International

Financial
Institutions
Constance L. Danner
• Maria 05
• Maryam 22
• Hina 26
• Nada 36
• Zohra 48
 Financial System
• Money
• Financial Instruments
• Financial Markets
• Financial Institutions
• Central Banks
 Financial Institutions
• “A financial institution is an institution that
provides financial services for its clients or
members.”

• Act as financial intermediaries.

 International Financial
Institutions
~Definition~

“International Financial Institutions

(IFIs) Refers to financial institutions
that have been established (or
chartered) by more than one country
and hence are subject to international
law”
 Types Of IFIs
• Bretton Woods institutions
• Regional development banks
• Bilateral development banks
• Other regional financial institutions
 Examples Of IFIs
• International Monetary Fund
• World Bank Group
• Asian Development Bank
• African Development Bank
• Inter-American Development Bank
• Islamic Development Bank
 History Of IFIs
• After the Great Depression in
the 1930s there was a need for
an organization to create a
system for exchange rate
stability
• The World Bank and the
International Monetary Fund
were created in the aftermath
of World War II
• Countries’ economies affected
by WWII
• need for reconstruction in well-
developed nations
• need for development in the
lesser developed nations
 Bretton Woods (Cont’d)
• The meeting was
born out of the
determination by
US President
Franklin D
Roosevelt and UK
Prime Minister
Winston Churchill
to ensure post-war
prosperity through

•Churchill & Roosevelt at their first meeting

~Bretton Woods~
Bretton-Woods
 President
Roosevelt told the
conference: "The
economic health of
every country is a
proper matter of
concern to all its
neighbours, near
and distant”
1944 Bretton Woods
IFIs: that We’ll discuss

• International Monetary Fund

• World Bank
• Asian Development Bank
• Islamic Development Bank

* ADB & IsDB will be explained briefly

International Monetary
Fund
(The IMF)
 International Monetary
Fund
• The International Monetary Fund (IMF)
is an international organization that
oversees the global financial system by
following the macroeconomic policies of its
member countries, in particular those with
an impact on exchange rates and the
balance of payments. It is an organization
formed to stabilize international exchange
International Monetary Fund
(cont’d)
• Established in (1944)
• Formally organized on (Dec 27th 1945)

• Member states (185)

• Headquarters (Washington USA)

• Currency (SDR)
• *SDR = just a unit of account…not a real currency

• *Background Image = IMF Headquarters

IMF: Managing Director
• Dominique Strauss-Kahn

• Nationality: French

• 10th Managing Director of

the International Monetary
Fund
• Assumed this position on
Nov 1st ,2007.
 IMF: Purposes
Articles of Agreement of the IMF
i) promote international monetary cooperation

ii) expansion and balanced growth of

international trade
iii) promote exchange rate stability
iv) help establish multilateral system of
payments and eliminate foreign
exchange restrictions

v) make resources of the Fund available to

members

vi) Shorten the duration and lessen the

degree of disequilibrium in international
balances of payments
 Where does the IMF get its
money?
• The quota
subscriptions
• Gold holdings
• Borrowing
arrangements (eg.
GABs)
• Interest charges and
Fees
 What IMF Does?
The work of the IMF is of three
main types:
• Surveillance
• Lending
• Technical Assistance
 Economic
Surveillance

• The IMF oversees the international

monetary system and monitors the
financial and economic policies of its
members. It keeps track of economic
developments on a national, regional, and
global basis
Technical Assistance
• To assist mainly low- and
middle-income countries
in effectively managing
their economies, the IMF
provides practical
guidance and training on
how to upgrade
institutions, and design
appropriate
macroeconomic, financial,
and structural policies.
 Lending
• The IMF provides
loans to countries that
have trouble meeting
their international
payments and cannot
otherwise find
sufficient financing on
affordable terms
 Special Drawing Rights (SDRs)
• The SDR is an international reserve asset,
created by the IMF in 1969 to supplement
the existing official reserves of member
countries.
• Unit of account
• Need of SDR
“The SDR is neither a currency, nor a claim
on the IMF. Rather, it is a potential claim on
the freely usable currencies of IMF
members.”
 SDR valuation criterion
• the value of the exports of goods and
services
• the amount of reserves denominated in the
respective currencies which were held by
other members of the IMF
 SDR valuation

• SDR was initially equivalent to 0.888671

grams of fine gold
• today consisting of the euro, Japanese yen,
pound sterling, and U.S. dollar.
• Values revised after five years
 How to calculate SDR

Friday, May 22, 2009

Weigh Currency amount Exchange U.S. dollar
Currency ts under Rule O-1 rate equivalent

Euro 44% 0.4100 1.35910 0.557231

Japanese 34%
18.4000 97.89000 0.187966
yen
Pound 11%
0.0903 1.51090 0.136434
sterling
U.S. dollar 11% 0.6320 1.00000 0.632000
1.513631
U.S.$1.00 = SDR 0.660663
SDR1 = US$ 1.51363
SDR Interest Rate Calculation
• Currently 42%
 How to Calculate *Interest Rate
* (Interest that’s charged on SDR)

For the week of May 18, 2009 to May 24, 2009

Currency Exchange rate

amount against the
Currency Interest rate 2 Product
under Rule O-1 SDR 1
(C) (A) x (B) x (C)
(A) (B)

Euro 0.4100 0.893571 0.7330 0.2685

Japanese Yen 18.4000 0.00670294 0.1950 0.0241
U.K. Pound
0.0903 1.0012 0.5500 0.0497
Sterling
U.S. Dollar 0.6320 0.665602 0.1800 0.0757

Total 0.4180
SDR Interest Rate 0.42
 Potential pitfalls as a reserve
currency
The SDR does not contain
Chinese Yuan,
Indian Rupee,
 Australian Dollar or Canadian Dollar,
(which are important benchmark or secondary
global reserve currencies.)
The current SDR is a relatively small basket
of currencies.
“QUOTAS”
 Quotas
“Definition”

Each member country of the IMF is

assigned a quota, based broadly on its
relative size in the world economy and
characteristics .
• Size of the quotas determine voting
power
• IMF decides on the quota for each
member
• richer countries have larger quota
 IMF Members' Quotas and Voting
Power *Source IMF site May 2009
QUOTA Governor VOTES
Member Millions Percent of Number Percent of
of SDRs Total Total
United States 37,149.3 17.09 Timothy F. Geithner 371,743 16.77

United 10,738.5 4.94 Alistair Darling 107,635 4.86

Kingdom
Japan 13,312.8 6.13 Kaoru Yosano 133,378 6.02

Germany 13,008.2 5.99 Axel A. Weber 130,332 5.88

France 10,738.5 4.94 Christine Lagarde 107,635 4.86

Italy 7,055.5 3.25 Giulio Tremonti 70,805 3.19

China 8,090.1 3.72 ZHOU Xiaochuan 81,151 3.66

India 4,158.2 1.91 P. Chidambaram 41,832 1.89

Pakistan 1,033.7 0.48 Salim Raza 10,587 0.48

The Multifaceted Role of Quotas
• (1) The amount of financial resources
• (2) The member's voting power in
institutional decision making (along with
basic votes);
• (3) The level of access of the member to
IMF financing;
• (4) The members' share of general SDR
allocations.
 More on quotas
• Quotas are reviewed every 5 years by the
IMF
• Formula calculation
• Quotas also determine how much each
member can borrow from the IMF when in
need of aid
 When is a country in need ?

A country that had not taken in enough

foreign currency to pay the other countries
for what they have bought
• spends more money than it takes in
• So IMF will lend foreign exchange to that
member
 How much money a member can
borrow from the IMF
• 25% of the country’s quota may be used
• If this is not sufficient, then members can
borrow up to 3 times the amount of its
quota
• present plans for reform to Executive
Directors
• If these plans are sufficient for the
Executive Directors, the IMF grants the
member a loan
 IMF
&
Pakistan
 Why does Pakistan
need IMF?
As Pakistan is a developing country and
has a struggling economy we often have to
turn to IMF for help.
Pakistan gets loans from IMF for the following
main purposes:
• Balance of payment deficits.
• Stabilization of currency.
• Rebuilding international reserves
• Managing liquidity problems.
 IMF’s Attitude towards
Pakistan
• IMF attitude towards
developing nations
has always been
humiliating so same is
the case with
Pakistan
• The conditions
imposed for lending
have a crushing effect
on the economy
 The Latest Loan
November 24th 2008
Pakistan has accepted 11 tough conditions from
the International Monetary Fund (IMF) to
overcome its pending balance of payment crisis
some of them are as follow:
• Pakistan government has agreed to gradually
impose the central excise duty (CED) on
services and agriculture sectors at the rate of
eight to 18 percent in place of the general sales
tax (GST)
• The Pakistani currency was devalued after slight
changes in the discount rate and exchange rate
decreased officially by 6-7%
The WORLD BANK
 • The World Bank is an international
financial institution that provides financial
and technical assistance to developing
countries for development programs (e.g.
bridges, roads, schools, etc.) with the
stated goal of reducing poverty.
 : Facts & Figures
• History: Similar to IMF (result of Bretton Woods Conference,1944)
• Formation: 27 December 1945
• Purpose/ Focus : Poverty elimination by
debt creation
• Membership: 185 countries
• President: Robert B. Zoellick
• Main Organ: Board of Directors
• Parent Organization: World Bank Group
• First loan: $ 250m to France (for post-war reconstruction)
 World Bank:
Headquarters

• *Location: Washington, D.C.

 World Bank: President
• Robert Bruce Zoellick
• Nationality: American
• Current (11th)
President of World
Bank
• Since: July 1st, 2007
• Nominated by: George
W. Bush
 World Bank: a Bank?
• The World Bank is not a bank in the
common sense of the word.
• A single person cannot open an
account or ask for a loan.
 World Bank Group
• International Bank for Reconstruction and
Development (IBRD)
• International Development Association
(IDA)
• International Finance Corporation (IFC)
• Multilateral Investment Guarantee Agency
(MIGA)
• International Centre for Settlement of
Investment Disputes (ICSID)
The World Bank Group
 World Bank
• The World Bank differs from the World
Bank Group, in that the World Bank
comprises only two institutions:
• International Bank for Reconstruction and
Development (IBRD)
• International Development Association
(IDA)
 IBRD
Orign
• The foundation of IBRD was laid in the Bretton Wood
conference.
• It was founded in 1944.

Purpose
• It was founded to finance reconstruction projects in war-
ravaged countries despite their poor creditworthiness.
 IBRD: Function
• To assist in process of reconstruction, development and
restoration of countries destroyed by war.
• To promote long term balanced growth all around the
world.
• To encourage international investments for development
of the member countries.
• To encourage private foreign investments by means of
gurantees.
• To help member countries in maintenances of
equilibrium of BOP.
• To play a role so that smooth transition may take place
from war time to peace time economies.
 IBRD
• Mode of funding
• Loans
• Membership
 IDA
Orign
In 1959, the US made the resolution for the articles of
agreement for IDA and in September 1960 the IDA was
established.
Objectives and functions
• To promote economic development
• increase productivity
• raise standard of living
• It was established to provide confessional (no interest or
"soft") loans to the world's poorest governments.
Loans
 World Bank Background and
Objectives
• Natural disasters
• Needs affecting developing economies
• Post conflict rehabilitation
• Needs affecting a transitioning economy
 WB: Areas of operation
The World Bank is active in the • International Economics and
following areas: Trade
• Agricultural and Rural • International Economics and
Development Trade
• Conflict and Development • Labor and social protection
• Development Operations and • Law and Justice
Activities • Macroeconomic and Economic
• Economic Policy Growth
• Education • Mining
• Energy • Poverty Reduction
• Environment • Poverty
• Financial Sector • Private Sector
• Gender • Public Sector Governance
• Governance • Rural Development
• Health, Nutrition and Population • Social Development
• Industry • Social Protection
• Information and Communication • Trade
Technologies • Transport
• Information, Computing and • Urban Development
Telecommunications • Water Resources
• International Economics and •
Trade Water Supply and Sanitation
 Globalization and the role of
World Bank
• The World Bank serves to eradicate the
evils of globalization.
• The first step of the World Bank towards
the accomplishment of the task is debt
relief.
• The World Bank has also drawn plans to
help the middle income countries in the
development of their infrastructure and
develop their trade
 Millennium Development Goals
• Goal 1: Eradicate extreme poverty and hunger
• Goal 2: Achieve universal primary education
• Goal 3: Promote gender equality and empower
women
• Goal 4: Reduce child mortality
• Goal 5: Improve maternal health
• Goal 6: Combat HIV/AIDS, malaria, and other
diseases
• Goal 7: Ensure environmental sustainability
• Goal 8: Develop a global partnership for
development
 Projects of World bank in
Pakistan
In Pakistan WB is
• supporting reforms at both the federal and provincial
level.
• working with Pakistan Poverty Alleviation Fund to bring
difference in the lives of poor.
• helping the victims of the Earthquake.
• working with the government to improve education
outcomes.
• joining with international partners to help Pakistan fight
polio.
• helping Pakistan prevent the spread of HIV/AIDS.
They (the WB) rely on local expertise.
Difference between IMF and WB
International Monetary Fund
1 Purposes
oversees the international monetary
system
2 Functions
promotes exchange stability and orderly
exchange relations among its member
countries
3 Recipients of Funding
assists all members--both industrial and
developing countries--that find themselves
in temporary balance of payments
difficulties by providing short- to
medium-term credits
4 Operations
supplements the currency reserves of its
members through the allocation of SDRs
(special drawing rights); to date SDR 21.4
billion has been issued to member
countries in proportion to their quotas
World Bank
seeks to promote the economic
development of the world's poorer countries
assists developing countries through long-
term financing of development projects and
programs
provides to the poorest developing
countries whose per capita GNP is less than
$865 a year special financial assistance
through the International Development
Association (IDA)
encourages private enterprises in
developing countries through its affiliate,
the International Finance Corporation (IFC)
 Difference between IMF and WB
[cont’d]
International Monetary Fund World Bank

5 Source of Funding acquires most of its financial resources by

draws its financial resources principally
from the quota subscriptions of its
member countries
6 Capital
has at its disposal fully paid-in quotas now has an authorized capital of $184 billion, of
totaling SDR 145 billion (about $215
billion)
7 Size and Structure
•has a staff of 2,300 drawn from 182
member countries
•has no affiliates or subsidiaries
borrowing on the international bond market
which members pay in about 10 percent
•has a staff of 7,000 drawn from 180
member countries (World Bank Group is
about three times as large as the IMF)
•Has a more complex structure
•WB itself comprises of 2 major
organizations
Asian Development Bank
(The ADB)
 The Asian Development Bank
(ADB)
• is a regional development bank established in
1966 to promote economic and social
development in Asian and Pacific countries
through loans and technical assistance.
• It is a multilateral development financial
institution owned by 67 members (48 from the
region and 19 from other parts of the globe)
• ADB's vision is a region free of poverty.
• Its mission is to help its developing member
countries reduce poverty and improve the quality
of life of their citizens.
 ADB:
Headquarters

• *Location:
Manila, Philippines
Islamic Development Bank
(The IsDB)
 IsDB: Fact & Figures
• Founded in: 18 December 1973
(officially began it’s activities on 20 October, 1975 [15 Shawwal 1395H])

• Headquarter: Jeddah, Saudi Arabia

• Members: 56 Countries
• Financial year: lunar Hijri Year
• Unit of Account: Islamic Dinar
• Official Language: Arabic (English &
French are also used)
 IsDB: Funtions
• to provide equity participation and grant
loans for productive projects and
enterprises.
• It also gives financial assistance to
member states in other forms for their
economic and social development and to
foster foreign trade among member
countries.
 IsDB: Purpose
• “To foster the economic
development and social progress of
Member States and Muslim
Communities individually as well as
collectively in accordance with the
principles of the Shariah…”
IsDB: Main Shareholders
• Saudi Arabia • UAE
• Sudan • Iran
• Kuwait • Egypt
• Libya • Indonesia
• Turkey • Pakistan

*IsDB: Bulding in Dhaka

 IsDB: Capital
• The authorised capital of the Bank is six billion
Islamic Dinars,
• divided into 600,000 shares
• The value of the Islamic Dinar is equivalent to
one Special Drawing Right of the IMF (SDR).
• The subscribed capital of the Bank is 4 billion
Islamic Dinars. One Islamic Dinar =1.3 US
Dollar.
• `
 on
i c i sm
C r i t d
F a n
IM B a n k
o r l d
W
 Criticism of
the IMF &
World Bank
often takes
the form of
protesting

• * A demonstrator waves a red and black flag during an intersection

occupation outside the World Bank. (october Rebellion 19-20 Oct,
2007)`
* video
 1.Conditionalities (so called SAPs)
• On giving loans to countries, the IMF makes
the loan conditional on the implementation of
certain economic policies.
• These policies tend to involve:
– Reducing government borrowing - Higher taxes
and lower spending
– Higher interest rates to stabilize the currency. Allow
failing firms to go bankrupt.
– Structural adjustment. Privatization, deregulation,
reducing corruption and bureaucracy.
• The problem is that these policies of
structural adjustment and macro economic
intervention make the situation worse.
(Argentina -2001 Example)
[cont’d] Conditionalities (so called
SAPs)
• Slows down social
stability
• Leads to an increase
in poverty
• “Strict programs,"
increasing taxes to
balance budget deficit
 What if the debtor countries
don’t fulfill IMF’s conditions?

• The alternative is
for debtor
countries to suffer
the same kind of
economic
sanctions as Iran,
Cuba and pre-
invasion Iraq.
 2.Impact on Public Health
In 2008, A study by Cambridge and Yale concluded:
• strict conditions
on the
international loans
by the IMF
resulted in
thousands of
deaths as public
health care had to
be weakened.
• In the 21 countries
which the IMF had
given loans,
tuberculosis
deaths rose by
16.6 %
• WB: AIDS
controversy
 3.Devaluations
3.Devaluations

• IMF is also criticized for allowing

inflationary devaluations
– How ??
 4.Crititsm from free-market
advocates
• Believers in free markets argue that:
– it is better to let capital markets operate
without attempts at intervention.
– And attempts to influence exchange rates only
make things worse
 5.IMF/World Bank support of
military dictatorships
• Arguments in favor of the IMF “Economic stability is a precursor to
democracy”
• However, The role of the Bretton Woods institutions has
been controversial since the late Cold War period, as the
IMF policy makers supported military dictatorships
friendly to American and European corporations.
• there are various examples in
which democratized countries fell
after receiving IMF loans.
• E.g World Bank’s support to a
Brazilian Dictator
• In Pakistan, the IMF used the
military government to impose the
General Sales Tax (GST)
 6. IMF & WB : secretive
institutions with no accountability
• The IMF is funded with
taxpayer money, yet it
operates behind a veil of
secrecy.
• Members of affected
communities do not
participate in designing
loan packages.
• The IMF works with a
select group of central
bankers and finance
ministers to make polices.
 7.Democracy is being torn apart by
a financial oligarchy (Might is right)
 Undemocratic System
While the WB represents 185 countries, it is
run by a small number of economically
powerful countries
• a. Past Managing Directors
Historically
– the IMF's managing director = European
– president of the World Bank = from United States
• b. Americanization
– IMF & World Bank: an instrument for the promotion of US or
Western interests in certain regions of the world
– The United States has an exclusive veto power in major IMF
decisions
– WB’s president :always an American
 8.Violation of Islamic Principles
• In Islam distribution of
income is the vital element
• Interest is un-Islamic
• IMF has disregarded all
these Islamic Norms by
only nurturing the rich. *The world divided into
“rich” & “poor”
 9.Other Criticisms

• IMF Hurts the

environment
[eg. Ivroy Coast’s
Some of the most Ironic Facts: coca production]
IMF itself is exempt from all taxes, along
with its sister institutions, eg. the World
• Human rights and
Bank) Labor rights-
HQs of IMF & WB both in Washington
DC.
violated
IMF’s Dominique Strauss Kahn is no
stranger to controversies either
 Criticism: by some Famous People
• “They [WB] focused on growth-based development and
thus invest in energy sectors, setting up ports and
infrastructure.instead of this they must focus on poor.”
~PROF MUHAMMAD YUNUS~ [Nobel laureate, Bangladeshi banker and
economist, founder of Grameen Bank]

• “the IMF is not serving a useful role in low-income

countries, and that low-income national governments
need more policy space and less IMF interventions.”
~JACK JONES ZULU~ [Southern African Regional Poverty Network]

• “American diplomats wanted to lock foreign countries

into further dependency on paper dollars.”
~MICHAEL HUDSON~ [a Wall street analyst, economist and Historian]
Why do countries sign agreements
with the IFI’s if the consequences
are ultimately negative?
• Most countries that
accept the loans do so
because they have no
other way of avoiding
total financial collapse.
• there often are
international pressures
on such countries to
get “Aids” from the IMF
and World Bank
 IMF and the 3 World rd

• The 3rd World

treated “step-
motherly”
• *(A Clip from
John Piglers’s
documentary
“New rulers of
the World)
* IMF: Lender of last resort !!
 Response to Criticism by IMF
• Crisis always leads to some Difficulties.
• IMF has had Some Successes.
• Confidence
• Countries are not obliged to take an
IMF loan
• IMF Easy target.