1. INTERNATIONAL FINANCIAL INSTITUTIONS
Introduction
After the First World War there was complete lack of monetary co-operation among the
countries of the world. The gold coin standard used before World War I, was abandoned
during the war. As a result of the breakdown in gold standard, the World lost the most
efficient automatic standard upon which nations had for a long time a vehicle for restoring
equilibrium in their balance of payments whenever it was disturbed.
It was therefore necessary that a concerted effort be made on international level to create
some effective international arrangement whereby exchange stability could be guaranteed.
A common plan evolved at United Nations Monetary and Fiscal Conference of 44 world
nations held at Bretton Woods, New Hampshire in July 1944. Out of the deliberation of
this conference sprang up the Brettonwoods twins - the International Monetary Funds
(IMF) and the International Bank for Reconstruction and Development (IBRD).
Establishment of IMF
Beginning from 1914, when the First World War, most countries suspended the convertibility of
their currencies to gold. They financed their war operations by printing more money. This led to
transactional accumulations of currencies during the four years of war (1914 – 1918)
As a result the gold standard system declined by a half. The value of the paper money issued by
the central banks depreciated as prices continued to increase.
Exchange rates and interest rates experienced wide fluctuations. The German mark (DU) fell to
its record low as German lost the war. Even the winners in the war experienced great problems.
The old gold standard was re- established in the early 1920s but it failed leading to the financial
crash during the great depression.
During 1920 – 1935, production levels were very low and the levels of unemployment were very
high. Most countries resulted to protection tactics, by selling high tariffs, establishing Quotas

2. and banning certain imports. The situation led to the establishment of the gold exchange
standard system, where currencies were not directly convertible to gold but only their par value
were based on the value of gold.
A new system was established and the amount of gold in each central bank had to be fixed as a
fixed fraction or percentage of the total money supply in circulation.
In 1944, after the gold exchange standards had failed completely, the U.K. and U.S.A. laid down
the basis for an international monetary system at Breton woods, New Hampshire, U.S.A. This
was designed to prevent a recurrence of the hectic inter – war conditions in international trade
and Finance. It called for establishment of the international monetary fund (IMF) to see to it that
the nations kept the generally accepted code of rules in their conduct of international trade and
finance. IMF was expected to set up borrowing facilities for nations having deficits.
Requirements of I.M.F
1) Each member state, upon entering the IMF, was to fix the value of its Currency in terms of
gold or dollars and then keep its exchange rate within One % of this par value.
2) The par value could be changed only within the permission of the IMF, except where the
member state changed the value of its currency by less than 10%.
3) Temporary deficit were to be financed out of the nation’s reserves with IMF and firm direct
borrowing from the IMF. The World Bank was created to provide from long term development.
4) A Quota was assigned to each nation in the IMF. The size of the quota was based on the
nation’s economic importance it determined the nation’s voting power in the organization and its
ability to borrow from the fund.
NB/ Each nation was required to deposit 25% of its quota in gold and 75% in its own currency
with the IMF. The Breton woods system worked well until the period after 1950 when huge and
persistent deficit in the USA’s balance of trade caused it to collapse.

3. The major objectives of the IMF set by charter are:-
1. To promote cooperation among countries on international monetary Issues
2. Promote stability in exchange rates.
3. Provide temporary funds to member countries attempting to correct imbalances of
international payments.
4. To promote free trades. It’s clear from these objectives that the IMF goals encourage
increased internationalization of business.
Each member of IMF is assigned a quota based on a variety of factors reflecting the country
status and each country that a country can borrow from IMF is dependent on its particular
assigned quota.
The financing by IMF is measured in special drawing rights (SDRS). This is a unit of account,
an international reserve asset created by IMF and allocated to the member countries to
supplement currency reserves. SDR’s value fluctuates in accordance with the value of five
major currencies i.e. US Dollar, German Mark, French Franc, Japanese Yen and British Pound.
Each currency was assigned weight in accordance with their international importance to
determine the SDR value. U.S. dollar received 42% weight, German mark received 19% weight,
the following other currencies received 13% weight each.
World Bank
The international Bank for Reconstruction and Development (IBRD), also referred to as World
Bank was established in 1944. The primary objective of the World Bank is to make loans to
countries in order to enhance economic development. E.g. World Bank recently extended a loan
to Mexico about $4 billion over ten year period over environmental projects to facilitate
industrial development near U.S. border.

4. The philosophy behind the World Bank’s objective is profit- oriented. Therefore, loans are not
subsidized but are extended at market rates to government (and their agencies) that are likely to
make repayment.
One of the World Bank’s facilities is the structural adjustment loan (SAL) facility established in
1980. The SAL is intended to enhance a country’s long- term economic growth. Example SALS
have been provided to Turkey and to some other LDCs that are attempting to improve their
Balance of trade (B.O.T). Because the World Bank provides only a small portion of the
financing needed by developing countries, it attempts to spread its funds by a entering into co-
financing agreements. Such as:-
(a) Official Aid agencies
-Development agencies may join World Bank by financing development projects in low
income countries.
(b) Export credit Agencies
- World bank co-finances some capital intensive projects that are also financed through
export credit agencies.
(c) Commercial Banks
-World bank has joined with commercial banks to provide financing for private sector
development. In recent years 350 commercial banks have participated in financing with the
World Bank.
World Trade Organization (WTO)
The world trade organization was created as result of the Uruguay Round of trade negotiations
that led to the GATT (General Agreement of Trade & tariffs) accord in 1993. This organization
was established to provide a forum for multilateral trade negotiations and to settle trade disputes
related to the GATT accord. It begun its operations in 1995 with a membership of 81 countries,

5. and more countries are joining. Member countries are given voting rights that are used to make
judgments about trade disputes and other issues.
International Finance Corporation (IFC)
Established in 1956 to promote private enterprise initiative within countries like IMF, it is
composed of a collection of nations as members. While it aims to enhance economic
development, it uses the private rather than government sector to achieve its objectives. It is not
only providing loans to corporations but also purchase stock, thereby becoming a part owner in
some cases rather than a creditor. The IFC typically provides 10 to 15% of the necessary funds
in the private enterprise projects in which it invests, and the remainder of the projects must be
financed through other sources.
In this, the IFC act as a catalyst, as opposed to a sole supporter, for private enterprise
development projects. It traditionally has obtained financing from the World Bank but can
borrow within the international financial markets.
Services provided by the international Banks
 Risk sharing service
 Liquidity services
 Information services
The rise of Euromarkets
Before World War II, London was the leading global financial and commercial centre British
pond largely served as an international transaction currency. After World War II the United
States become the dominant financial and industrial nation. Thus, the US Dollar became the
international transaction currency, even in exchange in which neither the buyer nor the seller was
a U.S. firm. In certain markets, such as world oil market, trades are still made in dollars. During
the following World War II, the former Soviet Union and Eastern block countries accumulated
dollars reserves for international trade. For political reasons, they did not want to keep these
reserves in banks inside the United States. They had lost confidence with U.S. Currency as a
result of persistent deficit and balance of trade in U.S.A. Instead they deposited their US Dollars

6. reserves in European banks rather than converting them into European currencies, they kept them
dominated in dollars. These Accounts became known as Eurodollars.
Since 1960s the Euro market has grown from negligible size to a very big size. Much of current
international banking system is conducted in a relatively unregulated banking center known as
Euromarkets. Euro markets are markets for Euro currency deposits or time deposits dominated
in a currency rather than that of the issuing domestic financial center e.g. Dollar deposits at a
French bank.
Euro loans, Eurobonds or Euro commercial papers are bonds, loans and commercial papers
dominated in a currency other than that of the issuing financial centre.
Most of Euro currency deposits are negotiable certificates of deposits with maturities of at least
30 days.
FACTORS TO CONSIDER WHEN CHOOSING BETWEEN EUROMARKETS OR
DOMESTIC MARKETS
(a) The currency that the borrower wants to obtain
Multinational companies usually want to borrow in foreign currency to reduce their
foreign exchange exposure and therefore borrow in Euromarkets rather than the
domestic market.
(b) The cost
There is often a small difference in interest rate between Eurocurrency and domestic
markets. On large borrowings, however, even a small difference in interest rate result
in a large difference in the total interest charged on the loan.
(c) Timing and speed
It may be possible to raise money on the Euromarkets more quickly than in the
domestic markets.
(d) Security
Euro market loans are usually unsecured. Whereas domestic market loans are more
commonly secured. Large borrowers may therefore prefer Euromarkets.

7. (e) The size of the loans
It is often easier for a large multinational to raise very large sums on the Euromarkets
than in a domestic financial market.