What does the World Bank take against guaranteed loans ?

Question

Accepted Answer

The correct option is 1:
The World Bank, specifically the International Bank for Reconstruction and Development (IBRD), charges a **commission** on loans that are guaranteed by the borrowing government. This commission is essentially a guarantee fee or a service charge that the World Bank takes for undertaking the risk associated with the loan, even though the loan is guaranteed by the member country's government. This practice is part of the Bank's operational mechanism to manage its balance sheet and ensure financial stability. Historically, this commission was levied under the Articles of Agreement of the IBRD to build a reserve fund, although the actual rate and application have evolved over time. Therefore, the Bank does not simply give guaranteed loans for free; it charges a fee for its guarantee and lending services.

The incorrect option is 2 (Compulsory fee):
While a commission is a type of fee, in the context of international lending and the World Bank's terminology, "Compulsory fee" is too general and does not precisely capture the nature of the charge associated with guaranteed loans. The specific term used for the guarantee charge on loans is "commission."

The incorrect option is 3 (Interest):
Interest is charged on the disbursed loan amount itself as a cost of borrowing capital. However, the question specifically asks what the World Bank takes *against* guaranteed loans, pointing toward the separate cost associated with the guarantee itself, which is the commission. Borrowers pay both interest (for the funds) and a commission (for the guarantee).

The incorrect option is 4 (Nothing):
The World Bank is a financial institution, and it does not operate without charge for its services, particularly for providing and guaranteeing loans. Charging a commission is necessary to cover administrative costs, mitigate risk, and maintain its financial reserves, making it untrue that the Bank takes "nothing."