International Finance Corporation
|International Finance Corporation|
|Type||Development finance institution|
|Purpose/focus||Private sector development, Poverty reduction|
|Executive Vice President & CEO||Jin-Yong Cai|
|Parent organization||World Bank Group|
The International Finance Corporation (IFC) is an international financial institution which offers investment, advisory, and asset management services to encourage private sector development in developing countries. The IFC is a member of the World Bank Group and is headquartered in Washington, D.C., United States. It was established in 1956 as the private sector arm of the World Bank Group to advance economic development by investing in strictly for-profit and commercial projects which reduce poverty and promote development. The IFC's stated aim is to create opportunities for people to escape poverty and achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible and competitive markets, supporting businesses and other private sector entities, and creating jobs and delivering necessary services to those who are poverty-stricken or otherwise vulnerable. Since 2009, the IFC has focused on a set of development goals which its projects are expected to target. Its goals are to increase sustainable agriculture opportunities, improve health and education, increase access to financing for microfinance and business clients, advance infrastructure, help small businesses grow revenues, and invest in climate health.
The IFC is owned and governed by its member countries, but has its own executive leadership and staff which conduct its normal business operations. It is a corporation whose shareholders are member governments which provide paid-in capital and which have the right to vote on its matters. Originally more financially integrated with the World Bank Group, the IFC was established separately and eventually became authorized to operate as a financially autonomous entity and make independent investment decisions. It offers an array of debt and equity financing services and helps companies face their risk exposures, while refraining from participating in a management capacity. The corporation also offers advice to companies on making decisions, evaluating their impact on the environment and society, and being responsible. It advises governments on building infrastructure and partnerships to further support private sector development.
The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report recognized that its investments performed well and reduced poverty, but recommended that the corporation define poverty and expected outcomes more explicitly to better-understand its effectiveness and approach poverty reduction more strategically. The corporation's total investments in 2011 amounted to $18.66 billion. It committed $820 million to advisory services for 642 projects in 2011, and held $24.5 billion worth of liquid assets. The IFC is in good financial standing and received the highest ratings from two independent credit rating agencies in 2010 and 2011.
The World Bank and International Monetary Fund were designed by delegates at the Bretton Woods conference in 1944 and the World Bank, then consisting of only the International Bank for Reconstruction and Development, became operational in 1946. Robert L. Garner joined the World Bank in 1947 as a senior executive and expressed his view that private business could play an important role in international development. In 1950, Garner and his colleagues proposed establishing a new institution for the purpose of making private investments in the developing countries served by the Bank. The U.S. government encouraged the idea of an international corporation working in tandem with the World Bank to invest in private enterprises without accepting guarantees from governments, without managing those enterprises, and by collaborating with third party investors. When describing the IFC in 1955, World Bank President Eugene R. Black said that the IFC would only invest in private firms, rather than make loans to governments, and it would not manage the projects in which it invests. In 1956 the International Finance Corporation became operational under the leadership of Garner. It initially had 12 staff members and $100 million ($844.9 million in 2012 dollars) in capital. The corporation made its inaugural investment in 1957 by making a $2 million ($16.4 million in 2012 dollars) loan to a Brazil-based affiliate of Siemens & Halske (now Siemens AG).
In 1965, the corporation channeled $600,000 ($4.4 million in 2012 dollars) in capital from Deutsche Bank and other investors to Champion Cellulose, marking the launch of the IFC's Syndicated Loan Program. In the early 1970s, the IFC set up its own Capital Markets Department to bolster the stock markets, banks, and other financial intermediaries in developing nations and also offered its first advisory services to Indonesia. Afterward, the corporation formalized its advisory services. In the years that followed up until 1977, the IFC decentralized its operations by establishing field offices in its member states. As of 2008[update], only half of its staff operate from its Washington, D.C. headquarters.
In 1984, the IFC became financially autonomous and was authorized to issue its own bond instruments across international capital markets, thereby ending its reliance on World Bank financial support. The corporation's shareholders approved a capital increase of $1.2 billion ($2.7 billion in 2012 dollars) in order to expand its work in private development. The IFC increasingly invested in private energy from 1966 to 1994, financing 34 projects in the electric power sector worth approximately $7.4 billion USD ($11.5 billion in 2012 dollars). It financed 88 infrastructure projects across 26 member states at a total cost of $15 billion USD ($23.2 billion in 2012 dollars). It had invested in one energy project in 1966 and another in 1981, but in the six years between 1988 and 1994 it invested in a bulk of 32 energy projects.
The IFC adopted its Environmental and Social Standards in 1998 with the intent of prioritizing sustainability in its investment activities. In 2001, the corporation began attempting to implement such concerns into its investments. Critics have questioned the sustainability of some projects funded by the corporation. The IFC approved a $90 million loan in 2007 for the upgrading of a slaughterhouse facility in the Amazon region owned by Brazil's biggest beef producer Bertin, despite opposition from local NGOs, the Sierra Club, and the advisement against by the Bank's Independent Evaluation Group. Six months later in June 2008, the IFC and World Bank ultimately backed out of the investment project and expressed dissatisfaction regarding Bertin's ability to meet its sustainability standards. In 2009, an internal audit by the Office of the Compliance Advisor Ombudsman determined that the IFC ignored its Environmental and Social Standards by approving $200 million worth of loan guarantees to fund the production of palm oil in Indonesia, a country faced with significant environmental risks to its rainforests. In 2010, the Office of the Compliance Advisor Ombudsman channeled a complaint by a collection of NGOs filed against the IFC for its equity and loan investments in an aluminum smelting operation in Mozambique which the NGOs allege could expose local inhabitants to harmful emissions.
The IFC is evaluated annually by the Bank's Independent Evaluation Group. In 2011, the group published an evaluation report titled "Assessing the IFC's Poverty Focus and Results" in which it noted that although the IFC's projects that emphasized inclusive growth patterns performed well and that poverty reduction was an implicit outcome, the IFC neglected to articulate and detail the impacts on poverty of the projects which target economic growth specifically. This circumstance made it difficult for the evaluation group to identify specific opportunities for the poor. The group ultimately recommended that the IFC adopt a more strategic approach to poverty reduction by better defining poverty reduction impacts and poverty itself, and that the IFC establish a framework for greater outside consultation on its understanding, measurement, and reporting on poverty reduction efforts.
Response to the 2008 financial crisis
The IFC performed a critical function by helping developing countries deal with the aftermath of the 2008 financial crisis. It provided a $16.2 billion line of credit to small and medium businesses (34% more than in 2007) and authorized a $200 million selective capital increase, of which $130 million accounted for new shares which grew the representation of developing countries by 6.07% to a total share of 39.48%.
The IFC is governed by its Board of Governors which meets annually and consists of one governor per member country (most often the country's finance minister or treasury secretary). Each member typically appoints one governor and also one alternate. Although corporate authority rests with the Board of Governors, the governors delegate most of their corporate powers and their authority over daily matters such as lending and business operations to the Board of Directors. The IFC's Board of Directors consists of 25 executive directors which meet regularly and work at the IFC's headquarters, and is chaired by the President of the World Bank Group. The executive directors collectively represent all 184 member countries. When the IFC's Board of Directors votes on matters brought before it, each executive director's vote is weighted according to the total share capital of the member countries represented by that director. The IFC's Executive Vice President and CEO oversees its overall direction and daily operations. As of October 2012, Jin-Yong Cai serves as the Executive Vice President and CEO of the IFC. President of the World Bank Group Jim Yong Kim appointed Jin-Yong Cai to serve as the new Executive Vice President and CEO of the IFC. Cai is a Chinese citizen who formerly served as a managing director for Goldman Sachs and has over 20 years of financial sector experience.
Although the IFC coordinates its activities in many areas with the other World Bank Group institutions, it generally operates independently as it is a separate entity with legal and financial autonomy, established by its own Articles of Agreement. The corporation operates with a staff of over 3,400 employees, of which half are stationed in field offices across its member nations.
The IFC is owned by its 184 member governments which pay in capital, vote on matters of policy, and approve all of its investing activities. Each member country is a shareholder of the IFC, and the percentage of each member's ownership share is determined by the amount of capital it pays into the IFC. As of 2011[update], the United States is the IFC's single largest shareholder with a share of 24%. Japan holds a share of 6%, while each of Germany, France, and the United Kingdom hold 5%. The IFC's share capital amounted to approximately $2.4 billion as of 30 June 2011[update], of which 51% is controlled by the seven largest member governments of the OECD. Membership in the IFC is available only to countries who are members of the World Bank, particularly the International Bank for Reconstruction and Development.
The IFC's investment services consist of loans, equity, trade finance, syndicated loans, structured and securitized finance, client risk management services, treasury services, and liquidity management. In its fiscal year 2010, the IFC invested $12.7 billion in 528 projects across 103 countries. Of that total investment commitment, approximately 39% ($4.9 billion) was invested into 255 projects across 58 member nations of the World Bank's International Development Association (IDA).
The IFC makes loans to businesses and private projects generally with maturities of seven to twelve years. It determines a suitable repayment schedule and grace period for each loan individually to meet borrowers' currency and cash flow requirements. The IFC may provide longer-term loans or extend grace periods if a project is deemed to warrant it. Leasing companies and financial intermediaries may also receive loans from the IFC. Though loans have traditionally been denominated in hard currencies, the IFC has endeavored to structure loan products in local currencies. Its disbursement portfolio included loans denominated in 25 local currencies in 2010, and 45 local currencies in 2011, funded largely through swap markets. Local financial markets development is one of IFC’s strategic focus areas. In line with its AAA rating, it has strict concentration, liquidity, asset-liability and other policies. The IFC committed to approximately $5.7 billion in new loans in 2010, and $5 billion in 2011.
Although the IFC's shareholders initially only allowed it to make loans, the IFC was authorized in 1961 to make equity investments, the first of which was made in 1962 by taking a stake in FEMSA, a former manufacturer of auto parts in Spain that is now part of Bosch Spain. The IFC invests in businesses' equity either directly or via private equity funds, generally from five up to twenty percent of a company's total equity. IFC’s private equity portfolio currently stands at roughly $3.0 billion committed to about 180 funds. The portfolio is widely distributed across all regions including Africa, East Asia, South Asia, Eastern Europe, Latin America and the Middle East, and recently has invested in Small Enterprise Assistance Funds' (SEAF) Caucasus Growth Fund, Aureos Capital's Kula Fund II (Papua New Guinea, Fiji, Pacific Islands) and Leopard Capital’s Haiti Fund. Other equity investments made by the IFC include preferred equity, convertible loans, and participation loans. The IFC prefers to invest for the long-term, usually for a period of eight to fifteen years, before exiting through the sale of shares on a domestic stock exchange, usually as part of an initial public offering. When the IFC invests in a company, it does not assume an active role in management of the company.
Through its Global Trade Finance Program, the IFC guarantees trade payment obligations of more than 200 approved banks in over 80 countries to mitigate risk for international transactions. The Global Trade Finance Program provides guarantees to cover payment risks for emerging market banks regarding promissory notes, bills of exchange, letters of credit, bid and performance bonds, supplier credit for capital goods imports, and advance payments. The IFC issued $3.46 billion in more than 2,800 guarantees in 2010, of which over 51% targeted IDA member nations. In its fiscal year 2011, the IFC issued $4.6 billion in more than 3,100 guarantees. In 2009, the IFC launched a separate program for crisis response, known as its Global Trade Liquidity Program, which provides liquidity for international trade among developing countries. Since its establishment in 2009, the Global Trade Liquidity Program assisted with over $15 billion in trade in 2011.
The IFC operates a Syndicated Loan Program in an effort to mobilize capital for development goals. The program was created in 1957 and as of 2011[update] has channeled approximately $38 billion from over 550 financial institutions toward development projects in over 100 different emerging markets. The IFC syndicated a total of $4.7 billion in loans in 2011, twice that of its $2 billion worth of syndications in 2010. Due to banks retrenching from lending across borders in emerging markets, in 2009 the IFC started to syndicate parallel loans to the international financial institutions and other participants.
To service clients without ready access to low-cost financing, the IFC relies on structured or securitized financial products such as partial credit guarantees, portfolio risk transfers, and Islamic finance. The IFC committed $797 million in the form of structured and securitized financing in 2010. For companies that face difficulty in obtaining financing due to a perception of high credit risk, the IFC securitizes assets with predictable cash flows, such as mortgages, credit cards, loans, corporate debt instruments, and revenue streams, in an effort to enhance those companies' credit.
Financial derivative products are made available to the IFC's clients strictly for hedging interest rate risk, exchange rate risk, and commodity risk exposure. It serves as an intermediary between emerging market businesses and international derivatives market makers to increase access to risk management instruments.
The IFC fulfills a treasury role by borrowing international capital to fund lending activities. It is usually one of the first institutions to issue bonds or to do swaps in emerging markets denominated in those markets' local currencies. The IFC's new international borrowings amounted to $8.8 billion in 2010 and $9.8 billion in 2011. The IFC Treasury actively engages in liquidity management in an effort to maximize returns and assure that funding for its investments is readily available while managing risks to the IFC.
In addition to its investment activities the IFC provides a range of advisory services to support corporate decisionmaking regarding business, environment, social impact, and sustainability. The IFC's corporate advice targets governance, managerial capacity, scalability, and corporate responsibility. It prioritizes the encouragement of reforms that improve the trade friendliness and ease of doing business in an effort to advise countries on fostering a suitable investment climate. It also offers advice to governments on infrastructure development and public-private partnerships. The IFC attempts to guide businesses toward more sustainable practices particularly with regards to having good governance, supporting women in business, and proactively combating climate change.
Asset Management Company
The IFC established IFC Asset Management Company LLC (IFC AMC) in 2009 as a wholly owned subsidiary to manage all capital funds to be invested in emerging markets. The AMC manages capital mobilized by the IFC as well as by third parties such as sovereign or pension funds, and other development financing organizations. Despite being owned by the IFC, the AMC has investment decision autonomy and is charged with a fiduciary responsibility to the four individual funds under its management. It also aims to mobilize additional capital for IFC investments as it can make certain types of investments which the IFC cannot. As of 2011[update], the AMC managed the IFC Capitalization Fund (Equity) Fund, L.P., the IFC Capitalization (Subordinated Debt) Fund, L.P., the IFC African, Latin American, and Caribbean Fund, L.P., and the Africa Capitalization Fund, Ltd. The IFC Capitalization (Equity) Fund holds $1.3 billion in equity, while the IFC Capitalization (Subordinated Debt) Fund is valued at $1.7 billion. The IFC African, Latin American, and Caribbean Fund (referred to as the IFC ALAC Fund) was created in 2010 and is worth $1 billion. As of March 2012[update], the ALAC Fund has invested a total of $349.1 million into twelve businesses. The Africa Capitalization Fund was set up in 2011 to invest in commercial banks in both Northern and Sub-Saharan Africa and its commitments totaled $181.8 million in March 2012. As of 2012[update], Gavin E.R. Wilson serves as CEO of the AMC.
The IFC prepares consolidated financial statements in accordance with United States GAAP which are audited by KPMG. It reported income before grants to IDA members of $2.18 billion in fiscal year 2011, up from $1.95 billion in fiscal 2010 and $299 million in fiscal 2009. The increase in income before grants is ascribed to higher earnings from the IFC's investments and also from higher service fees. The IFC reported a partial offset from lower liquid asset trading income, higher administrative costs, and higher advisory service expenses. The IFC made $600 million in grants to IDA countries in fiscal 2011, up from $200 million in fiscal 2010 and $450 million in fiscal 2009. The IFC reported a net income of $1.58 billion in fiscal year 2011. In previous years, the IFC had reported a net loss of $151 million in fiscal 2009 and $1.75 billion in fiscal 2010. The IFC's total capital amounted to $20.3 billion in 2011, of which $2.4 billion was paid-in capital from member countries, $16.4 billion was retained earnings, and $1.5 billion was accumulated other comprehensive income. The IFC held $68.49 billion in total assets in 2011.
The IFC's return on average assets (GAAP basis) decreased from 3.1% in 2010 to 2.4% in 2011. Its return on average capital (GAAP basis) decreased from 10.1% in 2010 to 8.2% in 2011. The IFC's cash and liquid investments accounted for 83% of its estimated net cash requirements for fiscal years 2012 through 2014. Its external funding liquidity level grew from 190% in 2010 to 266% in 2011. It has a 2.6:1 debt-to-equity ratio and holds 6.6% in reserves against losses on loans to its disbursement portfolio. The IFC's deployable strategic capital decreased from 14% in 2010 to 10% in 2011 as a share of its total resources available, which grew from $16.8 billion in 2010 to $17.9 billion in 2011.
In 2011, the IFC reported total funding commitments (consisting of loans, equity, guarantees, and client risk management) of $12.18 billion, slightly lower than its $12.66 billion in commitments in 2010. Its core mobilization, which consists of participation and parallel loans, structured finance, its Asset Management Company funds, and other initiatives, grew from $5.38 billion in 2010 to $6.47 billion in 2011. The IFC's total investment program was reported at a value of $18.66 billion for fiscal year 2011. Its advisory services portfolio included 642 projects valued at $820 million in 2011, compared to 736 projects at $859 million in 2010. The IFC held $24.5 billion in liquid assets in 2011, up from $21 billion in 2010.
The IFC received credit ratings of AAA from Standard & Poor's in December 2012 and Aaa from Moody's Investors Service in November 2012. S&P rated the IFC as having a strong financial standing with adequate capital and liquidity, cautious management policies, a high level of geographic diversification, and anticipated treatment as a preferred creditor given its membership in the World Bank Group. It noted that the IFC faces a weakness relative to other multilateral institutions of having higher risks due to its mandated emphasis on private sector investing and its income heavily affected by equity markets.
- Environment, Health and Safety
- Global Environment Facility
- Grassroots Business Fund
- Multilateral Investment Guarantee Agency
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- IFC Kula Fund II
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