World Bank Lending For Lines Of Credit: An Ieg Evaluation (independent Evaluation Group Studies)

Over the 1993-03 period, $13.4 billion were approved for lines of credit, representing 8.4 percent of total Bank commitments for investment lending. The trend in commitments has been sharply downward, however, from some 10 percent of total Bank commitments in the early 1990s to well under 2 percent in 2002-03. Most lines of credit are in the rural and financial sectors and municipal lending, and involve a wide range of designs, objectives, and arrangements. The main findings of the report are that implementation of Bank guidelines for lines of credit has been poor. In addition, outcomes are unacceptably low, at only 52 percent satisfactory by number and 45 percent by net commitment. Cancellation rates have been high, more than double the cancellation rates of other investment loans over this period. Better outcomes for lines of credit are associated with: (i) stable macroeconomic conditions; (ii) stronger financial sectors, including satisfactory competition policies and good legal and regulatory regimes governing financial institutions, and mostly market determined interest rates, few distortionary credit and tax policies, and limited state ownership of financial institutions; (iii) use of clear eligibility criteria in the selection of participating financial institutions, and (iv) use of only private sector financial intermediaries. This evaluation provides an independent assessment of lines of credit financed by the World Bank during the period FY93-FY03. It is the first of a two-part evaluation looking at Bank support to the financial sector. The second part focuses on Bank support for financial sector reform. This volume presents data on trends in lending for lines of credit and examines whether the design, supervision, and reporting on lines of credit followed the Bank's policies. The evaluation examines outcomes, analyzes factors associated with satisfactory outcomes, and draws conclusions based on the analysis; the evaluation also presents recommendations for the future. The basis for this evaluation consists of a database developed by the Department of Independent Evaluation Group (IEG) on all lines of credit, a survey of the characteristics of a large sample of the projects at entry, during supervision, and at completion, plus information on cancellations and IEG project assessments. The methodology for the sample selection and survey instrument is described in appendix A. The evaluation also draws on a similar exercise carried out by the Consultative Group to Assist the Poor (CGAP) on microfinance lines of credit, the full results of which are in a separate report This review of World Bank support for lines of credit, channeled through local financial institutions in client countries, finds that the Bank's own guidelines have not been followed and outcomes are poor. [by Laurie Effron]. Author From Acknowledgments. Ieg, Independent Evaluation Group. Includes Bibliographical References (p. 79-80).