13 April 2014
|Peter Chowla, Bretton Woods Project||Morgan Landy|
|Kris Genovese, SOMO||James Scriven|
|Sasanka Thilakasiri, Oxfam||Reider Kvam|
|Carla Garcia Zendejas, CIEL||Ajay Narayanan|
|Jocelyn Medallo, CIEL||John McNally|
|Vince McElhinny, BIC||Aaron Rosenberg|
Discussion on the rationale for FI investment
IFC staff expressed caution about the civil society request for a new strategy, saying they have an annual strategy. They presented thoughts on why they focus on FIs – with a stress on financial inclusion and the need for access to financial services for poor people and for SMEs. They also discussed the value financial services can add to other development efforts such as agriculture or climate change/clean energy expansion. IFC staff pointed out that it was difficult to get banks to change their practice suddenly, and IFC’s approach was one of pushing them towards best practice over time. The IFC also pointed out that by demonstrating the value of innovations (such as SME finance) a bank could be convinced to go into a whole new area with positive development impact. They also explained the concentration of activity on commercial banks because of their systemic importance in small markets and the relatively lack of financial sustainability with non-bank financial institutions. Civil society reps clarified that calling for a strategy review did not mean calling for a suspension of FI investments.
IFC staff stressed the deep commitment that the Bank management and board have to work on financial inclusion. Also discussed was the Bank/IFC restructure with financial sector advisory services merged with the IFC’s financial markets investment team. However, those parts of IFC AS that worked with governments and regulators are being moved in the new World Bank global practice on financial markets.
Civil society representatives stressed a few points including client choice needs and better risk categorisation. There were also questions about the impact of financial services on inequality and if some of the problem was a lack of competition in the markets. They also stressed that the reason for the strategy review request was to have deeper conversations about the issues to do with targeting SMEs, excessive financialisation, and the potential negative consequences of financial deepening. They also explained that it is hard to comment on the strategy given the lack of transparency and the difficulty in accessing data on the portfolio.
The IFC committed to try to share with the attendees the annual Financial Institutions Group strategy document which was approved in December 2013 and could form the basis for a future discussion on the issues raised.
Discussion on E&S issues
On the E&S issues, the IFC staff explained that the management and board had debated issues of “do no harm” and fundamentally disagreed with those that ask for the IFC to guarantee ‘do no harm’ at the subclient level. They explained that knowing where every cent of IFC money went would require the IFC having only a handful of clients instead of 900, and would defeat the purpose of supporting the development and evolution of the financial sector. The management and board wanted more leverage and bigger impact. This accounts for the management system approach, as there is no way to eliminate residual risk. The IFC’s work in development seeks to balance risk with impact, and IFC staff suggested that civil society suggestions for tightening rules could be applied to certain sectors or risk levels and not across the board. They explained that there are human resource constraints, though the budget for this is going to be changing in the future.
The IFC also explained that the merger of investment and advisory staff into single units, as part of Financial Institutions Group, would enable us to offer a much more comprehensive package to our clients and on projects, combining financing with advice on best practice and capacity building.
Civil society groups explained that they are concerned about the IFC‘s lack of accountability for sub-projects. They urged the IFC to recognise that they proposed thresholds of risk and size which would trigger enhanced disclosure, supervision and due diligence. They asked if the IFC could model the number of subclients affected by varying thresholds (i.e. how many are Cat A?) to give an idea of what is practical and feasible.
IFC pointed out that while IFC is accountable for the outcomes and impacts of its investments in the financial sector, and can demonstrate improvements in the application of best practices at the FI level, IFC cannot guarantee outcomes at the individual sub-client level.
In terms of sequencing, a discussion ensued on the process IFC goes through in an investment as part of a discussion about making sequencing of capacity building. Civil society reps stressed that the IFC should make sure capacity is built and E&S management systems are in place when the IFC has influence over the client. IFC expressed the view that it had strongest leverage before disbursement, and often issues with E & S come to light after mandate and due diligence. IFC also explained that Board approval for a project or investment, did not mean a project would go ahead, but gave the green light to move into final negotiations and legal agreements with the partner. It was at this stage, before disbursement, where leverage could be greater. Civil society reps felt influence could be stronger before Board approval.
IFC said that it was willing to engage in discussions on risk categorization and disclosure. IFC pointed out that the Summary of Investment Information (SII) is published on its website, and includes critical information, but often goes without comment. IFC expressed openness to considering a different approach to sequencing if Bank were moving into riskier sectors.
There was insufficient time to discuss the other issues. IFC and civil society reps agreed to try to convene more specific discussions – perhaps via phone or VC to ensure we have adequate time to go through each of the recommendation areas.
Civil society said that would like to know more about how and why IFC select’s its financial intermediary clients, what is appropriate and when in terms of capacity building, and what happens if clients are non-compliant.
IFC also committed to get a formal response to the civil society letter. IFC also committed to send to civil society the legal analysis done that explains the reasons why transparency on commercial banking portfolios is not possible, and to share the annual financial institutions group strategy. There will a meeting Asia sometime this summer – which IFC is working to schedule. Aaron would be in touch with groups to discuss the best sequencing of the various discussions.