THE ROLE OF INTERNATIONAL FINANCIAL INSTITUTION IN GLOBAL CRISIS

THE ROLE OF INTERNATIONAL FINANCIAL INSTITUTION IN GLOBAL CRISIS

Introduction

International financial institutions normally provide professional advice and financial support for economic as well as social development activities in developing countries besides promoting international economic stability and cooperation. The term International Financial Institutions points to International Monetary Fund (IMF) and the five multilateral development banks (MDBs) such as; The African Development Bank, The World Bank Group, The Inter-American Development Bank, The Asian Development Bank as well as the European Bank for Reconstruction and Development. Among the five multilateral banks, four place their focus on specific world region and are therefore referred to as regional development banks (Scott, H. 2010, P. 50). However, International Monetary Fund and the World Bank are global banks, governed independently by the United Nation’s system, as they are specialized agencies to the UN.

All International Financial Institutions have admissions for only sovereign who are the owner members although they are characterized by a country membership that is broad (Irudaya, R. 2014, P.12). This includes developing countries who normally borrow as well as developed donor countries. On the other hand, membership in regional development bank is usually not limited to those countries in particular regions but includes other countries from a global perspective. It is worth noting that each International Financial Institution holds its own operational and legal status although a high level of collaboration and cooperation is maintained between member countries as they have membership in various IFIs.

It is important to note that International Monetary Fund typically makes temporary financial assistance to all countries that hold membership status. This is mainly aimed at easing or adjusting balances of payment (Ozkan, J. Unsal, H. & International, 2012, P.39). On the other hand, the five multilateral development banks provide financial assistance for all developing countries through long term loans that mainly have a maturity period of a maximum twenty years depending on market interest rates. Typically maintaining and obtaining sufficient resources for these long term loans, the MDBs are forced to borrow on the international capital market so as to lend again to those developing countries who need financial assistance (Ozkan, J. et al, 2012, P. 39). Additionally, MDBs provides very long-term loans that normally have maturity period of up to forty years based on interest rates that are below market rate. This particular loan is normally funded or contributed directly by donor countries. Finally the MDBs provides grant financing but not by all of them (Ozkan, J. et al., 2012, P.40). This is mainly aimed at offering financial assistance in developing countries in areas such as technical support, project preparation as well as advisory services.

All international financial institutions are very active in offering financial support to programs that contain a global scope (ABC International, Films for the Humanities & Sciences (Firm), & Films Media Group, 2009, P. 64). This is in addition to their core function of providing technical as well as financing assistance to programs at specified country level. However, it is worth noting that there are other international banks that are publicly owned who offer financial assistance to developing countries, which are in the same category as the multilateral financial institutions and not international financial institutions. These international banks normally have relative or narrow membership and ownership structure, meaning that they focus on specific activities or sectors.

 

The Role of International Monetary Fund in Global Crisis

International Monetary Fund was established in 1945 by an international treaty to act as a central institution of the system of international monetary. This is a system of currency exchange rates and trading which enables businesses to effectively take place between countries that have differing currencies (Yehoue, E. & International Monetary Fund, 2009, P.5). Moreover, International Monetary system’s objective is to prevent or eliminate financial crisis in the international system. In this regard, international financial crisis is avoided by encouraging countries to monitor their adherences on policies besides adopting sound economic policies. The available fund for lending is tapped by member countries who need temporal financing in bid of addressing problems of balance payments (Teagarden, M. Pashtenko, V. Ahmed, Z. Abdul, R. Nor, H. Mohd, Z. Academy for Global Business Advancement. 2009, 17).

The International Monetary Fund’s statutory purpose comprises promoting world trade’s balanced expansion, the avoidance of competitive currency devaluation including all problems associated with correction of balance of payments (Sun, W. Steward, J. & Pollard, D. 2010, P.75). In order to serve all these purposes the International Monetary payments have to engage in three main major activities. The first purpose is to monitor financial and economic developments including relevant policies in member countries mostly at global level. It is also a critical component in the process of offering policy advises as it has over fifty years of experience (Sun, W. et al., 2010, P.76). For instance, a case of Greek’s recent deteriorating economy begged for International Monetary Fund’s intervention. The main proposals offered to restructuring the dwindling economy was the provision of long-term loans. However, even after the provision of such a loan from the IMF, Greek’s economic growth could not be saved because of political interferences and inadequate investment knowledge. This means that the provision of advises by the IMF is of critical value to the borrowing countries such as Greece.

The second purpose of International Monetary Fund is to lend financial assistance to members who are experiencing problems in balance of payments (Tran, V. & Harvie, C. 2000, P. 43). This is mainly aimed at not only to provide temporal financing but also aims at supporting economic adjustments through effective reforms that can correct any underlying problems. The third purpose of International Monetary Fund is to provide the central banks as well as the governments of its member countries with sufficient training and technical assistance in all areas that are need of expertise skills (Gallagher, K. 2015, P. 71). The headquarters of IMF is based in Washington D.C, which is governed by its global members of about one hundred and eighty four countries. National economic policies concerning global contexts as well as mattes of stability on financial and monetary systems are normally discussed at the headquarters. These include the risk of destabilizing capital flows from a global perspective, choice of exchange rate arrangements of member countries and the design of internationally recognized codes of institutions and policies as well as standards (Gallagher, K. 2015, P. 72).

The Role of World Bank in Global Financial Crisis

The World Bank was founded in 1945 during an international conference that founded International Monetary fund (Xiao, Y. & International Monetary Fund. 2009, P. 44). The main purpose for its formation was to involve itself in reconstruction processes of all countries that had been devastated by World War II. During these reconstruction processes, World Bank shifted its focus of addressing economic development on non-industrialized countries from all over the world (Xiao, Y. & International Monetary Fund. 2009, P.46). The main objective for this envisioned task was to protecting the world from poverty (Alfaro, L, 2010, 28).

In addressing current global financial crisis, the World Bank scheduled many meetings with the board of governors who represents member countries. These boards of governors usually represent the shareholding countries and are ministers of development and finance. At the ministerial levels, normally establish the development committee (Bird G. & Rowland D. 2007, P. 4). Their main task is to facilitate consensus building on development matters at intercontinental level, thus, advising the International Monetary Fund and the Bank on critical issues concerning issues such as global financial crisis (Berlatsky, N. 2010). This means that the committee is responsible in managing resources prudently to promote global developments that are required.

The World Bank Group is headquartered at Washington D.C is usually composed of five main institutions (Stiftung, B. & Institute, M. 2010, 36). These institutions are the International Finance Corporation (IDA), International Bank for Development and Reconstruction (IBRD), the International Development, Association (IDA), the Multilateral Investment Guarantee Agency (MIGA) as well as the International Centre for settlement and Investment Disputes (Matheson, T. 2013, P. 61). It is important to note that each of these institutions play critical role in responding to global financial crisis as well as improving living standards and reducing world’s poverty in most developing countries (International, M. 2016, 34). Moreover, they have a fundamental policy of providing loans that are of low interest rate, grants to governments including private sector and interest free credits. This is an important contribution that aims to achieve quality infrastructure, health, education, communications as well as support services on investments (Matheson, T. 2013, P.63).

During the recent financial crisis, international bank for reconstruction and development focuses on those middle income countries as well as creditworthy low income countries (Özkan, G. Unsal, D. & International Monetary Fund. 2012). On the other hand, during the same period International Development Bank lays its focus on those countries that are the world’s poorest (Klunder & Edward, 2013, P.57). However, International Bank for Reconstruction and development only lends financial assistance to governments. These loans are financed by selling bonds that are triple A-rated in the global financial markets. Even though International Bank for Reconstruction and Development earns a small portion of such lending, lending its own capital brings a greater portion of its income (Klundert, T, & Edward Elgar Publishing. 2013, P. 60). The capital is composed of reserves that are accumulated over the years and the World Bank’s shareholders pay the money. This income is also critical in paying off World Bank’s operating expenses while a smaller portion is contributed to International Development Association as well as debt relief during financial crisis (Eijffinger, S. & Masciandaro, D. 2013, 43).

It is important to note that during the recent financial crisis, International Development Association is a major provider of financial assistance to governments of the world’s poorest countries. This is because this association is the global leader in lending out interest free loans as well as granting financial assistance (Taylor, M. & Clarida, R. 2014, P. 102). In every three years, its funds are replenished by donor countries that consist of about forty members. Repayments of the principal loans normally generate more additional funds on its forty years of non-interest loans. Such loans are then made available for lending again. In addition International Development Association lending amounts differ every year, however account for forty percent of total lending of the entire World Bank Group (Taylor, M. & Scarita, R. 2014, P.102).

On the other hand, International Financial Corporation (IFC) normally focuses on financing the projects of private sector during any financial crisis. These private sectors are capable of taking equity stake after getting financial assistance. Multilateral Investment Guarantee Agency is responsible in the promotion of direct investments that are mainly foreign in most of the developing countries (Kishore, A. Patra, M. & Ray, P. 2011, P. 90). This is mainly through insuring investors against any form of non-commercial or political risks in the countries where such investments are needed. ICSID is only responsible for providing a forum where financial disputes are mediated between governments and investors (Kishore A. et al., 2011, P. 91). Moreover, it offers advises to governments in bid of attracting investors for investment opportunities.

The Role of Inter-American Development Bank in recent financial crisis

The Inter-American Development Bank (IBD) was founded as an institution for development in 1959. This means that IBD is the oldest as compared to other regional development banks (Chance, G. 2012, P. 66). About forty-seven member countries that include twenty-six Latin American, Canada, the United States, Caribbean states, and sixteen European Countries, Korea, Israel and Japan own the inter-American Development Bank. Moreover, this bank has its headquarters in Washington D.C. The inter-American Development Bank is considered the main source of multilateral financing within its region. The IBD’s objective is to promote social, economic and institutional development projects particularly during financial crisis (Chance, G. 2012, P. 67). This is in both private and public sectors whereby they are encouraged to embrace regional and trade integration programs.

During any financial crisis the Inter-American Development Bank is tasked with, promoting social equity, poverty reduction and economic growth that sustain the environment (Aggarwal, K. & Lee, S. 2011, P.36). This is made possible through four main areas that are critical during this process. The first area is fostering competitiveness by promoting policies as well as programs that have the capacity to increase a country’s potential and viability for development in an economy that is globally open. The second area is modernizing particular states by strengthening the culture of efficiency as well as transparency especially in public institutions (Aggarwal, K. & Lee, S. 2011, P.38).

In addition, IDB responds to global financial crisis by investing in social programs that have the capacity of expanding the poor people’s opportunities (Aggarwal, K. & Lee, S. 2011, P.42). The fourth critical area of focus is promoting regional economic integration through the process of forging links between countries in order to promote development of large markets for both goods and services (Temouri, Y. & Jones, C. 2014, 23). It is important to note that inter-American Development Bank is keen in supporting regional initiatives. This is by producing knowledge and information that is critical during policy discussions as well as providing financial assistance for technical support to individual governments (Aggarwal, K. & Lee, S. 2011, P.42). This is on trade and integration matters including the process of conducting public outreach actions that can promote such important integrations.

 

 

The Role of Asian Development Bank in responding to financial crisis

The Asian Development Bank (ADB) is ideally owned by its forty-seven member countries who are in the same regions as well as eighteen other parts of the world (Xiao, Y. & International Monetary Fund. 2009, P. 82). The board of governors is its highest policy making body that holds meetings each year at its headquarter that is based in Manila. ADB’s board of governors is a composition of one representation from every member country. It is important to note that this board of governors holds elections whereby they elect twelve members of the board of directors (Xiao, Y. & International Monetary Fund. 2009, P. 82).

During global financial crisis, Asian Development Bank focuses on the process of eradicating poverty. The main objective is usually to promote development in all of its forty seven members in an effort of improving quality of life of the people through the process of promoting policy dialogues, technical assistance, loans, equity investments and guarantees (Horowitz, S. & Heo, 2001, U. P.120). Asia Development Banks’ operations are typically financed through recycled repayments, bonds as well as contributions made by all members, about seventy percent of all cumulative lending are normally received from ordinary capital resources however, ADB is also tasked with the provision of loans from other special funds. It is important to note that periods characterized by financial crisis, Asian Development Bank provides loans that are concessional to country members who are least developed (Horowitz, S. & Heo, U. 2001, P. 121). The management of several trust funds as well as channels grants typically provided by bilateral donors to the final recipients couples this.

The role of the African Development Bank during global financial crisis

The African Development Bank (AFDB) is mainly responsible to promoting social progress and economic development of its shareholder African countries. AFDB was created in 1964 where the headquarters is based in Abidjan, Cote d’Ivore (Ryder, N. Turksen, U. & Hassler, S. 2016. 53). About fifty-three countries own the African Development Bank with twenty-four countries in Europe, United States and Asia. During financial crisis, the African Development Bank responds by engaging in several activities (Ryder. N. et al., 2016, P.55). The first main responding method is developing both equity and loan investments for social and economic advancement in the African region. The African Development Bank also responds to financial crisis by providing technical assistance for the process of developing and executing development projects as well as programs. All major private and public capital are promoted by the AFDB through investments in order to develop purposes. Finally, the bank responds to regional members’ requests for assistance for the purposes of coordinating policies and plans aimed at achieving development objectives (Ryder, N. et al., 2016, P.59).

However, it is important to note that the African Development Bank is tasked with paying special attention to all national as well as multinational programs and projects that have the capacity of promoting regional integration especially during global financial crisis (Chow, P. & Gill, B. 2000, P. 80). The African Development Bank achieves its financial resources from subscribed reserves, capital, accumulated net income as well as funds raised from loans. Capital is normally subscribed in such a way that regional member countries are able to hold 2/3 of the total whereby the non-regional members hold 1/3 of the total subscribed capital (Vovenda, A. & Plotnikov, V. 2011, P. 108).

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