|This Operational Policy statement was revised in March 2012 to take into account the provisions of OP/BP 9.00, issued in February 2012.|
Note: This OP replaces OP 7.20 dated July 1998. Questions should be addressed to the Chief Counsel, Operations Policy.
Revised March 2012
1. For loans to member countries or government-owned entities, IBRD does not require security1 except: (a) when a project/program cofinancier is granted security; (b) through operation of IBRD's negative pledge clause; or (c) when it makes a loan to a non-creditworthy member or to a governmental entity of such a member.
2. For loans to private borrowers, IBRD may take some form of security in addition to the guarantee of the applicable IBRD member, if such security is required under the circumstances and its value would not be greatly undermined by sharing arrangements or negative pledge clauses in favor of other creditors.
3. The recommendation on whether to seek security for a loan is made by the country director concerned in consultation with the relevant chief counsel and the Credit Risk Department.
Negative Pledge Clause
4. The General Conditions applicable to all IBRD Loan and Guarantee Agreements include a negative pledge provision2 that limits the creation of security in favor of other creditors over assets of borrowing entity and, where the borrower is not the member country, assets of the member country concerned (including assets of subdivisions of the member, entities owned or controlled by the member, and entities operating on the member's account or for its benefit). The negative pledge provision does not prohibit the creation of security in favor of other creditors. Instead, it prohibits the establishment of a priority for other debts over the debt due to IBRD by requiring that IBRD ratably share in security created in favor of other creditors.
5. When the borrower or guarantor is a member, the negative pledge clause applies to any security over public assets that results in a priority in the use of foreign exchange for the benefit of external creditors. When the borrower is not the member, the clause applies to any security on any assets of the borrower as security for any debt.
6. The negative pledge clause does not apply to security on property for the payment of the purchase price of the property (or for the payment of debt incurred to finance the purchase of such property), or to security arising in the ordinary course of banking transactions for a debt maturing not more than one year after the date on which it was originally incurred.
7. In exceptional cases, upon request, IBRD may grant a waiver in respect of the negative pledge clause.3 A proposed waiver must be recommended by the country director, through the Regional vice president (in consultation with the Vice President and General Counsel and the Director, Credit Risk Department), to the Managing Director (MD) concerned. The proposed waiver is then submitted to the Board for approval. In exceptional circumstances in which the assets subject to the security are considered to have no material effect on the country's ability to service IBRD debt, the MD's approval is sufficient.
Security as Condition of Effectiveness
8. When IBRD requires security, the completion of the security arrangements is normally a condition of effectiveness of the Loan and Guarantee Agreements.
9. If a member requires, as a condition for the effectiveness of the member's guarantee to IBRD, security to secure the borrower's obligations to the member in respect of the guarantee, the completion of such security arrangements is a condition of effectiveness of the Loan and Guarantee Agreements. IBRD does not require that it share in such security or that equivalent security be provided to it.
In this statement, "security" means a mortgage, pledge, charge, privilege, or priority of any kind. See also the term "lien" in the relevant General Conditions Applicable to Loan and Guarantee Agreements, which is defined in the same manner.
See Section 9.03 of the relevant General Conditions: General Conditions Applicable to Loan and Guarantee Agreements for Currency Pool Loans; General Conditions Applicable to Loan and Guarantee Agreements for Single Currency Loans; or General Conditions Applicable to Loan and Guarantee Agreements for Fixed Spread Loans. The General Conditions Applicable to Development Credit Agreements do not contain a negative pledge provision. When IBRD provides guarantees, the negative pledge clause is normally included in the indemnity agreements between the member country concerned and IBRD, so that the member's payment obligations to IBRD under such agreements are the same as the member's payment obligations under loan and guarantee agreements with IBRD.
Staff should refer to the Board paper, IBRD's Negative Pledge Policy with Respect to Debt and Debt Service Reduction Operations (R90-151) July 19, 1990.