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World Bank Lending for Lines of Credit
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| An IEG Evaluation |
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 | Lines of credit have been funded in many sectors of the Bank’s work. Although the trend in such commitments has been downward, and debate continues about their effectiveness, lines of credit can play a useful role, when employed well, to achieve various objectives. Better outcomes are associated with some specific conditions. |
Identifying Lines of Credit | | In the absence of a reliable database for all LOC, IEG examined appraisal and completion reports for over 2,000 loans and credits (and found over 200 LOC). Other than projects specifically classified as financial intermediation loans, it was not always clear whether LOC were embedded in project designs. Some appraisal reports mentioned that a component would be passed on to beneficiaries as subloans to be repaid, but provided no other detail. In other cases, it was difficult to know if the subloans were being financed by the Bank loan or credit and if so, the amount. For example, China presented special challenges, as virtually all Bank lending is passed on to provinces, municipalities, state agencies, and other institutions in the form of subloans. IEG also compared its database with other databases on LOC within the Bank and IFC to ensure completeness. |
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LOC were identified in many sectors; the rural sector accounted for almost one-third of them, with financial and urban sectors each accounting for another 15 percent. The trend in commitments has been sharply downward, however, continuing the trend that started in the mid-1980s.
LOC can play a useful role when used well. They can achieve a variety of objectives, such as expanding access to credit for sectors and groups of borrowers that would otherwise be excluded from borrowing. They can also enable new technologies, expand access to infrastructure, help to create employment, strengthen financial intermediaries, and develop a market in lending to subsectors.
In practice, however, many, if not most, Bank-funded LOC during the last decade failed to achieve good results. Bank guidelines on LOC were followed in the minority of projects; and in a high proportion of LOC, funds were not used as planned, financial sector objectives and real sector objectives were generally not met, and the rate of satisfactory outcomes was unacceptably low.
According to implementation completion reports, external conditions caused cancellations in lines of credit in some countries: large macroeconomic shocks, government delay, and subsequent change of conditions. But in many cases, design weaknesses surfaced during implementation, including overestimation of demand, weak participating financial intermediaries, and lending terms and conditions that proved too difficult to meet.
LOC are unlikely to disappear. According to Bank operational staff and managers, demand from governments remains strong and the queue of upcoming projects contains a number of relatively large LOC scheduled for approval in the next fiscal year. Furthermore, a recent internal Bank paper on enhancing Bank support to middle-income countries suggests the use of LOC for funding infrastructure at a subnational (mainly municipal) level.
This review shows that LOC can be useful instruments under the right circumstances and points to a number of salient features of LOC that are associated with better outcomes. |  [return to top] | | Findings and Recommendations | | Findings | Recommendations |  | Implementation of Bank guidelines for LOC has been poor. | | Outcomes are poor. | | Cancellation rates have been high. | | Better outcomes for LOC are associated with specific conditions. |
| | Guidelines for LOC should be updated. | | Management should ensure that the guidelines are followed. | | Bank management should take the initiative to engage with MDBs and other major donors to assess the extent to which there are differences in guidelines. | | Quality enhancement within the Bank for LOC should be improved. | | Basic indicators and quantitative financial information should be evident. |
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| LOC Sectoral Distribution, by Number of Operations, FY93-FY03 |
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| Sector | % of all LOC | % of Regular LOC | % of Microfinance LOC | | Rural | 31.4 | 26.4 | 42.5 | | Finance | 16.9 | 20.2 | 9.6 | | Urban | 14.0 | 19.0 | 2.7 | | Private Sector Development | 9.7 | 11.7 | 5.5 | Social Protection | 9.7 | 3.1 | 24.7 | | Energy | 4.7 | 4.3 | 5.5 | | Environment | 3.8 | 4.3 | 2.7 | | Water and Sanitation | 3.0 | 3.7 | 1.4 | | Othera | 6.8 | 7.4 | 5.5 | | Total | 100 | 100 | 100 |
a. Includes the public sector; transportation; economic policy; education; and health, nutrition, and population sectors.
| Â World Bank and IFC Lending for LOC 
Source: Operations Evaluation Group, IFC
| | LOC by End Users |
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| Beneficiaries/Investments | # of LOC | Percent | Commitment (US$m) | | Not targeted | 25 | 20 | 1,519 | | Small and medium enterprises | 7 | 6 | 789 | | Export-oriented enterprises | 7 | 6 | 593 | | Farmers and agro-industries | 33 | 27 | 1,788 | Infrastructure entities | 8 | 7 | 1,091 | | Homeowners | 10 | 8 | 873 | | Municipalities, providences | 18 | 15 | 1,538 | | Other targeted end users | 13 | 11 | 1,122 | Total | 121 | 100 | 9,313 |
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