WORLD BANK
International Finance Corporation watchdog in turmoil following scathing report on microfinance in Cambodia
The head of an internal auditor resigned after the board of the World Bank’s private investment arm rejected her office’s findings that the deal violated internal safeguard policies.
Over nearly three decades, the organization tasked with watching the World Bank Group’s private investment arm has handled a multitude of complaints against projects financed by the institution, ranging from the displacement of indigenous populations by massive hydroelectric dams to labor disputes at car manufacturers.
But the watchdog, known as the Compliance Advisor Ombudsman (CAO), was plunged into crisis last month, after the board of the International Finance Corporation (IFC) rejected its finding that the bank had failed to follow its own safeguard policies when backing Cambodian microfinance lenders engaged in aggressive debt collection practices.
The CAO’s head, Janine Ferretti, resigned the day after the board announced its response to the report in a statement which drew heavy criticism from organizations that have fought to promote accountability at the IFC.
The board’s decision to reject the CAO’s findings has raised concerns that the World Bank is abandoning its commitment to independent oversight of its private-lending operations, setting a potentially problematic example for other development banks, which often follow its lead on governance issues.
“This decision sets a dangerous precedent for accountability at the World Bank Group,” a group of over 60 nonprofits and development finance experts wrote in a statement following the decision.
Microlending is a top priority for the bank’s leadership. IFC has provided billions of dollars of financing to the industry globally, including over $400 million to Cambodia.
The World Bank has argued that the loans are an economic development engine, providing small business owners with the financing they need to create jobs and build their local economies.
But the programs have come under heavy criticism over concerns that the loans can trap borrowers in crippling debt. That has been especially true in Cambodia, which in 2019 had the most microfinance debt per capita of any country in the world, according to Human Rights Watch.
News reports by Bloomberg News and the Wall Street Journal, among others, have highlighted how microlenders, some underwritten by the IFC, have contributed to the problem.
The World Bank itself has long recognized the potential dangers to borrowers from poorly regulated microfinance operations: a 2009 report funded by the bank warned that Cambodians’ inability to repay loans was a “grave concern for the poor and vulnerable.”
The CAO began looking into problems with six IFC-backed lenders in Cambodia in early 2022, following complaints by borrowers who alleged they had experienced “predatory and deceptive lending practices.”
The following year, IFC management attempted to stop the CAO from proceeding with the investigation, arguing that the projects fell outside of the CAO’s mandate. It subsequently withdrew its objections, and the investigation continued, resulting in a 142-page report that the CAO submitted to the board last October. (An earlier draft of the report, reviewed by ICIJ, laid out problems with the IFC-backed lenders in far more detail than the version ultimately shared with the board.)
The final report concluded that IFC did not comply with its own environmental and social sustainability policies when conducting due diligence and oversight of the projects, resulting in harm to the borrowers.
In response, IFC management wrote that, although it had taken “significant actions to address concerns related to aggressive lending and debt collection,” the policies cited by the CAO do not apply to the microfinance sector and, therefore, the investigation was beyond the watchdog’s remit.
“Looking forward,” it wrote, “IFC will continue to advance responsible microfinance, support regulatory reforms, and build capacity across the sector.”
This time, the board sided with management. In a statement on June 24, it said that IFC management would work to address the harms to the 18 complainants, but that there had been no failure to comply with the policies in question.
This decision sets a dangerous precedent for accountability at the World Bank Group,
— a group of over 60 nonprofits and development finance experts
Ms. Ferretti, CAO’s director, announced her resignation the next day. The board thanked her for her work, noting in a statement that it “reaffirms the importance of a strong, independent accountability mechanism and remains committed to supporting its effective functioning.”
Ms. Ferretti did not respond to a request for comment.
Last week, the CAO announced that the board has barred it from processing any new complaints related to microlending going forward and instructed it to suspend all ongoing work on such cases. There are currently 10 such cases in Cambodia and one in Rwanda.
Such a decision is “unheard of” and will undermine trust in the World Bank’s ability to fairly and objectively address complaints about IFC projects, according to Arna Hartmann, a senior adjunct professor at Johns Hopkins School of Advanced International Studies, who has worked extensively with the world’s largest development banks on accountability issues.
“The CAO has to now tell the parties to pack up your things and go back to IFC management” to attempt to resolve the outstanding complaints, she said, adding “that really will hurt the people, and it really will hurt the effectiveness of the mechanism.”
The IFC has faced a run of scandals in recent years related to its failure to provide sufficient oversight of projects it finances.
A 2023 report in the Intercept alleged that the organization’s management had interfered with a CAO probe into problems, including child sexual abuse allegations, at Bridge International Academies, an IFC-backed operator of private schools in Africa.
An investigation by the law firm Freshfields Bruckhaus Deringer subsequently concluded that there had been no “intent to obstruct or frustrate” the CAO, but that the IFC could have cooperated in a “more timely, efficient, and rigorous manner.”
Last year, ICIJ reported that the IFC board had for over a year suppressed the release of a damning CAO report on abuses at a bank-backed rubber company in Liberia.
A separate ICIJ investigation revealed abusive debt-collection practices and denial of care at private hospitals in East Africa financed by the IFC. The CAO is currently working to resolve a complaint filed by one of the patients.
In June, the World Bank announced that it would be merging the CAO with the group’s two other accountability mechanisms. The change, it said, was “designed to make the accountability process simpler and clearer for complainants to navigate.”
The board’s actions regarding the CAO’s microfinance investigation have heightened already existing concerns that the reorganization will reduce oversight of the IFC, said Stephanie Amoako, policy director at Accountability Counsel, a nonprofit that advocates for people affected by international development projects.
“Would any combined accountability mechanism have the power to do its work independently?” she asked during a recent interview. “Would it have the institutional support and independent leadership to make such a mechanism work?”