The African Development Bank (ADB) gets full marks for its efforts to reform and modernize its operations in what is arguably one of the world's toughest banking environments.
The ADB launched its reform programme in 1995 with the aim of improving lending operations, financial management policies and institutional management governance.
"With respect to project-related activities, a framework is being put in place to monitor, enforce quality control and streamline operational reporting at various stages of the project cycle," says ADB spokesman Kemal Saiki in Abidjan.
A few years ago there was serious concern over the ADB's future. The bank's financial position, and indeed its viability, was threatened by a policy of granting hard-currency loans to countries without the ability to service their obligations.
That policy has been stopped as part of the reform programme.
"The ADB is doing a first-rate job in terms of improving the efficiency of its operations," says Richard Akwei, vice-president of JP Morgan in Johannesburg. "It has been successfully streamlining its operations and sharpening its focus. In the past it had tried to be all things to many people and a large part of its loan portfolio was with countries that could not service their obligations. The bank has rationalized what it can in terms of lending and it is focusing more on developing infrastructure-type projects."
Jefrey Shafer, managing director of Salomon Brothers in New York, is encouraged by the bank's modernization and its focus on the private sector under its president, Omar Kabbaj. "They have got rid of a lot of deadwood and toughened up their arrears policy in one of the most difficult regions of the world for a bank to do business," he says. "An example of how developments in the region affect the banks is Zaïre [Democratic Republic of Congo], which has the biggest outstanding arrears. Political changes there may set the stage for the country to pick up its obligations. Also, the quality of lending is improving as the ADB is beginning to focus more on private-sector projects that contribute to development and strengthen its environmental department."
Saiki says that, as part of the action plan, the bank has introduced a policy of cancelling undisbursed loan balances for completed projects, non-performing loans and grants, to clean up the portfolio. "We have made efforts to ensure that ADB-financed projects are executed with sound environmental management at all stages of the project cycle," he says.
In April the bank approved three single-currency loan products which it will offer to its borrowers from the beginning of October. These instruments will replace existing multi-currency pool-based variable-rate loans that have been the ADB's main lending instrument since 1990. The objective in broadening the menu of loan products is to enable borrowers to select the currency and interest-rate exposures best suited to their individual external-liability needs. The ADB says the introduction of market-based instruments will improve the competitiveness of the bank's lending operations and provide transparent pricing of loan products.
The single-currency variable-rate loan is mainly for borrowers seeking long maturities and debt-service stability but who do not require a close linkage to current market interest rates. The single-currency floating-rate loan is for borrowers whose revenues vary with short-term market interest rates. The single-currency fixed-rate loan will suit borrowers who want interest-rate stability but do not consider the timing of the market conditions for rate setting a critical factor.
"The new lending products will force borrowers to choose from a more limited group of instruments, and this will facilitate lending management and enable the ADB to be more active in developing African industry," says JP Morgan's Akwei. "It will also increase the bank's ability to do more business."
As part of its financial overhaul the bank has introduced liability-management reforms with a view to restructuring the liability portfolio. It has also set up an asset-liability management committee in charge of reviewing the bank's risk-management policies.
There has been a major change in the bank's liquidity policy, affecting its investment management. Previously, the ADB maintained liquidity at 1.5 times the subsequent year's estimated loan disbursements. The new policy bases liquidity on key cashflow parameters such as debt-service requirements, loan disbursements and loan-principal repayments. The ADB has created a new investment benchmark effective from January based on six-month Libor.
From June the bank increased its flexibility to borrow by obtaining evergreen consents from member countries. This new dispensation allows the bank to borrow without requesting the approval of its shareholders for each borrowing operation. "This means the ADB can take advantage of market opportunities as they arise and borrow at finer rates," says Saiki.
This year South Africa became an official ADB member and, although the country accounts for more than 90% of the African continent's banking assets, it has so far played a fairly cautious role in the organization. "It does not want to push its weight around," says Akwei. "However, I expect them to be significant contributors, particularly as it relates to the SADC [Southern Africa Development Community] region."
As for future challenges, says Akwei, the bank faces increased competition from multilateral, government and private funds which are looking to capitalize on Africa's improved economic and political situation. "The ADB will have to access even more competitive financing to be competitive, and regaining its triple-A rating is an important step in the process," he says.
It is also widely acknowledged that the bank needs to increase the size of its fund to take on a greater role in infrastructure and equity investments in Africa.
"There was disappointment that last year the US congress was not persuaded to appropriate funds for the ADB soft window," says Salomon Brothers' Shafer. "The jury is still out on this year but the [US congress] house appropriations committee has proposed $25 million in funds. People are still talking about a capital increase, which is important but not time-critical." Jules Stewart