A year after promising to improve, what has the IFC done to clean up their financial intermediary lending?
“We must do better.”
That’s what the International Finance Corporation chief, Phillipe Le Houerou, said last year, after multiple investigations revealed human rights abuses linked to their financial intermediary lending.
This approach to financing development projects — using third party financial institutions such as commercial banks and private equity funds as intermediaries — has led to the weak enforcement of critical safeguards and left entire communities being forcibly evicted and serious environmental contamination and destruction.
In his blog, among other commitments, Le Houerou promised to limit the flow of IFC money through financial intermediaries going to socially and environmentally high-risk operations such as infrastructure, agribusiness, energy, etc. He said they’d do this by “reducing the number of general purpose loans to banks…and continuing to increase the number of targeted loans”.
Basically, when the IFC gives a “general loan” or invests equity in a bank, the bank is then pretty much able to use that money however it chooses (with a few exceptions such as arms among others) and the IFC therefore becomes accountable for anywhere that money may end up.
On the other hand, with “targeted loans” the FI has a contractual obligation to only use the money for specific purposes, for example funding micro, small and medium enterprises or housing, mortgages, etc.
In a second opinion piece, Le Houerou provided an update on the IFC’s progress, claiming the IFC had increased their targeted investments and that they had “turned down several large deals in FY17 because of [their] greater selectivity.”
A closer look
We looked first into the IFC’s annual reports, and we found that during the last fiscal year alone, the IFC committed $6.4 billion to FIs — a new record, now making up more than half (54 percent) of its portfolio.
Then, we looked into how the FI portfolio breaks down by calendar year — basically where the money goes.
Interestingly, we found a general trend of decreasing number of FI operations — from 98 projects in 2015 to 61 projects in 2017. Considering that the dollar value of the FI portfolio has increased, we can conclude that IFC appears to be investing larger amounts in fewer FIs. In many aspects, this could be interpreted as applying greater selectivity.
That said, we’re surprised to note that all risk categories of FI clients are also on a general downward trend. We would have expected to see just the higher risk FIs go down.
When it comes to targeted vs. general loans, however, the waters are a bit murkier. Using the IFC’s own sector codes and classifications, pictured below, we simply cannot find a conclusive trend towards increased targeted investments.
However, we found that the total share of commercial banking –general loans, for our data crunching — as a proportion of the FI portfolio seems to be also decreasing. It went from 48 percent in 2015, to 36 percent in 2017.
We also observed that in 2017, around 15 percent went to FIs for investing in micro, small and medium enterprises. About 20 percent went to housing. And about 36 percent went towards commercial banking.
And, here’s where we face a major block: we can’t break down that 36 percent to “commercial banking” further. It’s very difficult to tell where those millions of dollars are going after they are transferred from the IFC to those commercial banks.
Consider, for instance, the IFC’s investments in Rizal Commercial Banking Corporation (RCBC) –two equity investments, 2010 and 2012, two general commercial banking loans one in 2013 and another one in 2015. The IFC states that its additionality is to lend credibility to the bank’s efforts and business, as well as support expansion of its lending to infrastructure projects. RCBC is considered a high-risk FI client given that the bank’s portfolio includes exposure to high risk business activities such as infrastructure, energy, and other sectors. As a result, RCBC is expected to uphold the IFC’s social and environmental standards in its investments.
However, because of lack of disclosure of project information there is no public way to know where RCBC is investing in high risk infrastructure projects and if those standards are being applied properly.
Through an exhaustive investigation and months of digging, Inclusive Development International, Bank Information Center Europe, and Philippine Movement for Climate Justice exposed that RCBC was actually financially connected to 19 coal fired power plants. As a result, several communities have now been able to file a complaint with the IFC’s independent accountability mechanism, the Compliance Advisor Ombudsman. They’ve raised environmental and social concerns around the projects for which the IFC is also accountable for, through this intermediary client.
The IFC’s transparency and disclosure of its high risk FI clients’ project information — such as in the case of RCBC — is nonexistent. This type of information, however, is critical not only for the IFC’s own accountability process, but most importantly, for communities that have the right to know who is financing such projects, which standards should apply, what their rights are, and who to hold accountable if things go wrong.
Back in 2012, the CAO said that without more disclosure about these type of investments, they were “effectively secret and thus divorced from systems which are designed to ensure that IFC, and its clients are accountable to project affected people for delivery on their environmental and social commitments.”
Last year, Le Houerou promised the IFC would explore a voluntary disclosure framework for sub-clients and projects and set up a working group with this mandate, but we’ve yet to see progress on this.
When investing in high-risk financial intermediaries, like those involved in infrastructure or agribusiness, the IFC should, at a minimum, publicly disclose the name, sector and location of every high-risk investment in their FI client’s portfolio.
To continue to build the case for how and why the IFC can and should take this important step, Oxfam will soon be releasing a new report looking at current practices of disclosure in the financial sector and how disclosure can be systematized by development finance institutions using tools and practices that already exist. Stay tuned!
This post was written by Christian Donaldson, economic justice policy advisor at Oxfam International’s Washington Office.