The world bank was established on December 25, 1944. United Nations Monetary and Financial conference held at Bretton Woods provided for the establishment of the International Monetary Fund and the International Bank for Reconstruction and Development. Then the World Bank was born. The world bank is actually two different entities namely
- the International Bank for Reconstruction and Development (IBRD); and
- the International Development Association (IDA).
Both these entities have different role to play in helping out its member nations.
Objectives of World Bank:
The following are the important objectives of the World Bank:
1. World Bank assists the reconstruction and development of member countries by helping in investment. It helps in the restoration of the economies from the destructive effects of the second world war; encouragement for the development of productive resources of less developed countries.
2. World bank assists the establishment of projects in backward areas so that output, employment and income may increase.
3. World Bank develops infrastructure facilities such as power, transport, communication and irrigation sectors.
4. World Bank finances social programmes such as development of education, health and training.
5. World Bank helps special area development programmes in drought prone areas, flood prone areas, etc.
6. World Bank lends for product purposes thereby stimulating economic growth in developing countries.
7. World Bank promotes the growth of international trade and maintenance of equilibrium in balance of payments.
8. World Bank supports special programmes related to the development of the country e.g. forest development, port development, agricultural development, urban services, housing projects, sewerage development or underground railways.
Membership and organizational structure of the World Bank:
The World Bank has 182 members. A member country can cancel its membership at any time by paying back all loans along with interest. The country withdrawing its membership is also liable to pay its share of financial loss incurred by the bank.
Organizational Structure of World Bank:
The organizational structure of the World Bank consists of Board of Governors, Executive Directors and a president. All the powers of the bank are entrusted to the Board of Directors. Each member country has one governor and one alternate governor and their term is for five years. The Board of Governors meets once a year. The governors have delegated their powers to a Board of Executive Directors in order to carry on the day-to-day functions of the bank. At present, there are 25 executive directors.
The president of World Bank is also the chairman of the Board of Executive Directors. The meeting of the Board of Executive Directors is held once a month. They formulate the policy of the bank within the framework of the articles of agreement. They also decide over the loan and credit proposals made by the president. They submit to the Board of Governors the audited accounts and administrative budget and an annual report on the operation and policies of the bank at its annual meeting.
The World Bank has about 6500 staff members in Washington in addition to about 1200 consultants. A number of vice presidents and directors of various departments and regions also assist the president of the World Bank in his functions.
Resources of World Bank
Initially, the World Bank has an authorized capital of 10 billion US dollars divided into 1,00,000 shares of 1,00,000 US dollars. Out of this, the member countries’ subscription was 9400 million dollars. The United States was the largest subscriber and India was one of the five largest subscribers to the bank. The subscription quota of each country consisted of three divisions.
- Two percent of the quota was payable in gold or US dollars which was available for lending.
- 18 percent of the quota was payable in local currency and was available for lending with the consent of the members whose currency was involved and
- the remaining 18 percent of the subscription was subject to call, as and when required by the bank to meet its obligations.
In 1995, the authorized capital of the IBRD was 184 billion dollar 3.96 percent of the authorized capital represented subscribed capital which amounted to 176.4 billion dollars.
Funds were mobilized from such other sources as governments, commercial banks, export credit agencies and other multilateral institutions. The IBRD finances its lending operations primarily from borrowings in the world capital market.
Lending operations of World Bank
Lending by the World Bank is of two types. The first is for developing countries which are able to pay near market interest rates. Resources for such type of lending are obtained from investors across the world. The World Bank issues bonds to mobilize such funds. The second type of lending is to the poorest countries which have no credit worthiness in the international financial markets. As they will not be in a position to pay near market interest rates on their borrowings. The World Bank’s affiliate, the International Development Association (IDA) undertakes Lending to poorest countries.
Forms of loans offered by World Bank:
The World Bank extends loans to member countries in the following forms:
- Granting loans out of its own funds.
- By participating in loans out of funds raised in the market of a member country or otherwise borrowed by the World Bank.
- Providing guarantee in part or in full for loans made by private investors through the usual investment channel.
Conditions of loans offered by World Bank:
The World Bank lends on the following terms:
- The World Bank ensures that the borrower is unable to obtain loans under conditions which the bank considers reasonable.
- Loans are meant for reconstruction or development except in special circumstances.
- The Central Bank of the member country guarantees payment of the principal, interest on loan and other related charges.
- The competent committee in the World Bank is thoroughly satisfied with the loan project.
- The borrower is able to meet obligations as imposed by the World Bank.
Leading pattern of World Bank:
The medium term and long term loans are repayable over a period up to the completion of the project. Long term loans are repayable over a periodof20 years or less with a grace period of 5 years. The interest rate charged by the World Bank is dependent upon its cost of borrowing. Apart from interest, an annual commitment charge of 0.75 percent per year is levied on the outstanding balances.
Since its inception, the World Bank gave priority for infrastructure projects such as roads and railways, generation and distribution of electricity, irrigation projects, telecommunication, Port development, etc., for the first two decades.
Since 1970, the emphasis of World bank has shifted to financing of the educational system in developing countries, creation of institutions for financing industrial investments and provision of technical assistance for the selection and appraisal of industrial and agricultural projects.
However, the present lending concentrate on investment, influencing directly the welfare of people of developing nations. In particular, the purpose is to raise the productivity and standard of living of the poor populace. For example, agriculture and rural development, education, nutrition programmes, family planning, provision of drinking water, low cost housing and improvement of drainage and sewerage system get priority in lending.
During 1980s, two other lending facilities were introduced.
- Structural adjustment facility and
- Enhanced structural adjustment facility.
Structural adjustment facility
In 1985, IBRD introduced structural adjustment facility to help the borrowing countries in reducing their international deficit payments while maintaining the pace of growth. Credit is extended to finance the import of goods, except those of luxury goods and military imports. Loans are subject to strict conditions.
Enhanced structural adjustment facility
Enhanced structural adjustment facility was introduced in December 1987 to enhance the concessional funds available to poor countries. For the purpose of giving concessional loans, the World Bank obtains concessional loans and contributions from the developed OPEC countries. This facility also assists the borrowing countries in reducing their BOP deficits thereby stimulating growth. The repayment of loan commences after 5.5 years of disbursement of loans. Loans under Enhanced structural adjustment facility carries an interest of 0.5 percent per year.