What it means
Most development lending goes to governments, but economies also depend on private companies that create jobs and pay taxes. The IFC focuses on those companies, from small local banks to large infrastructure projects, in places where commercial financing is hard to obtain.
It offers several kinds of funding, and clients often combine them. It makes loans, buys shares in companies, issues guarantees that reduce lenders' risk, and provides advisory services on subjects such as corporate governance, environmental standards and business planning.
Equity stakes are generally minority holdings that the IFC sells after several years. Its involvement does more than supply money.
A company with the IFC as an investor often gains credibility with other lenders, and the IFC requires projects to meet environmental and social performance standards, which can improve how the business is run. Companies must report regularly on their performance against those standards.
Many IFC deals are structured as partnerships with commercial banks and investors. The IFC may provide a loan alongside other lenders or arrange syndicated loans in which several lenders share the funding and the risk.
For finance professionals, the IFC is important as both a source of capital and a signal. A business working with it can expect detailed due diligence, thorough reporting requirements and a longer approval process, in return for patient capital and a respected partner.
Management time spent on the process should be budgeted from the start. The nuance is that the IFC is not a charity or a grant-maker.
It expects repayment and a financial return, and it aims to invest where it can add something that the private market is not providing by itself.
In practice
Real-world examples.
Example
A regional bank in a low-income country wants to lend more to small businesses but lacks long-term funds. The IFC provides a credit line and technical help in assessing small borrowers. The bank lends more to enterprises that previously had no access to credit, and the IFC tracks how many jobs those firms create.
Example
A renewable energy developer plans a large wind farm in an emerging market. The IFC takes part in the project financing alongside commercial banks, sharing the risk. Its presence reassures other lenders about the project's standards, and the project reaches financial close sooner than it otherwise might have done.
Example
A food-processing company wishes to expand into a neighbouring country. The IFC takes a minority shareholding and provides advice on governance and sustainability. The company gains access to new capital and a longer-term partner, while the founders keep control of day-to-day decisions.
Case study
Seen in the real world.
This is an illustrative story about a fictional company, Sunridge Agro, which processed fruit for export in an emerging economy. It had strong demand from overseas buyers but could only borrow from local banks on short terms at high interest rates, which made it hard to build a new cold storage facility.
Sunridge approached the IFC, which reviewed its financial statements, its environmental practices and its management team. After several months of due diligence, the IFC agreed to provide a long-term loan and a small equity investment, with conditions on water use and worker safety. The loan ran for eight years with a grace period, so repayments only began once the new facility was operating.
The new facility reduced spoilage, and exports grew steadily. Because the IFC had invested, two commercial banks also agreed to lend. The illustrative story shows how the IFC's participation can draw in additional private funding. It also shows that much of the benefit came from the discipline the IFC's standards required of management, not only from the cash.
Watch out
Common mistakes.
- Assuming the IFC lends to governments. Its focus is the private sector, while other World Bank Group members lend to governments.
- Treating IFC money as a grant. Its financing must be repaid or earns a return as an equity investment.
- Expecting a quick process. Due diligence on financial, environmental and social matters can take months, and projects that fall short of the standards may be turned down altogether.
Questions
People also ask.
Who owns the IFC?
Its member countries are its shareholders, and it raises most of its funds by issuing bonds in the international capital markets, supported by its own capital and retained earnings.
Can a small business get IFC funding directly?
Usually not. It tends to invest in larger projects and reaches small businesses through local banks and funds that it finances, and it often adds training for the bank's lending staff.
How is it different from the World Bank's lending arm?
The IBRD lends mainly to governments, whereas the IFC invests in private companies and financial institutions.
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