Re-examining our work with financial institutions
By Philippe Le Houérou
In some of the world’s toughest economic markets, access to finance is often severely limited, and regulation and environmental and social standards in the banking industry poorly developed.
Those two difficulties explain why we at IFC — the world’s largest development institution dedicated to expanding private sector investment in developing countries — give loans to or invest in banks around the world. We seek to use their multiplier effect to make finance accessible to businesses and people who desperately need it, and have severely limited legal or affordable alternatives.
For instance, when garment factories in Bangladesh sought to upgrade their facilities’ worker safety standards after the tragic Rana Plaza fire, IFC worked with industry associations and local banks to provide $40 million in dedicated loans to update those factories. And when Ebola swept through West African countries and devastated economies, IFC put together an emergency facility for local banks, which helped the flow of essential imports and exports and trading among businesses to continue.
Several groups have called into question our work in providing loans to or investing in banks. Few would disagree that we need to make capital more accessible in many countries to create jobs, and banks are indispensable for this task. Their critique is not focused on the financing itself — but its indirect impact.
We welcome the scrutiny because getting policies right is critical if we are to meet our institution’s goals of ending extreme poverty by 2030 and boosting shared prosperity. We have a strategy of continuous improvement, ongoing dialogue with stakeholders, learning from mistakes and successes, and refining our approach. As part of this ongoing process, we will be making some important additional improvements to the way we work.
First, we are intensifying our upstream engagement with banking associations and regulators, including through the Sustainable Banking Network (SBN), to promote sustainable environmental and social practices in the broader financial sector, including stock exchanges. This systemic approach to build capacity and awareness in banks and other financial institutions, will lead to more responsible financing in developing countries, far beyond IFC clients.
Second, we will better focus our environmental and social resources on appraisal, supervision, and capacity support to our financial intermediary clients who are deemed higher risk.
Third, we will reduce IFC’s own exposure to higher risk FI activity, and apply greater selectivity to these type of investments, including equity investments. This means reducing the number of general purpose loans to banks, which can be used to support any client sub-projects in any sector, and continuing to increase the number of targeted loans, which can be ‘ring-fenced’ to support particular efforts that, for instance, help women-owned SMEs or mitigate climate change.
And finally, we will work to be more transparent, even beyond our existing Access to Information Policy, as we have already done with our private equity investments. On one level this includes demonstrating that targeted loans to banks are being used for their express purpose.
We are also establishing a working group with various financial sector stakeholders to explore a voluntary disclosure framework for sub-clients and projects, within the context of privacy laws, client confidentiality requirements and disclosure regulations that vary based on jurisdiction.
Portfolio-wide, client-level disclosure is not standard practice by financial institutions in developed markets, and this will be challenging to institute in emerging markets. However, we will continue to advocate in this direction with stakeholders like SBN.
For many years, IFC has been a market leader in environmental and social risk management. As far back as 2003, IFC policies inspired the Equator Principles, now adopted by 89 banks in 37 countries. We have helped build and improve the capacity of our banking clients to assess and mitigate their own risks in line with international best practice, even as we have significantly enhanced our own approach, such as with IFC’s 2012 Performance Standards.
We now work with over 750 financial institutions, which have helped businesses and individuals thrive in more than 100 countries. In 2015 our clients provided 7.6 million loans worth $344 billion to small and medium enterprises, and 51 million small loans worth $60 billion to micro enterprises in emerging markets.
These investments have vastly increased the number of women-owned businesses, and support for trade finance, digital finance, farmers and middle- and low-income homebuyers. The impact of this work is clear.
In leveraging our reach and scale through financial intermediaries, IFC cannot have the same level of oversight of the sub-projects supported by our FI clients as with our direct investments. But this work is a development imperative, and we are committed to supporting our clients and reducing the E&S risks in our portfolio.
We must do better in ensuring that our work helps create a more responsible banking system. We believe these improvements will help us do just that.
Le Houérou is Executive Vice President and CEO of the International Finance Corporation, the private sector arm of the World Bank Group.