Lending instruments , Exams of Islamic Finance and Banking Systems

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World Bank

Lending Instruments

Resources for Development Impact

O P E R AT I O N S P O L I C Y A N D C O U N T RY S E RV I C E S

The World Bank Group is an international organization of more than 180 member countries. Its objective is poverty reduction, and it uses its resources and collaborates with other organizations to help client countries achieve sustainable and equitable growth. The Bank Group offers an array of customized services—including loans, technical assistance, and advice—to its developing and in-transition member countries.

This booklet describes the lending instruments of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which together are the World Bank. IBRD provides loans and development assistance to middle-income countries and creditworthy lower-income countries. IDA provides low-interest loans and other services to the poorest countries. IBRD and IDA loans are made to member countries; IBRD also makes loans to borrowers in a member country, with the country’s guarantee.

The other members of the World Bank Group offer different kinds of services. The International Finance Corporation (IFC) finances private sector ventures in developing countries, in partnership with private investors. The Multilateral Investment Guarantee Agency (MIGA) encourages direct foreign investment in developing countries by providing guarantees against noncommercial risk to foreign investors. And the International Center for the Settlement of Investment Disputes (ICSID) provides facilities for the settlement of investment disputes between foreign investors and their host countries.

More information about the products and services of the World Bank Group is available at the Bank’s website, www.worldbank.org, or from

The World Bank InfoShop 1818 H Street NW, Room J1- Washington DC 20433 telephone (202) 458- fax (202) 522- e-mail: [email protected]

July 2001

Introduction

(^1) World Bank refers to both IBRD and IDA; loan refers to both IBRD loans and IDA credits. (^2) The CAS is prepared by Bank staff in collaboration with the borrower, and usually in consultation with donors, civil society, and other public and private sector stakeholders. (^3) Preparation includes a feasibility study and an environmental assessment. Borrowers generally finance their own project preparation activities. In special cases, however, the Project Preparation Facility (PPF) advances up to US$2 million per proposed project (US$3 million for projects expected to cost US$200 million or more) to finance local staff training and the design of adjustment and training programs. PPF advances are made only when there is a strong possibility that the Bank will approve the project.The advances are normally repaid out of the project loan, once it becomes effective.

This booklet describes the World Bank’s lending instruments for development support.^1 Its purpose is to enhance the dialogue among developing member countries, the Bank, and other development partners.

The Bank has two basic types of lending instruments: investment loans and adjustment loans. Investment loans have a long-term focus (5 to 10 years), and finance goods, works, and services in support of economic and social development projects in a broad range of sectors. Adjustment loans have a short-term focus (1 to 3 years), and provide quick-disbursing external financing to support policy and institutional reforms. Both investment and adjustment loans are used flexibly to suit a range of purposes, and are occasionally used together in hybrid operations. This booklet describes their use in various situations. The descriptions are intended to be illustrative rather than prescriptive or constraining.

Loans are made as part of the comprehensive lending program set out in the Country Assistance Strategy (CAS), which tailors Bank assistance (both lending and nonlending services) to each borrower’s development needs and the Bank’s comparative advantage. 2 The CAS incorporates projects and programs with the greatest potential to reduce poverty and further the country’s development objectives.

Lending operations are developed in several phases. The borrower identifies and prepares 3 the project, and the Bank reviews its viability. During loan negotiations, the Bank and borrower agree on development objective, components, outputs, performance indicators, implementation plan, and schedule for disbursing loan funds. Once the Bank approves the loan and it becomes effective, the borrower implements the project or program according to terms agreed upon with the Bank. The Bank supervises implementation and evaluates results.

All loans are governed by the World Bank’s Operational Policies, which aim to ensure that Bank-financed operations are economically, financially, socially, and environmentally sound. Fiduciary policies and procedures govern the use of project- related funds, particularly for the procurement of goods and services. Safeguard policies help to prevent unintended adverse consequences on third parties and the environment.

The various types of financing schemes are summarized at the end of this brochure.

Investment Lending

Investment loans provide financing for a wide range of activities aimed at creating the physical and social infrastructure necessary for poverty alleviation and sustainable development.

The nature of investment lending has evolved over time. Originally focused on hardware, engineering services, and bricks and mortar, investment lending has come to focus more on institution building, social development, and the public policy infrastructure needed to facilitate private sector activity. Projects range from urban poverty reduction (involving private contractors in new housing construction, for example) to rural development (formalizing land tenure to increase the security of small farmers); water and sanitation (improving the efficiency of water utilities); natural resource management (providing training in sustainable forestry and farming); post-conflict reconstruction (reintegrating soldiers into communities); education (promoting the education of girls); and health (establishing rural clinics and training health care workers).

Eligibility

Investment loans are available to IBRD and IDA borrowers not in arrears with the Bank Group.

Disbursement

Funds are disbursed against specific foreign or local expenditures related to the investment project, including pre-identified equipment, materials, civil works, technical and consulting services, studies, and incremental recurrent costs. Procurement of these goods, works, and services is an important aspect of project implementation.To ensure satisfactory performance, the loan agreement may include conditions of disbursement for specific project components.

Instruments

The large majority of investment loans are either specific investment loans or sector investment and maintenance loans. Adaptable program loans and learning and innovation loans were recently introduced to provide more innovation and flexibility. Other instruments tailored to borrowers’ specific needs are technical assistance loans, financial intermediary loans, and emergency recovery loans.

Specific Investment Loan

Specific investment loans (SILs) support the creation, rehabilitation, and maintenance of economic, social, and institutional infrastructure. In addition, SILs may finance consultant services and management and training programs.

When are SILs used?

The SIL is a flexible lending instrument appropriate for a broad range of projects. SILs help to ensure the technical, financial, economic, environmental, and institutional viability of a specific investment.They also support the reform of policies that affect the productivity of the investment.

Examples

THAILAND SOCIAL INVESTMENT PROJECT LOAN AMOUNT: IBRD US$300 million APPROVAL DATE: July 9, 1998 PROJECT DESCRIPTION: This project responds to the financial and economic crisis in East Asia by supporting the rapid creation of employment opportunities and the provision of essential social services to the unemployed and the poor. It also supports bottom-up service delivery by financing locally identified and managed development initiatives, and by promoting decentralization, local capacity building, and community development.

SRI LANKA MAHAWELI RESTRUCTURING AND REHABILITATION PROJECT CREDIT AMOUNT: IDA US$57 million equivalent APPROVAL DATE: April 14, 1998 PROJECT DESCRIPTION: This project aims to shift the focus of the Mahaweli Authority from project implementation to river basin management, to help ensure that natural resources in the Mahaweli river basin and watershed are managed more efficiently, productively, and sustainably. The project also aims to increase agricultural productivity through the rehabilitation, upgrading, and improved operation and maintenance of irrigation facilities.

Adaptable Program Loan

Adaptable program loans (APLs) provide phased support for long-term development programs. They involve a series of loans that build on the lessons learned from the previous loan(s) in the series.

Special design features

APLs involve agreement on (1) the phased long-term development program supported by the loan, (2) sector policies relevant to the phase being supported, and (3) priorities for sector investments and recurrent expenditures. Progress in each phase of the program is reviewed and evaluated, and additional analysis undertaken as necessary, before the subsequent phase can be initiated.

When are APLs used?

APLs are used when sustained changes in institutions, organizations, or behavior are key to successfully implementing a program.They can be used to support a phased program of sector restructuring, or systemic reform in the power, water, health, education, and natural resource management sectors, where time is required to build consensus and convince diverse actors of the benefits of politically and economically difficult reforms.

Examples INDIA POWER SECTOR RESTRUCTURING PROGRAM LOAN LOAN AMOUNT: IBRD US$210 million APPROVAL DATE: February 18, 1999 PROJECT DESCRIPTION: This project, first in a series, is part of an adaptable program that, over the next eight years, will help transform Andhra Pradesh’s power sector—now a major drain on the state’s budget—into a contributor of resources for priority sectors.

BOLIVIA HEALTH SECTOR REFORM PROJECT CREDIT AMOUNT: IDA US$25 million equivalent APPROVAL DATE: June 15, 1999 PROJECT DESCRIPTION: This project supports the first phase of the government’s health reform program, which aims to reduce the infant mortality rate by complementing other interventions in education, rural productivity, and water and sanitation.The project involves (1) increasing the coverage and quality of health services, (2) empowering communities to improve their health status, and (3) strengthening local capacity to respond to health needs. It introduces new vaccines, strengthens the immunization program, and establishes a basic health insurance program.

Learning and Innovation Loan

The learning and innovation loan (LIL) supports small pilot-type investment and capacity-building projects that, if successful, could lead to larger projects that would mainstream the learning and results of the LIL.

Special design features

LILs do not exceed $5 million, and are normally implemented over 2 to 3 years—a much shorter period than most Bank investment loans. All LILs include an effective monitoring and evaluation system to capture lessons learned.

When are LILs used?

LILs are used to test new approaches, often in start-up situations and with new borrowers. LILs may be used to build trust among stakeholders, test institutional capacity and pilot approaches in preparation for larger projects, support locally based development initiatives, and launch promising operations that require flexible planning, based on learning from initial results.

Examples GABON PILOT COMMUNITY INFRASTRUCTURE WORKS LOAN AMOUNT: IBRD US$5 million APPROVAL DATE: August 24, 1998 PROJECT DESCRIPTION: This project assists the government in designing and testing methods and procedures to facilitate the involvement of private local firms in small-scale slum upgrading works. It also supports the dissemination of information on such methods, with the aim of strengthening private construction companies and increasing employment among the poor.

MOLDOVA RURAL FINANCE PROJECT LOAN AMOUNT: IDA US$5 million APPROVAL DATE: January 13, 1998 PROJECT DESCRIPTION: This project aims to develop a cooperative rural banking system that would provide financial services to small private farmers and rural entrepreneurs. It (1) establishes savings and credit associations (SACs) and trains their members, with assistance from the Moldova Microfinance Alliance; (2) creates a regulatory body for SACs; (3) strengthens the Rural Finance Corporation; and (4) finances a rural credit line for SACs.

Financial Intermediary Loan

Financial intermediary loans (FILs) provide long-term resources to local financial institutions to finance real sector investment needs.The financial institutions assume credit risk on each subproject.

Special eligibility and design features

Eligibility for a FIL requires a satisfactory macroeconomic and sector framework. The FIL supports financial sector reforms—interest rate policies, subsidies, measures to enhance financial system competition, institutional development of financial intermediaries—that have a direct and substantial bearing on the operational efficiency of financial intermediaries. FILs may accompany adjustment operations that address financial sector policy issues, and may contain technical assistance components.

The borrower may pass on Bank funds to a financial intermediary as either a loan or equity. The financial intermediary, in turn, may pass on Bank funds to subborrowers as subloans or equity, to finance projects that aim to increase the production of goods and services. To ensure satisfactory performance, these subprojects must meet specific eligibility and development criteria. Bank funds are disbursed against eligible expenditures for goods, works, and services, including technical assistance.

When are FILs used?

FILs help to develop sound financial sector policies and institutions, promote the operational efficiency of those institutions in a competitive environment, improve the terms of credit to enterprises and households, and promote private investment.

Example LITHUANIA ENTERPRISE AND FINANCIAL SECTOR PROJECT LOAN AMOUNT: IBRD US$25 million APPROVAL DATE: April 13, 1995 PROJECT DESCRIPTION: This project supports government reform in the financial sector, and the delivery of finance to support the development of private and privatized enterprises. It provides financial resources and technical assistance to improve (1) the capacity of the banking system to deliver financial resources, and (2) the ability of enterprises to prepare financing plans.

Emergency Recovery Loan

Emergency recovery loans (ERLs) support the restoration of assets and production levels immediately after an extraordinary event—such as war, civil disturbance, or natural disaster—that seriously disrupts a borrower’s economy.They are also used to strengthen the management and implementation of reconstruction efforts, and to develop disaster-resilient technology and early warning systems to prevent or mitigate the impact of future emergencies.

Special design features

To accommodate the emergency nature of the operation, abbreviated processing may be used.The ERL may include fast-disbursing components that finance a list of imports identified as necessary to an effective recovery program.

When are ERLs used?

ERLs focus on the rapid reconstruction of economic, social, and physical systems within a limited period, normally 2 to 3 years. They finance investment and productive activities, rather than relief or consumption. For recurring events such as annual flooding, or for a slow-onset disaster such as drought, a SIL is usually more appropriate.

Examples DOMINICAN REPUBLIC EMERGENCY OPERATIONS PROJECT LOAN AMOUNT: IBRD US$111 million APPROVAL DATE: December 10, 1998 PROJECT DESCRIPTION: This project (1) helps maintain growth in key sectors of the economy; (2) supports the reconstruction and rehabilitation of key social and economic infrastructure damaged or destroyed by Hurricane Georges; and (3) strengthens the country's capacity to prepare for and respond to future natural disaster emergencies. A quick-disbursing component finances imports needed for agriculture and reconstruction, and an investment component finances the rehabilitation of critical public infrastructure. The project also includes institutional strengthening to improve the country’s long-term preparedness for natural disasters.

BANGLADESH EMERGENCY FLOOD RECOVERY PROJECT CREDIT AMOUNT: IDA US$200 million equivalent APPROVAL DATE: November 24, 1998 PROJECT DESCRIPTION:This project is the first part of a three-part strategy to help Bangladesh recover from the 1998 floods. It aims to (1) help restore and sustain macroeconomic stability and contain pressure on the balance of payments; (2) maintain and augment food grain stocks, contain inflation, and ensure food security; and (3) help revive the agricultural, industrial, and economic activities disrupted by the floods.

Examples MALAYSIA ECONOMIC RECOVERY AND SOCIAL SECTOR LOAN LOAN AMOUNT: IBRD US$300 million APPROVAL DATE: June 18, 1998 PROJECT DESCRIPTION: This project supports the government’s program of preemptive measures to (1) minimize the downturn in economic activity in the wake of the 1997-98 regional crisis; (2) expand social safety nets to protect the poor and near-poor from the adverse effects of the crisis; and (3) protect investments in the human resource base. It also supports policy reforms aimed at promoting robust and sustainable growth.

MALAWI FISCAL RESTRUCTURING AND DEREGULATION PROGRAM II AND TECHNICAL ASSISTANCE PROJECT CREDIT AMOUNT: IDA US$92 million equivalent APPROVAL DATE: December 3, 1998 PROJECT DESCRIPTION: This project aims to create a policy environment that encourages greater private sector investment and efficiency. It also supports government policies that redirect expenditures into social sectors and programs that specifically benefit the poor, such as health, education, and social funds. And it assists the government in maintaining macroeconomic stability in the wake of declining terms of trade and a significant drop in export earnings.

Structural Adjustment Loan

The structural adjustment loan (SAL) supports reforms that promote growth, efficient use of resources, and sustainable balance of payments over the medium and long term.

When are SALs used?

SALs typically focus on major macroeconomic and structural issues that cut across sectors, such as trade policy, resource mobilization, public sector management, private sector development, and social safety nets.

Sector Adjustment Loan

The sector adjustment loan (SECAL) supports policy changes and institutional reforms in a specific sector.

When are SECALs used?

SECALs focus on major sectoral issues such as the incentive and regulatory frameworks for private sector development, institutional capability, and sector expenditure programs.

Special features

SECALs are subject to an environmental assessment.

Examples MOROCCO CONTRACTUAL SAVINGS DEVELOPMENT LOAN LOAN AMOUNT: IBRD US$150 million APPROVAL DATE: June 9, 1998 PROJECT DESCRIPTION:This project aims to improve the accumulation of long- term savings, encourage their allocation to private productive investment, and guarantee the long-term sustainability of the country’s pension system. Its focus is the reform of contractual savings institutions, including insurance companies, savings banks, and the pension system.

SENEGAL ENERGY SECTOR ADJUSTMENT OPERATION CREDIT AMOUNT: IDA US$100 million equivalent APPROVAL DATE: May 19, 1998 PROJECT DESCRIPTION: This program promotes reforms in the energy sector, with the aim of providing more efficient electric power service and lowering electricity and petroleum prices. These reforms—which support the government’s medium-term reform agenda—will reduce factor costs, improve Senegal’s competitiveness and growth prospects, and increase job opportunities.

Special Structural Adjustment Loan

The special structural adjustment loan (SSAL) supports structural and social reforms by creditworthy borrowers approaching a possible crisis, or already in crisis, and with exceptional external financing needs.These loans help countries to prevent a crisis or, if one occurs, to mitigate its adverse economic and social impacts.

Special eligibility and design features

SSALs are available to countries facing an actual or potential financial crisis with substantial structural and social dimensions. They support structural, social, and macroeconomic policy reforms that are typically part of an international support package put together by multilateral donors, bilateral donors, and private lenders and investors. An IMF program must be in place.

SSALs have different terms than other Bank loans.They carry a 5-year maturity with a 3-year grace period, and a minimum loan spread of 400 basis points over USD LIBOR equivalent.There are no waivers of interest or commitment charges. (Terms for other Bank loans are described at the end of this brochure.)

Examples ARGENTINA SPECIAL STRUCTURAL ADJUSTMENT LOAN LOAN AMOUNT: IBRD US$2.52 billion APPROVAL DATE: November 10, 1998 PROJECT DESCRIPTION: This loan, in conjunction with the Special Repurchase Facility Support Loan, assists the country’s continuing efforts to transform its economy and protect the gains already achieved. The program is preventive, aimed at mitigating the deleterious effects of international financial instability on the economy and vulnerable groups. This loan helps the government to meet its foreign exchange needs, thus allowing it to remain focused on longer-term reform issues.

BRAZIL SOCIAL PROTECTION SPECIAL SECTOR ADJUSTMENT LOAN LOAN AMOUNT: IBRD US$252.5 million APPROVAL DATE: January 7, 1999 PROJECT DESCRIPTION:The loan supports the government's efforts to protect social expenditures targeted to the poor and those particularly vulnerable to economic hardship—children in poor families, retired and disabled people in poor families, families needing regular access to free or low-cost basic health services, children attending public primary schools, and adults who may lose their jobs during periods of economic uncertainty.

Rehabilitation Loan

The rehabilitation loan (RIL) supports government policy reform programs aimed at creating an environment conducive to private sector investment, where foreign exchange is required for urgent rehabilitation of key infrastructure and productive facilities.The focus is on key short-term macroeconomic and sector policy reforms needed to reverse declines in infrastructure capacity and productive assets.

When are RILs used?

RILs are typically used when a country is committed to overall economic reform but a SAL cannot be used because the structural reform agenda is still emerging. RILS are appropriate in transition economies and post-conflict situations.

Example TAJIKISTAN POST-CONFLICT REHABILITATION CREDIT CREDIT AMOUNT: IDA US$10 million equivalent APPROVAL DATE: December 16, 1997 PROJECT DESCRIPTION: The project provides noninflationary budget financing in the country’s post-conflict economy, enabling the government to purchase critical imports to support the social safety net and restore production, employment, and consumption. The counterpart funds generated by this credit will help meet near-term costs associated with the peace accord, while maintaining progress toward financial stabilization.