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The East: World Bank's IFC Reexamines Its Role In Global Economy

  • Robert Lyle

Washington, 30 April 1999 (RFE/RL) -- The International Finance Corporation (IFC) is a part of the World Bank group that deals only with the private sector, making loans to and investments in generally small and medium size businesses in developing countries around the world.

The man who took over leadership of the IFC in January, German-born investment banker Peter Woicke, says the agency's aim is still to finance projects which are considered too risky for commercial lenders and investors:

Woicke said: "We go into regions that are not yet touched by the private sector. (For example), in China, we increasingly do little in the coastal regions, we're concentrating on inland areas, again where the private sector is not very much present."

The IFC never takes a majority share of any loan or investment, but uses its status as part of the World Bank to act as a catalyst -- and even sometimes guarantor -- for other lending and investment. That is how the agency is able to use its assets of nearly $10 billion to draw an additional $9 billion into its projects.

The changing global economy, especially after the Asian and Russian crises, is causing the IFC to reexamine its own role and the types of projects it can support.

Woicke met with a group of international journalists during the IMF/World Bank meetings this week to talk about the changing needs it faces in developing and transition nations.

One of the biggest needs, he says, is for what is called "micro-finance" -- banking and financial services for very small businesses and poor working people:

Woicke said: "One of the problems of micro-finance is not only that people, poor people don't get credit, but they also can't make their deposits Because their deposits are so small that they are not attractive enough for the banks. And I think micro-finance banks would take advantage of that and administratively handle, to take in the deposits and lend them out."

The IFC tried to provide some direct loans of around one million dollars each for a few medium size business, but Woicke says that still left truly small entrepreneurs out and didn't do anything to build a country's own capacity to develop and grow the kind of financial service industry any market economy needs.

The IFC has invested in and supported a number of banking projects in Central and Eastern Europe with the specific intent of serving small and medium sized businesses. Its recent involvement in a Gdansk, Poland regional bank and in the Romanian-American small business lenders project are examples of projects designed to create local financial services for both small and large business.

Another role the IFC intends to expand is its work in privatization, most notably in Russia:

Woicke said: "What the IFC has done in Russia mainly is privatizing small businesses. We had $85 million in trust funds which we used to employ young Russians to literally privatize 90,000 small businesses, small farms, bakeries, butcheries and that has been very successful."

Before the financial crisis last August, Woicke said Russia was the classic case of a country which did NOT need the IFC's loans and investments because the private sector was providing massive amounts of loans and was rushing in with investments. In fact, today the IFC has loans of only $131 million and investments of just $108 million in Russia.

But the August financial collapse abruptly ended the private investment and lending flows, so, says Woicke, the IFC is having to reexamine its role in Russia:

Woicke said: "Right now we are being faced with a lot of pressure from Russia to do more. We're being approached today by companies, even the oil companies who didn't need us until a year ago. And we are trying to define what we should do. We would like to go grow with foreign sponsors, where there's foreign sponsorship."

By foreign sponsorship, he means projects where outside commercial investors and companies are willing to significantly participate. In Russia, added Woicke, the IFC has concentrated its investments in export-driven industries simply because it is the one way the agency can be assured of repayment.

But now the IFC is taking a fresh look at what it can do in Russia. "There's a huge need for the IFC and we're trying to figure out how to do it," he said.

In countries such as Azerbaijan, Kazakhstan, Tajikistan, Uzbekistan and Georgia, Woicke says the IFC is concentrating on building capital and financial markets:

Woicke said: "We have in some of these countries invested in joint venture banks, where a foreign manager comes in along with the IFC, sometimes along with the EBRD (European Bank for Reconstruction and Development), and the local bank forms a joint venture bank which we hope will become benchmarks. We are involved in a number of natural resources projects, and we are involved in a number of small enterprises, where we finance two or three million dollars."

Woicke, who came to the IFC after nearly 30 years with the New York-based investment bank J. P. Morgan, says the increasing mergers among major international banks is reducing the amount of private banking funds available for IFC projects. When two big banks merge, he said, they tend to reduce their investment in developing areas to minimal levels.

Woicke says he is looking for ways to draw in other investors, especially institutional investors like major mutual and retirement funds, to start participating with the IFC in projects in developing and transition nations. Even if this effort works, however, Woicke says, it is apt to raise the cost of what the IFC does.