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OP 7.00 - Lending Operations: Choice of Borrower and Contractual Agreements

These policies were prepared for use by World Bank staff and are not necessarily a complete treatment of the subject.
OP 7.00
February, 2001
Note: This Operational Policy was revised on April 2013 to take into account the recommendations in “Investment Lending Reform: Modernizing and Consolidating Operational Policies and Procedures (R2012-0204 [IDA/R2012-0248]), which were approved by the Executive Directors on October 25, 2012. As a result of these recommendations, a number of OP/BPs have been consolidated and are now reflected in OP/BP 8.60, Development Policy Lending, OP/BP 9.00, Program-for-Results Financing and OP/ BP 10.00, Investment Project Financing; policy provisions that were previously reflected in the OP/BPs, but are also reflected in the Board-approved General Conditions, have not been repeated in these 3 OP/BPs. Consequently, this OP has been updated to reflect the requirement that any changes to the General Conditions require LEGVP approval.

Questions should be addressed to the Chief Counsel, Operations Policy.
Revised April 2013

Choice of Borrower
1. Borrower. IBRD under its Articles of Agreement may lend to (a) a member country; (b) a political subdivision of a member; and (c) any business, industrial, and agricultural enterprise in the territories of a member.1

2. IBRD generally prefers to lend directly to the entity responsible for the implementation and operation of the project2  for which the loan is made. The IBRD Articles of Agreement require the Bank to make arrangements to ensure that the proceeds of the loan are used only for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency.3 By lending directly to the entity responsible for project implementation, the Bank is better able to monitor the project's implementation efficiently and suggest corrective steps when there are shortcomings in project implementation. When such an entity is not the member country and direct lending to it is not feasible or practical, IBRD may lend to the member country or another entity if the project can nevertheless be efficiently implemented and operated.4

3. Guarantor. If the member in whose territories the project is located is not itself the borrower, the member must guarantee the payment of the principal and interest and other charges on the loan.5 When a member guarantees a loan, it does so as a principal debtor and not merely a surety. Thus, IBRD may call directly on the guarantor for payment, and is not required first to exhaust its remedies against the borrower. When the member effectively controls the entity in charge of implementing and operating the project, IBRD requires the member to guarantee performance as well as repayment.6

4. Regional Organizations as Borrowers. IBRD may finance a project to be carried out by an enterprise owned jointly by two or more members or by public or private entities of such members. In this type of lending, IBRD requires either joint and several guarantees or several guarantees from the members in whose territories the project is located (the amount of each such guarantee being related, for instance, to expected or actual benefits flowing from the loan), as long as these guarantees together cover the total amount of the principal and interest and other charges on the loan.


5. Borrower. IDA under its Articles of Agreement may lend to (a) member country; (b) the government of a territory included within IDA's membership; (c) a political subdivision of any of the foregoing; (d) a public or private entity in the territories of a member or members; or (e) a public international or regional organization.7

6. IDA lending is designed to assist in the development of the low-income countries included in its membership. IDA normally makes credits to member countries only, whether the member itself or another entity is responsible for project implementation, to ensure that the full benefit of the concessionality of IDA resources is accorded to the members.

7. Guarantee. Although IDA normally does not make credits to entities other than a member country, if it were to do so, its Articles of Agreement provide that it may, at its discretion, require a suitable governmental or other guarantee.8

Contractual Agreements


8. When making a loan,9  the Bank uses a variety of documents to define its contractual relationships with the borrower, guarantor, and other entities that are responsible for the project or that have a direct interest in the project or in the achievement of its objectives.10

9. Loan Agreement. For each loan, the Bank and borrower enter into a Loan Agreement that sets forth the amount of the loan or credit and the terms and conditions on which it is made.
10. Guarantee Agreement. If IBRD makes a loan to an entity other than the member country concerned, it enters into a Guarantee Agreement with the member, which sets forth the member's contractual obligations as guarantor. Additional undertakings made by the guarantor to facilitate the achievement of the loan's purposes are set forth in the Guarantee Agreement.

11. Security Arrangements. Generally, IBRD does not require specific security from its borrowers. However, IBRD may take some form of specific security for a loan to a privately owned borrower or a loan to a non-creditworthy member or entity owned by such a member.11 In such cases, additional contractual documentation is required.

12. Project and Other Agreements. If the Bank lends to an entity other than the entity that is responsible for the implementation and operation of the project, it normally enters into a Project Agreement with such entity. The Project Agreement contains the normal covenants of a Loan Agreement concerning the implementation and operation of the project. Whether or not the Bank enters into a Project Agreement, it may require the borrower to enter into subsidiary agreements with the project implementing entity or other project beneficiary, setting forth the respective obligations of the borrower and such entities with respect to the project. The Bank may also enter into agreements with other entities that have a direct interest in the project or in the achievement of its objectives. These agreements set forth the obligations of such parties with respect to the project.

13. The Loan and Guarantee Agreements incorporate by reference the applicable General Conditions. Since the General Conditions are approved by the Executive Directors (EDs), any amendment of their provisions requires clearance by the LEG VP, who also decides whether approval by the EDs is also required.  The Loan, Guarantee and/or Project Agreements incorporate, as applicable, guidelines such as the Guidelines: Procurement under IBRD Loans and IDA Credits; Guidelines: Selection and Employment of Consultants by World Bank Borrowers and Guidelines for Conversion of Loan Terms for Fixed-Spread Loans.12 

14. Covenants. The undertakings, or covenants, that are included in the contractual documents set out the parties' obligations with clarity and specificity. The covenants are tailored to the specific responsibilities of the contracting party (i.e., borrower, guarantor, or implementing entity). In particular, covenants must not require the party to cause certain actions to be taken by an entity over which it cannot exercise the necessary control. Covenants should cover aspects that are essential for the operation. Covenants must be (a) reasonable in number; (b) realistic and reasonable in substance and in their time horizon and monitorable; and (c) consistent with other covenants with the same parties. The Bank does not stipulate covenants that require the member to enact legislation, and tries to work within existing law to the extent possible.13 If enactment of particular legislation is necessary to achieve the project's objectives, the appropriate steps to be taken for such enactment should be clearly defined; and such enactment is made a condition of negotiation, Board presentation, effectiveness, or disbursement, rather than a covenant.14

15. Supplemental Letters. A supplemental letter may be used to (a) elaborate on a particular covenant or provisions of the General Conditions; or (b) contain representations made by the borrower, the guarantor, or the implementing entity at the time the loan is made. A supplemental letter specifying the member's obligation to provide information about its financial and economic condition15  is signed for each loan. A supplemental letter including representations regarding the financial condition of the borrower (other than a member) or party to the Project Agreement is normally signed for each loan. A supplemental letter should not be used to create obligations additional to those reflected in the Loan Agreement.

16. Letter of Development Policy. For a development policy loan, the Letter of Development Policy (LDP) sets out the salient elements of the proposed program to be supported by the loan.16 The borrower's commitment to carry out the program is set out in the LDP or the Loan Agreement. The contents of the LDP are defined as "the Program" and are incorporated by reference in the Loan Agreement. Receipt by the Bank of this letter, duly executed, constitutes a condition of Board presentation of the Loan.

17. Agreed Minutes of Negotiation. In order to assist in the interpretation of the contractual documents, the Bank's practice is to have a brief agreed record of the negotiations, known as Minutes of Negotiations. Agreed Minutes of Negotiations are not enforceable documents; thus they do not include undertakings that the Bank expects to enforce in the future.


18. The Legal Department is responsible for the contractual arrangements of each loan. It also ensures that the contractual documents to which the Bank is a party, or which are entered into for the benefit of the Bank, duly reflect the agreements reached between the parties to the documents.

  1. IBRD Articles of Agreement, Article III, Section 4.
  2. Unless the context requires otherwise, "projects" includes programs supported by Program-for- Results financing and development policy lending.
  3. IBRD Articles of Agreement, Article III, Section 5(b).
  4. Staff should consult with LEG for guidance on the considerations affecting the choice of borrower for various types of projects.
  5. IBRD Articles of Agreement, Article III, Section 4(i). While the Articles provide that the member or the central bank or some comparable agency of the member acceptable to the Bank must provide this guarantee, the Bank requires the guarantee of the member for the following reasons: (a) the Bank's desire to have the full faith and credit of the member behind the guarantee; (b) the fact that guarantee agreements contain undertakings that a central bank could not validly undertake or effectively comply with; and (c) the Bank's desire to create, by the guarantee agreement, a contractual relationship under public international law that will not be subject to impairment as a result of restrictions or provisions of the laws of the member.
  6. Staff should consult with LEG for guidance on the application of this paragraph.
  7. IDA Articles of Agreement, Article V, Section 2(c).
  8. IDA Articles of Agreement, Article V, Section 2(d).
  9. For purposes of this and following sections of the OP, "Bank" includes IBRD and IDA, "loan" includes IDA credit and IDA grant, and "Loan Agreement" includes Development Credit Agreement.
  10. Staff should consult with LEG for guidance on the considerations relating to the design and content of contractual arrangements.
  11. Examples of such loans: mortgages, other liens, trust arrangements, or assignments of contractual rights such as rights under purchase contracts between the borrower and third parties, or specific guarantees from shareholders.
  12. See OP/BP 11.00, Procurement, and OP 3.10, Loan Charges, Currencies and Payment Terms of IBRD Loans and IDA Credits.
  13. If the amendment of a particular law would impede the achievement of the project's objectives, the contractual agreements may provide that such amendment would constitute an event of suspension. See Section 6.02 of the relevant General Conditions.
  14. Development policy loans require often entail significant changes in existing laws, regulations, and administrative practices. The legislative steps to be undertaken are normally described in the Letter of Development Policy (see para.16), but may also be part of the specific actions incorporated in the Loan Agreement as conditions of Board presentation or conditions of disbursement of particular loan tranches, rather than as covenants.
  15. See Section 9.02 of the relevant General Conditions.
  16. See OP 8.60, Development Policy Lending.

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