big and developed countries of the World due to which these countries have high political influence over the Bank.

(4) Emphasis on Repayment Capacity : It is also a part of criticism gainst the World Bank that it checks very strictly the repayment ability of the ncerned country before granting loans. Actually it is not a modern trend of *** World Bank. It is unscientific for any developing country. The capacity of mayment of the developing countries is automatically reduced after taking Thus, the Bank should look into only that whether the project for which the loan is being granted is productive or not. The World Bank definitely keeps an eye on the use of the loan.

(5) Loan for Specific Project only : The critics held that the World Bank grants loan only for specific project, while the underdeveloped countries need loans more for their general development.

(6) Emphasis on Repayment in Foreign Money : It has also been a charge against the World Bank that it makes it compulsory to repay its loans in gold or in the currency of that country only, in which the loan has been taken. It is rather a strict condition for developing countries.

(7) Delay in Providing Loans : The critics held that the process of granting loans by the World Bank is very complicated due to which much dery is made in. sanctioning loans. Sometimes due to delay the proper utility of the project is spoiled. But it can be said against this criticism that the World Bank is not the bank of any particular country and representing so many countries at a time is not easy task.

Despite these criticisms it can be said the World Bank is an extremely useful organisation.

INDIA AND THE WORLD BANK

India is among the founder members of the World Bank. The World Bank has had an important role in India’s development since independence. India got the first loan from the World Bank in 1949, two years after its independence. By that time India was the first member country from Asia that got loan from the World Bank. In the initial phase, India was one among the five countries which had a good share in the capital of the World Bank. So, it had the right of choosing an executive director. But in the later phase the quota of other countries surpassed India’s quota.

The World Bank had given India an instant help of 300 million dollar after the Gujarat Earthquake. Long term loans have been continuously granted to India for communication, education, irrigation, electric power, population control, poverty, alleviation, rural development, infrastructural development etc. to promote the speed of India’s development. India has received maximum loan for the development of railways. The first loan received for this project in 1949 was worth 34 million dollar. Again for agricultural development an extra loan of 10 million dollar was received in that very year. In 1950 and 1952 a total loan of 22 million dollar was received for two separate projects. Similarly the World Bank has contributed to India’s development from time to time by giving financial assitance. By June 1975, India received 44 loans adding up to 1536.6 million dollar on which interest rates from 3.5 percent to 8.9 percent had to be paid.

An “Indian Assistance/Help Club” was set up in 1558 to provide economic assistance in the second and third five year plans in which there were ten countries of International Development Federation along with the World Bank. The club meeting had positive attitude in granting assistance to India. Later on this club was renamed as “India Development Forum.”

By the financial year ending June 2005, the World Bank had granted a total loans of 22.3 billion dollar for 279 projects in different countries; out of which only 2.89 billon dollar was given to India. The World Bank granted loan of India for the Powergrid Corporation of India, a loan amount of 40 crore dollars in January 2006. Similarly, a loan of 4.9 billion dollars has been approved for year 2009-10.

Thus, the World Bank has played an important role in the development of India. Due to a good repayment reputation there is a good possibility of getting co-operation from World Bank in future as well.

INTERNATIONAL FINANCE CORPORATION-IFC

International Finance Corporation is an associate Organisation of the World Bank. It was founded in 1956. The main function of IFC is to promote the private sector of developing countries. Thus IFC makes arrangement of loans for the private enterprises of developing countries without government securities. The authorised capital of IFC was 100 million dollars which was divided into 1 lakh shares each worth 100 dollars. Its authorised capital increased to reach up to 2,361 million dollars on 30th June, 2004.

Having the membership of the World Bank is essential for having the membership of IMF. At present, 182 countries are its members. 447 projects in 103 countries have been approved in the year 2009.

The main objectives of IPC_(I) Providing loans to private sector. (11) Establishing coordination between capital and management. (III) Encouraging capital investment in projects.

INTERNATIONAL DEVELOPMENT ASSOCIATION-

IDA DA is an associate organisation of the World Bank. It was established in 1960. Legally, it is separated from World Bank but in reality it is an associate organisation of the World Bank. The President of the World Bank is its President also.

IDA is also called the Soft Loan Window of the World Bank. There is no compulsion of paying interest on the loan granted by this institution. Only poor countries can get loan from this institution.

The membership of the World Bank is essential for the membership of IDA. At present, 169 countries are members of IDA. it is run by the authorities of the World Bank only.

India is also among the countries getting loan from this organisation.

MULTILATERAL INVESTMENT GUARANTEE AGENCY [MIGA)

MIGA is an affiliated institution of World Bank group. It was founded in 1938. A country has to sign MIGA -Agreement to become its member. At present, there are 174 member countries of MIGA.

The main objective of MIGA are as follows:

 (I) Encouraging Capital flow to developing member countries.

(II) Providing Investment Insurance under its guarantee program to evade political risk.

(III) Insuring investments.

(IV) Providing encouragement and advices to developing countries

(V) Creating proper environment for investment.

NEW DEVELOPMENT BANK: BRICS DEVELOPMENT BANK

The new International Financial Institution BRICS Bank was formed on 15th July 2014 as New Development Bank. The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing US-dominated World Bank and Fund. The Bank is set up to foster greater financial and development cooperation among the five emerging markets. It will be headquartered in Shanghai, China. Unlike the World Bank, which assigns votes based on capital share in the New Development Bank each participant country will be assigned one vote and no countries will have veto power.

On 15 July 2014, the first day of the 6th BRICS summit held in Fortaleza, Brazil, the group of emerging economies signed the long-anticipated document to create the $100 billion BRICS Development Bank and a reserve currency pool worth over another $100 billion. Shanghai (China) was selected as the headquarter. The first president will be from India, the inaugural Chairman of the Board of directors will come from Brazil and the inaugural chairman of the Board of Governors will be Russian.

Capital structure and Objectives

The bank’s primary objective of lending will be infrastructure projects with authorized lending of up to $34 billion annually. South Africa will be the African headquarters of the bank named the New Development bank Africa Religious  Centre” The bank will have starting capital of $50 billion, with capital increased to $100 billion over time, Brazil, Russia, India, China and South Africa will initially contribute $10 billion each to bring the total to $50 billion. Each member cannot increase its share of capital without all other 4 members agreeing. This was a primary requirement of India. The bank will allow new members to join but the BRICS capital share cannot fall below 55 percent. MODUM

EXERCISE QUESTIONS

Long Answer Type Questions

1. Discuss the objectives and functions of International Bank for Reconstruction and

2. Discuss the management and organisation of the World Bank. Also explain its functions.

3. Explain the relationship between India and the World Bank

Short Answer Type Questions

1 What are the objectives of establishment of the World Bank?

2. What are the institutions of the World Bank Group ?

3. Write notes on:

(i) IFC

(ii) IDA

(iii) MIGA

(iv) BRICS Development Bank

III. Objective Type Questions

Choose the correct option

1. The other name of IBRD is…

(a) The World Bank

(b) Foreign Bank

(c) IMF

(d) MIGA

2. ……………….is included in the World Bank Group.

(a) IDA

(b) IFC

(c) MIGA

(d) All the above

3. The World Bank started its work in………

(a) 1945

(b) 1946

(c) 1956

(d) 1960

4. IFC was founded in…………

(a) 1946

(b) 1952

(c) 1956

(d) 1988

5. IDA was founded in……

(a) 1945

(b) 1960

(c) 1970

(d) 1981

6. MIGA was founded in………..

(a) 1960

(b) 1981

(c) 1988

(d) 1992

7. …………………is also called Soft Loan Window.

(a) IMF

(b) IFC

(c) IDA

(d) MIGA

8. BRICS Development Bank was formed in…..

(a) 2011

(b) 2012

(c) 2013

(d) 2014

9. Headquarter of BRICS Development Bank is in………….

(a) New Delhi

(b) Shanghai

(c) Fortaleza

(d) Beijing

10. Which one is not a member of BRICS Development Bank?

(a) India

(b) Russia

(c) U.S.A.

(d) South Africa

[Ans. :1. (a), 2. (d), 3. (b), 4. (c), 5. (b), 6. (c), 7.(c), 8. (d), 9. (b), 10. (c).]

State whether the following statements are True or False :

1 Those countries which are the members or IMF are automatically the members of the World Bank.

2. International Finance Corporation is an associate organization of the World Bank.

3. IDA is also called as soft loan window of the World Bank.

4. India is not a member of the World Bank.

5. MIGA is an associate organization of the World Bank.