Nairobi — A dramatic drop-off in investor confidence has hit the East African Development Bank as it emerges that the African Development Bank has indefinitely postponed a $50 million loan to the regional lender long before its financial results, revealing losses worth $8.9 million, were released.

The revelation comes as EADB's board holds its quarterly meeting in Kampala this week to chart a way out of the financial institution's current troubles, which are reverberating through East Africa's private sector as available long-term credit shrinks.

Financial analysts said AfDB's decision to withhold that credit sends a worrying signal to offshore investors who, unlike the continental bank, which has a seat on EADB's board, are not privy to insider briefs that could inform time-sensitive decisions.

Apparently, EADB had applied for a loan of $80 million from AfDB -- which is its largest class B or institutional shareholder with a 7.8 per cent stake -- for on-lending to the private sector. AfDB, however, agreed to extending $50 million only, which would nevertheless have been the largest line of credit received at the bank in many years, and would significantly raise EADB's investment portfolio.

AfDB, like a number of other development finance institutions in Europe, China and India, has extended credit to EADB for on-lending before, although this loan was of prime significance to EADB's investment flexibility and East Africa's private sector, because of its open-ended nature and non-attachment to any sector or industry for on-lending.

The EastAfrican has learnt that the loan application was due for AfDB board approval, when it was pulled off the agenda on the day of the meeting in May, after word of a "financial tragedy" waiting to happen at EADB reached the continental bank's headquarters in Tunis, Tunisia.

This happened around the same time that the management of EADB was under board pressure to show the true financial health of the institution after the realisation that accounting gimmicks were used to under-declare its losses by a figure that The EastAfrican has learnt was just above $4 million, about half the final loss posted.

Sources also reported that not one of the two regular inspection missions that AfDB usually executes twice a year has been carried out, for unknown reasons, although officials at EADB said that the continental bank had recently taken issue with the regional bank's operations.

The Bank has declined to comment on its financial performance or subsequent issues like the management shake-up that The East-African reported in its issue of October 6-12; it has likewise refused comment on its emerging difficulties in resource mobilisation.

Markets across the region went into panic on learning of the bank's performance, with financial analysts predicting that investor confidence in EADB would drop and negatively affect its bond ratings.

Besides the bolded financial indicators, EADB's financial books reveal that the bank's liquidity ratio dropped from 1.63 in 2006 to 1.39 in 2007, very close to the 1.33 ratio required by policy, meaning that it may not be able to meet its debt obligations, or only do so with difficulty.

A liquidity ratio that raises concern like EADB's currently does, is a major disincentive to fundraising, which may explain why AfDB postponed approval of credit to East Africa's foremost financial institution.

It is also known that on top of the emerging issues, EADB has longstanding concerns capable of weakening its resource mobilisation efforts, such as cases brought against it by borrowers in courts of law, weak risk management mechanisms and political influence in loan appraisals and approvals.

In one notable case under litigation in the courts in Tanzania, EADB it is challenging an award of $61 million against it.

It is noteworthy that EADB applied for a postponement of payment of the award, although before this application, the High Court of Tanzania had dismissed an earlier petition from the bank to set aside this award.

A source familiar with EADB's operations said, "All development banks suffer litigation, but only up to reasonable levels.

It appears that EADB was not expeditiously handling litigation issues as soon as they came up, and now the amounts involved are huge, and could easily eat up the bank's financial cushion."Huge litigation burdens are also an indicator of loopholes in credit appraisal," he added.

Also of concern is the fact that EADB, despite growing its investment portfolio, which is dominated by long term loans, to about $84 million last year alone and having an asset base of $275 million, until recently had no risk management functionality, an omission partly blamed for the continuous occurrence of non-performing assets.

The EastAfrican in its issue of September 29-October 5 reported that EADB's non-performing loans shot up to $21 million in 2007 from only $1.5 million the previous year.

Sources in the bank revealed that management made a number of dubious loan approvals under political pressure, and was weak at inspecting approved projects in the field to ensure that the money was being spent according to the loan agreements.

Indeed, it has emerged that some of the companies that owe large sums to the bank but have been put under receivership in Uganda and Kenya belong to influential politicians, or to politically connected individuals.

Sources close to the matter have told The EastAfrican that until a convincing way forward for the bank is presented, AfDB will not extend what was going to be EADB's biggest line of credit in years.

Besides AfDB, EADB has received significant amounts of money in the form of long-term loans from other international financial institutions.

According to the report, "The agreement for a line of credit of euro 25 million with European Investment Bank was signed in February and that of $30 million with China Development Bank in October 2007. A $5 million line of credit from Export Import Bank of India came into effect in June 2007." Meanwhile, negotiations for a $10 million long-term loan from the Japan Bank for International Co-operation had reached an advanced stage.

However, a financial analyst who requested anonymity said, "If a continental bank (AfDB) operating with other banks like PTA Bank can withhold a credit facility, it indicates doubt over EADB's prudence in loan management, and directly tells other lenders to be more cautious with their money to this bank, especially because they may not have timely market intelligence like AfDB, which sits on the Board."

This possibility that there will be less money to lend going forward, given that the bank must continue providing for non-performing assets, is bad news for East Africa's private sector, which looks to EADB for long-term financing at fair rates.

Going by EADB's 2007 financial report, only one in every 38 projects that were approved to receive loans, actually got the money as annual disbursement declined by 31 per cent from 2006.

Last year's financial performance also puts the bank's plans to start disbursing at least $100 million by 2010 out of reach as analysts predict that EADB will experience difficulty in obtaining more lines of credit from other financial institutions, if there is no clear remedy to fix its balance sheet.

This also means that EADB's recapitalisation programme of about $135 million for direct loans, equity and housing projects, will either be halted or seriously slowed.