Opinion: Here's how the IFC is working with financial institutions

Last April, I wrote about the changes we are making as we re-examine our engagements with financial institutions, or FIs. We are doing this in order to create a more responsible banking system, as well as to boost financial inclusion globally. I want to provide an update on our progress in the past six months.

My commitment was that IFC would be more selective in terms of our financial intermediary investments and lending. We can report now that we have been more selective, but that we still face challenges in some other areas in our engagement.

In the last fiscal year, we have increased our targeted investments. For instance, we tripled our climate commitments with financial intermediaries, with more than $1.4 billion going to this sector. Our clients also made about 8.3 million loans to small- and medium-sized enterprises and 54 million microloans last year. Overall, 35 percent of our FI projects were in our category of the poorest countries — called IDA — and we exceeded our targets for investing in fragile and conflict-affected countries.

Our staff and management make every effort to ensure that we reduce our exposure to higher risk FI activity and apply greater selectivity to these transactions. In the last fiscal year, for instance, we financed five projects that we classify as higher risk under our Sustainability Policy, compared to 18 in FY16. We have also been reducing the number of general lines of credit. In fact, we have turned down several large deals in FY17 because of our greater selectivity.

Enhanced client support

We are also making progress on the support we provide to our portfolio clients. We have just completed a successful pilot project in Latin America and Asia, where we provided enhanced support to 15 higher risk FI clients that were either struggling with environmental and social risk management implementation, or operated in markets where standards were low or nonexistent.  

Despite their higher risk profile, these FIs have significant positive impact in their local markets and contribute toward our development goals. Working with these clients requires a greater commitment from us — more time and resources — but this investment is well worth it. We have started rolling this successful model out in other regions and with more portfolio clients. If we find that clients refuse this enhanced support, we will consider ending those relationships.

We have also changed our internal structures to better support the delivery model of environment and social risk management (E&S) to our clients. Now each region has a designated E&S regional sector lead for financial intermediary transactions. These key IFC staff oversee the quality of E&S assessments and supervision of FI clients performed by our dedicated E&S specialists. An additional global sector lead has been appointed to ensure consistency across regions.

In April, I also committed to greater transparency of how our FI funds are used. When we talk, for instance, about making a targeted loan to women-owned business, we want to specify the definition of those businesses. On our website, we recently provided clear definitions of targeted sectors, including small- and medium-sized enterprises, women-owned businesses, housing finance, and climate business.

And, as committed, we are disclosing the use of these targeted funds to show that they are being used for the stated purpose. For instance, if we sign a deal with a bank for $20 million in loans to small- and medium enterprises, our team will update the public Summary of Investment Information to confirm this deal. This adds another layer of accountability for IFC and its clients.

Raising standards across the finance industry

We also are working to expand transparency throughout the finance industry. We are continuing our efforts to establish an industry working group on disclosure. This has not been easy and has gone slower than we anticipated. As a start, we have mapped existing disclosure practices, and we plan to share a working paper on this issue soon.

Another commitment to bring about systemic change in the finance industry is now unfolding with the IFC-supported Sustainable Banking Network. SBN members represent 34 countries, which collectively cover 85 percent of banking assets from the emerging markets. In the past five years, 15 member countries have already launched sustainable finance policies and voluntary principles with IFC support. 

Over the past year, SBN also has developed a new measurement framework to systematically track and measure policy comprehensiveness and adoption across members and countries.  The goal of this exercise is to develop a practical methodology, tools, and indicators that SBN members can apply to their own national contexts, with state-of-the-industry reports issued annually.

Making progress with our FI partners and across the finance industry will take time. But we are committed to raising standards not just with our own projects, but throughout the finance industry. We also are committed to providing regular updates on our progress and our ongoing discussions with all parties interested in these issues.

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