International Finance Corporation (IFC)

The International finance corporation is the private affiliate of the World Bank. It was established in the year 1956 to extend credit to private business enterprises in the developing member countries.

Objectives of IFC

IFC provides equity and loan capital for private enterprises in association with private investors and encourages the development of local capital markets and stimulates the international flow of private capital. It supports joint venture which provides opportunities to combine domestic knowledge of market and other conditions with the technical and managerial experience available in the industrial nations.

The principal objectives of IFC are as follows.

1. It makes investments in productive private enterprises in association with private investors. It concentrates on areas where sufficient private capital is not forthcoming on reasonable terms and conditions.

2. It acts as a clearing house for bringing together investment opportunities, private capital and the experienced management.

3. It stimulates the International flow of capital.

4. It assists the development of capital markets in less developed countries.

5. It encourages private sector activity in developing countries through three types of activities.

  • private sector project financing
  • helping companies in the developing world to mobilize financing in the international financial markets and
  • providing guidance and technical assistance to business and governments.

Investment policies of the IFC

1. The IFC does not invest in projects in the advanced countries.

2. The IFC assists in the fields of manufacturing, mining and processing.

3. The local entrepreneurs should contribute at least 50% of the total cost of the project concerned.

4. The credit period is normally 5 to 15 years.

5. The rate of interest is negotiable depending upon the degree of risks involved and other terms and conditions of investments.

6. The IFC evaluates projects on the basis of profitability.

7. The IFC has the option of converting loans into capital stock of project and appoints its members on the Board of Directors of the borrowing country.

8. It has the right to dispose of capital stock at any time and to any party.

9. The IFC would give credit only to those enterprises which have experienced and competent management.

10. Project financing is done without requiring any guarantee from the borrowing country.

11. The IFC is to supplement and not to compete with private capital.

12. The IFC acts as a catalyst. It motivates inflow of capital from institutions which would not invest without IFC’s involvements.

13. The IFC invests only in profit making projects and charges market rates of interest.

Membership and capital resources of IFC

The membership of the IFC is open to all the member countries of the World Bank. The management of the IFC is similar to that of the World Bank. The member countries in the IFC are represented by the Governors and Executive Directors of the World Bank. The president of the World Bank acts as the chairman of the Board of Directors of the IFC. The Board of Directors of the IFC appoints its president on the recommendation of the chairman. Though IFC maintains a separate identity of its own, its activities are fully controlled by the World Bank authorities.

Initial authorized Capital of IFC

The initial authorized capital of the IFC was 100 million dollars. Each member country subscribes in proportion to its subscription towards the capital of the World Bank. So, it is clear that only the members of the World Bank can join the IFC. The capital base of the corporation can be expanded to borrow from the World Bank to the extent of four times its subscribed capital. The IFC is an autonomous body with its own Articles of Agreement, share capital, management and staff.

IFC and Developing Countries

The IFC gives financial assistance to private enterprises in developing countries. It helps them in reducing the capital burden and also foreign exchange shortages.

By the end of June of 1971, IFC’s investments in 172 projects in 47 developing countries aggregated to 577.8 million US Dollars. By June 1975, it had risen to 1262 million US Dollars. The IFC concentrated on the development of iron and steel, cement, paper, textile, chemicals and other allied industries. The United States contributed 48% of the total amount disbursed by the IFC, till june 1975. Likewise, the contributions from Japan, and EEC were 23% and 11% respectively. About 15% of the funds disbursed represented IFC’s own resources.

As on 30th June 1993, the IFC provided an assistance of 2.1 billion dollars to 185 private sector projects in 54 developing countries. It market an increase of 20% over the previous year. The total cost of the project assisted by the IFC was 17 billion dollars.

According to the IFC, Asia holds good prospects in natural resource-based industries. The IFC’s engineering wing provides technical advice to government institutes and small enterprises in preparing feasibility reports. It also helps in the small-scale sector in raising funds.

Criticism of IFC

The IFC has been criticized on the following lines.

1. Less developed countries feel that the assistance they received from the IFC is inadequate and it is far below their expectations.

2. The interest charged by the IFC is somewhat high. It is higher than the interest charged by the IDA.

3. The conditions for loan imposed by the IFC are rather stiff. The IFC insists on repayment of loan only in terms of US dollars. But less developed countries always experience foreign exchange crunch.

4. Less developed countries find the investment policies of the IFC tough. For example, entrepreneurs in the borrowing countries have to meet 50% of the value of their projects.

World Bank and the IFC – a comparison

Though the IFC is an affiliate of the world bank, the following differences are observe between them.

1. The IFC is the ‘private sector’ arm of the World Bank. It operates like a private financial or an investment firm. Its operation are guided by profitability. But the World Bank operations are not guided by the consideration of profitability.

2. The IFC can deal directly with the private enterprises in the member countries. It has other options of extending fixed interest loans and making investments in the equities. But the World Bank extends fixed interest loans to the member countries.

3. The World Bank has enormous amount of funds for financing development projects in the member countries. But the resources at the disposal of the IFC are comparatively limited. It offers credit to the private sector for expansion in less developed countries.