World Bank Audit Questions Transparency of IFC Lending

11 March 2013

By Toby McIntosh

The World Bank “knows very little” about the environmental and social effects of lending done through “financial intermediaries,” according to an extensive critique by an internal watchdog.

The report also raises questions about restrictions in the World Bank’s disclosure policy concerning such lending, in which intermediaries such as private banks receive Bank funds and make loans to clients, especially small and medium enterprises. This indirect lending amounts to about 40 percent of the activity by the Bank’s wing that lends to the private sector, the International Finance Corporation; more than $8 billion in 2011.

Tracking whether these sorts of loans are fulfilling the Bank’s environmental and social agenda is the IFC’s responsibility, but the systems being used aren’t up to the task, according to a report issued Feb. 8 by the Bank’s Compliance Advisor/Ombudsman (CAO).

It concluded, “The result of this lack of systematic measurement tools is that IFC knows very little about potential environmental or social impacts of its FM [financial market] lending.”

The CAO examined a sample portfolio of 63 investments. The CAO reported, “…. depending on the type of client and investment, there were parts of the sample portfolio where IFC itself did not have the information on the end use of funds available, other than on an aggregated level collected by the client, and mainly based on the size of the loan provided to subclients (the clients of IFC’s FM client).”

The report asks why the IFC “had not explored the evolving industry practice of requiring the client to engage third-party verification of end use of funds.”

Disclosure Limitations Questioned

The CAO report also addresses the IFC’s disclosure policy, which blocks access to much specific information about lending to financial intermediaries, particularly about what the ultimate borrowers do with the loans.

The IFC says the disclosure policy limitations are consistent with standard practice in the banking industry and that disclosure would compromise the confidentiality of the projects in a competitive marketplace (complete language below).

The CAO auditors point to the tensions in crafting a good disclosure policy, saying, “Disclosure of investment information is a central tenet of the accountability ofpublicly funded multilateral finance institutions, and poses a particular challenge whenworking through intermediaries in the private sector.”

But the CAO audit suggests that the balance is incorrect.

The IFC discloses information “about theprimary activity it funds,” meaning the overall task assigned to the financial intermediary, and the amount involved, the report explains, but reveals little about the subsequent loans. The Annual Environmental Performance Reports (AEPR) by the clients and the IFC’s responses are not disclosed.

“External observers raise a legitimateconcern that the constraints posed on disclosure effectively mean there is no informationpublicly available about the end use of IFC’s funds,” according to the report.  

 The CAO did not make specific recommendations on revising the disclosure policy (a task out of the scope of the inquiry), but expresses concern about its stringency.

The CAO panel recognizes the significant challenge that any enhanced disclosure would constitute. However, the fact that the end use of such a significant proportion of IFC funding remains opaque is a matter of some concern. Reconciliation of legitimate concerns over transparency and operational constraints pose a significant challenge.

 In its response, the IFC said its 2012 disclosure policy revisions expanded the amount of information available and environmental and social issues. The IFC said it “recognizes that there are further opportunities to enhance transparency by encouraging clients to report on their sustainability performance” and pledged to engage stakeholders on the topic.

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ABOUT IFTI WATCH

In this column, Washington, D.C.-based journalist Toby J. McIntosh reports on the latest developments in information disclosure in International Financial and Trade Institutions (IFTI).
Contact: freeinfo@gwu.edu or
1-(703) 276-7748