What is the World Bank Group?
The World Bank Group is a multilateral development bank that was conceived in 1946 as one of the two Bretton Woods institutions, along with the International Monetary Fund (IMF). It began as the International Bank for Reconstruction and Development (IBRD) to assist in the rebuilding of Europe and Japan in the aftermath of the Second World War.
After the task of rebuilding was complete, the World Bank shifted its focus towards the developing world. The first step was the setting up of the International Development Associations (IDA) in 1960. The IDA aimed to provide financial assistance to poor countries on easy terms.
The World Bank Group consists of five institutional arms. The first two – IBRD and the IDA – together make the World Bank. The other three – MIGA, IFC, and ICSID – are sister organizations that support the bank’s activities through specific programs.
The World Bank is funded through many sources. Initially, the source of funding was the contributions from the wealthier member states. More recently, the World Bank raises funds from the capital markets.
The World Bank holds an AAA credit rating, which makes it easy for it to raise capital at low interest rates. Consequently, it can provide developing countries financing at lower rates. Other sources of funding include the return on its investments and fees earned from advisory services provided.
The Five Institutions under the World Bank Group
International Bank for Reconstruction & Development (IBRD)
The International Bank for Reconstruction & Development (IBRD) was the organization that preceded the World Bank. It was set up in 1944 to help with the reconstruction after the Second World War. The IBRD provided financial assistance in the form of loans to the belligerent countries of Europe to help with the rebuilding of their infrastructure and economies that were lost during the war.
Later, it was merged with the newly-formed IDA to create the World Bank. It focuses on lending to middle-income countries and lower-income countries with a good credit rating. Through its lending, it supports infrastructure and capacity development programs that are in line with the Sustainable Development Goals (SDGs).
International Development Association (IDA)
Set up in 1960, the International Development Association (IDA), along with the IBRD, formed the World Bank as it is today. The IDA provides financial assistance to poor countries with a high risk of debt distress. They provide the assistance through IDA credits. The credits are in the form of grants or zero-to-low interest rate loans. The repayments for the loans can go for as long as 38 years with grace periods of 5 to 10 years.
International Finance Corporation (IFC)
Founded in the year 1956, the International Finance Corporation (IFC) is a sister organization of the World Bank. They exclusively support the private sector in developing countries. They accomplish this by investing in private sector companies via both debt and equity.
Some of the better-known investments of the IFC are the LG Electronics of South Korea and the HDFC of India. They also provide technical advisory services to the target companies to help them overcome any operational challenges in addition to the financial investment.
Some financial instruments used by the IFC are listed below:
- Global Bonds
- Discount Notes
- Social Bonds
- Green Bonds
- Local Currency Bonds
Multilateral Investment Guarantee Agency (MIGA)
The Multilateral Investment Guarantee Agency (MIGA) acts as an insurance provider against the political risk that comes with investing in emerging and frontier markets. They provide insurance against events like civil war and terrorism, breach of contract, and non-payment of financial obligation. The guarantees provided by MIGA can last for a term of three years and up to a term of 20 years.
Another goal of MIGA is to promote Foreign Direct Investment (FDI) in developing countries by helping investors hedge their exposure. They insure most businesses with exceptions of products illegal in either of the countries (host or investor), weapons, and products that are harmful to the environment.
International Centre for Settlement of Investment Disputes (ICSID)
The International Centre for Settlement of Investment Disputes (ICSID) is a dispute settlement body that helps provide a legal framework for the settlement of disputes arising out of investment contracts. It is like the dispute settlement of the WTO. It applies international law to resolve disputes to maintain a uniform code that governs investment activity across member states.
The ICSID also provides mediation and arbitration services that can help resolve disputes without the need for a hearing. The main idea is to facilitate the investment process in all ways possible, so the World Bank can continue its main task of financing development projects across the world.
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