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International Lending Agencies

International Lending Agencies

Chances are that when you decide to purchase a house, you won't be able to buy it in cash. Therefore, to achieve home ownership, you will have to go to a bank or another lending institution to borrow the money. Well, the same concept applies when economically less developed countries want to capitalize on a resource or construct some much-needed infrastructure. If they do not have the money, they borrow. But, countries won't go to your neighborhood bank. Instead, they take loans from international lending agencies. Read on to discover more about them.

International Lending Agencies Definition

International Lending Agencies are organizations that have been established by more than one country, to be of benefit to the public through the provision of financing.

Their owners or shareholders are typically governments or other international organizations. Membership in international lending agencies includes both borrowing countries (less economically developed) as well as donor nations (more economically developed). Their directives are based on the rules established in international agreements which have been signed by all of their members. These agreements are subject to international law.

International Lending Agencies enter into financial transactions (typically loans, but also other types) which are similar to those entered into by the private sector. The main difference is that these transactions are between international organizations and countries and are governed by international law. International Lending Agencies are also referred to as International Financial Institutions (IFIs), therefore the terms are often used interchangeably. Additionally, International Lending Agencies include Multilateral Development Banks (MDBs).1,2,3

Role of International Lending Agencies

At the country level, International Lending Agencies play a significant role in developing and emerging economies, by providing a variety of services to national governments. These services include the provision of loans, credits, or grants. They also provide technical assistance, and advisory services as well as conduct extensive research. The latter is used to inform their strategies. Further, International Lending Agencies lend money to what are termed "non-sovereign guaranteed" (NSG) actors, which are sub-national government organizations and private sector entities.3

At the global level, they provide funding to address issues that are global and/or regional. Financing is also provided to increase the global supply of public goods.

Importance of International Lending Agencies

Oftentimes, developing and emerging countries lack the capital to invest in development and turn to International Lending Agencies to bridge the gap in this financing. Therefore, these institutions have allowed countries to have the ability to develop their resources, even when the money is not available domestically. Once a resource or a piece of infrastructure is developed, it stands to reason that new businesses will be attracted and this will bring additional revenue to the national government. This revenue is not only used to repay the loan but also helps to reduce poverty and improve the standard of living for the citizens of the country.

International lending agencies are also important for the following non-exhaustive list of reasons:

  1. They contribute to improving countries' capacity by helping borrowers to develop and implement policies to achieve their social and economic development targets.

  2. They facilitate the adaptation of international best practices (e.g. environmental and social policies or procurement policies) across sectors. This helps to improve the functioning of national-level institutions which in turn increases countries' ability to better integrate into the global economy.

  3. They provide training that improves the capacity of public sector employees.

  4. On the more practical and economic side, international lending agencies fund projects that commercial banks would not. Moreover, their involvement in these projects gives more confidence to commercial lenders.

International Lending Agencies Examples

International Lending Agencies typically include the Bretton Woods Institutions—The International Monetary Fund (IMF) and the World Bank—along with regional Multilateral Development Banks, including, but not limited to the Inter-American Development Bank (IDB), the African Development Bank (AfDB), and the Asian Development Bank (ADB).

After World War II, the global economy was in shambles. Therefore, to revive it, while promoting global cooperation in trade as well as post-war peace, in 1944, forty-three world leaders held a meeting in Bretton Woods, New Hampshire. Known as the Bretton Woods Conference, during this meeting the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) i.e., the World Bank Group, were formed. There were also plans for the development of an International Trade Organization (ITO). However, this did not come to pass until the formation of the World Trade Organization (WTO) in the mid-1990s. Collectively the IMF and the World Bank are referred to as the Bretton Woods Institutions.4

International Lending Agencies IMF and IBRD articles of agreement StudySmarterFig. 1 - IMF and IBRD articles of agreement

In more economically developed nations, commercial banks also lend money to governments. Let's explore some, not all, of these institutions in a bit more detail in the following sections.

International Monetary Fund (IMF)

The IMF's main goal is to create global financial stability through the provision of financial assistance, policy advice, and capacity development. Established in 1944, the IMF currently has 190 members. It is different from the World Bank and other MDBs because it gives short-term loans to countries to help fix their economies and re-establish their financial structure.6

For a more complete understanding of this organization, read our explanation on the International Monetary Fund!

World Bank Group

In addition to being a Bretton Woods Institute, the World Bank is also a Multilateral Development Bank. In fact, it is the largest and oldest MDB. The World Bank Group has 189 member countries. Its headquarters are in Washington D.C, but the organization has offices in over 130 locations. The World Bank Group consists of the following institutions that make financing available to developing countries in the form of concessional and non-concessional loans, interest-free credits, and grants. The World Bank Group also provides technical assistance and conducts widespread research.

Table 1

Institution of the World Bank GroupService Provided
International Bank for Reconstruction and Development (IBRD)Finances development projects and provides policy financing through non-concessional loans to middle-income countries and also to low-income countries whose credit ratings qualify them.
International Development Association (IDA)Provides zero or low-interest loans (concessional loans) for the poorest countries or those whose credit ratings do not qualify them for IBRD borrowing.
International Finance Corporation (IFC)Provides investment (non-concessional loans), advice, and asset management for the private sector in middle and low-income countries.
Multilateral Investment Guarantee Agency (MIGA)Provides guarantees (risk insurance)

Since 1947, the World Bank Group has funded over 12,000 development projects.6,7

A concessional loan is one provided at a significantly lower interest rate than the market rate, while a non-concessional loan is one that uses market-based interest rates and is much less favorable than concessional loans.

African Development Bank (AfDB)

The African Development Bank was founded in 1964 and has its headquarters in Abidjan, Côte d'Ivoire. It was originally exclusively for only African states to promote greater corporation between them. In 1973, the AfDB created the African Development Fund (ADF) which allowed for non-African states to become member contributors. In 1982, AfDB non-concessional lending was opened to non-African states. Private sector organizations are also funded through non-concessional lending since the African Development Bank does not have a separate arm focused on private sector lending. Currently, the AfDB has 81 member countries—54 African nations (regional members) and 27 non-African nations (non-regional members). The AfDB also consists of the Nigeria Trust Fund which provides concessional loans to both public and private sectors in low-income countries with good risk ratings.6,8

Inter-American Development Bank (IDB)

Established in 1959, the IDB was founded out of the need for countries in Latin America and the Caribbean (LAC) to have an MDB which would be sensitive to their unique needs. The IDB Group is the number one source of development financing for the LAC region. It consists of the IDB, the IDB Invest (private sector financing ), and the IDB Lab (IDB's innovation arm). Headquartered in Washington D.C., the organization has 48 member countries. The IDB Group provides concessional and non-concessional loans, grants, and technical assistance as well as conducting research.6,9

International Lending Agencies IDB headquarters, Washington D.C. StudySmarterFig. 2 - IDB headquarters, Washington D.C.

Asian Development Bank (ADB)

The ADB was founded in 1966 to promote cooperation within the Asian region. It has 68 members, 49 of which are from Asia and the Pacific, and its headquarters are located in Manila Philippines. The ADB provides concessional and non-concessional loans, technical assistance, grants, and equity investments. Its concessional lending arm, the Asian Development Fund (ADF) was created in 1973. However, in 2017 concessional lending was transferred directly to the ADB while the ADF provides grants to low-income countries. The ADB does not have a separate arm that caters to the private sector. Instead, private sector loans are covered under its non-concessional lending.6,10

Disadvantages of Borrowing Money from International Lending Agencies

The following are some, not all, of the disadvantages that nations face when they borrow from International Lending Agencies.

  1. The economic policy conditions that are typically part of development project agreements can be seen as undermining borrowers' sovereignty thereby limiting their control over national development.

  2. While borrowing from international lending agencies is supposed to boost the economy, it can actually have the reverse effect and limit economic growth. This is especially if there is a large amount of debt to be repaid. Countries will use a large proportion of their earnings to service their debt, leaving very little left over to invest and grow the economy which stunts future growth.

  3. Borrowing can lead countries into a cycle of debt. Continuous borrowing increases their payment burden and may sometimes lead them to default on payments. They may then keep on having to take additional loans to service their debt, which results in them remaining in the cycle.

  4. Borrowing can be unpopular with the electorate of nations and could potentially encourage political unrest.

International Lending Agencies anti-IMF graffiti in Greece StudySmarterFig. 3 - anti-IMF graffiti in Greece

International Lending Agencies - Key takeaways

  • International Lending Agencies are supranational organizations that provide financing in order to benefit the public.
  • They provide loans, credits, grants technical assistance, and advisory services to borrowers.
  • International Lending Agencies allow emerging and developing economies access to finance which enables them to develop their resources thereby improving the lives of their citizens.
  • International Lending Agencies include the Bretton Woods Institutions and regional Multilateral Development Banks.
  • The disadvantages of borrowing from International Lending Agencies include loss of sovereignty, creating a cycle of debt, limiting economic growth, and can be unpopular with the population.

References

  1. Bradlow, D.D. and Hunter, D.B. (2010) 'International law and the operations of international financial institutions', in D.D. Bradlow and D.B. Hunter (eds) International financial institutions and international law. The Netherlands: Kluwer Law International, pp. 1-30.
  2. Lavan (n.d.) The Importance of international financial institutions in emerging market project finance. Available at: https://www.lavan.com.au/advice/banking_finance/the_importance_of_international_financial_institutions_in_emerging_market_p (Accessed 7 November 2022).
  3. Trade Commissioner Service (2020) Overview of international financial institutions. Available at https://www.tradecommissioner.gc.ca/development-developpement/mdb-overview-bmd-apercu.aspx?lang=eng (Accessed 7 November 2022).
  4. Bretton Woods Project (2019) What are the Bretton Woods Institutions? Available at: https://www.brettonwoodsproject.org/2019/01/art-320747/#:~:text=The%20Bretton%20Woods%20Institutions%20are,to%20promote%20international%20economic%20cooperation. (Accessed 8 November 2022).
  5. Fig. 1: IMF and IBRD articles of agreement (https://wordpress.org/openverse/image/82975c0d-0342-4414-a17c-055d0ea2edcb) by Archives New Zealand (https://www.flickr.com/photos/35759981@N08) Licensed by CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/?ref=openverse)
  6. Congressional Research Service (2020) Multilateral development banks: overview and issues for congress. CRS Report R41170. Available at http:crsreports.congress.gov
  7. The World Bank (n.d.) What we do. Available at https://www.worldbank.org/en/what-we-do Accessed 8 November 2022.
  8. African Development Bank (2022) Corporate information. Available at https://www.afdb.org/en/about/corporate-information Accessed 8 November 2022.
  9. Inter-American Development Bank (2022) Lending and grants. Available at https://www.iadb.org/en/fin Accessed 8 November 2022.
  10. Asian Development Bank (2022) Who we are. Available at https://www.adb.org/who-we-are/about#history Accessed 8 November 2022.
  11. Fig. 2: IDB headquarters, Washington D.C. (https://commons.wikimedia.org/w/index.php?curid=87133362) by Mariordo (Mario Roberto Duran Ortiz) (https://commons.wikimedia.org/wiki/User:Mariordo) Licensed by CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0/deed.en)
  12. Fig. 3: anti-IMF graffiti in Greece (https://www.flickr.com/photos/georgetikis/18587594884/in/photolist-vtD3ph-vy3yyY-ujwhnS-vx8iBU-uAEtb3-vvnkV9-vg6A9h-uAQd5R-uDTdLX-uAEnGY-vxEX2p-vGQBbb-yo5YZa) by georgetikis (https://www.flickr.com/photos/georgetikis/) Licensed by CC By-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)

Frequently Asked Questions about International Lending Agencies

International lending agencies are supragovernmental organizations that provide financing to development projects in order to benefit the public. 

The role of international lending agencies is to provide loans, credits, grants, technical assistance, and advisory services to its borrowers. 

Some international lending agencies include the International Monetary Fund, the World Bank, the African Development Bank, the Inter-American Development Bank, and the Asian Development Bank, among others. 

The disadvantages of lending include, but are not limited to continuous lending leading to the cycle of debt in borrowing nations, the loss of national control over development, the potential limitations to economic growth, and the threat of civil unrest due to its unpopularity with the populace. 

International lending agencies are important because they allow borrowers access to finance for their development thereby improving the lives of citizens. 

Final International Lending Agencies Quiz

Question

True or False: 

Membership in international lending agencies is limited to only borrowers.

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Answer

True.

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Question

For what does the acronym IFI stand?

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Answer

International Friendly Institutions.

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Question

All of the following statements are true about International Lending Agencies EXCEPT:

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Answer

Their shareholders are only governments.

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Question

Which organizations are referred to as the Bretton Woods Institutions?

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Answer

The World Trade Organization.

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Question

Which of the following statements is TRUE?

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Answer

International Lending Agencies do not provide training to public sector workers.

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Question

Where is the headquarters of the Inter-American Development Bank located?

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Answer

Panama City, Panama

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Question

True or False:

The International Development Association is an arm of the International Monetary Fund. 

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Answer

True

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Question

The African Development Bank has how many members?

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Answer

54

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Question

The Asian Development Bank has how many non-Asia or Pacific members?

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Answer

49

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Question

Which statement about the IDB Group is FALSE?

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Answer

The IDB Lab provides private-sector funding.

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Question

True or False:

The Asian Development Fund provides grant funding to middle-income countries.

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Answer

True

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Question

Borrowing from International Lending Agencies can be disadvantageous because it:

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Answer

Limits national control over development.

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