Social media war puts spotlight on EADB despite high ratings

As corporate civil wars go, Kampala-based East African Development Bank (EADB) has opened a new front that has left its owners — the East African Community member-states — in a governance quandary.

The EADB has since mid-last year been embroiled in a bitter internal war pitting its faceless employees against director-general Vivienne Apopo, who is accused of mismanaging the bank and running a lone-ranger operation.

The war, mainly fought on the social media and blogs, has continued to pile pressure on the EADB board, which responded late last year by commissioning accounting firm Ernst & Young to audit the bank’s management and governance processes.

What makes the EADB’s internal war unique is the fact that Ms Apopo, an experienced finance expert who took over as CEO eight years ago, has presided over the bank’s best years in terms of its financial health.

When Ms Apopo became CEO in January 2009, the EADB was an institution on life support, saddled with a huge mountain of non-performing loans and a thin assets base that had made it irrelevant in East Africa’s vibrant development financing market.

The global ratings agency Fitch had in 2007 downgraded the EADB to near junk status — a position that made it impossible to mobilise new funds for its lending operations.

Stable outlook

Fast forward to 2015, the latest year in which the bank was assessed, and Moody’s gave the EADB a Baa3 long-term rating with a stable outlook. Moody’s said the rating was based on the bank’s possession of adequate capital buffers, modest gearing ratios, and the very low levels of non-performing loans.

The EADB’s paid-up capital stood at $185.78 million in December 2015, a near double growth compared to $99.87 million in 2009.

In the eight years to December 2015, the mountain of toxic loans at the regional development finance institution dropped to 0.75 per cent from a high of 32 per cent in 2010, according to official data.

Moody’s commented in its ratings report that “the bank’s key strengths are its strong capital buffers which remain among the highest in the multilateral development bank universe.”

“The low level of non-performing loans and the high level of provision coverage means the bank remains well-positioned to absorb losses,” the New York-based ratings agency said in its latest research note dated July 2016.

“Although rising loan growth will lead to a modest deterioration of capital and leverage ratios, this is in line with our expectations, and will be partly offset by additional equity injections from new shareholders.”

This is just about the time that the internal wars, which began with the publication on blogs of a long memo alleged to have been written by the bank’s employees to the board.
The memo, whose authors remain unknown to date, accuses Ms Apopo of among other things mismanaging the bank by rejecting many good loan applications approved by her juniors thereby leaving a large fraction of the bank’s assets idle.

The bank’s financial statements and reports produced by independent assessors, however, tell a different story. The 2015 audited financial statements, for instance, show that the EADB’s loan book had surged to $162 million by December 2015, a 52 per cent growth from $106.7 million a year earlier.

Loans and advances, which stood at $104.3 million in 2009 had by end of 2015 risen to $582 million in December 2015, offering a view that is diametrically opposed to claims by the faceless complainants.

The EADB is jointly controlled 87 per cent by four East African Community member-states. Kenya and Uganda are the largest shareholders with a 28 per cent stake each while Tanzania and Rwanda own 24 per cent and seven per cent respectively.

The remaining 13 per cent is held by three institutional investors who are mostly multilateral development financiers.

The list includes the African Development Bank (AfDB) with nine per cent, Dutch development bank FMO (three per cent), and German investment firm DEG (one per cent).

Ms Apopo, a Kenyan lawyer-cum-banker, has previously worked for AfDB as the resident representative and country manager for Zambia; and as director of legal affairs at the continental lender.

Her tenure at the EADB’s corner office saw the lender return to profitability within a year of taking over. The EADB made a profit of $1.85 million in 2009 compared to a loss of $8.78 million the previous year.

Financial position

The bank’s financial position has remained strong despite profits falling by a third to $6.67 million in 2015 from $9.82 million a year earlier, hit by forex losses and losses on equities portfolio.

Analysts at Moody’s reckon that even though development finance institutions such as the EADB do not purely pursue profitability, growth in profitability is critical because it helps support capital adequacy as earnings can be ploughed back as equity.

The EADB only pays dividends to institutional investors and not the member-states who hold class A shares.

“To date, all profits due to member-states have been allocated to equity in order to strengthen its capital base, which we view as credit-positive,” said the Moody’s research note.

However, allegations of impropriety on the part of Ms Apopo have been raised in a whistleblower petition to the EADB’s governing council. EY has since been hired to conduct a forensic audit on the regional bank.

The EADB provides loans to private-sector institutions and projects in its four member-states.

It mostly offers lines of credit to financial intermediaries to support the financing of micro, small and medium enterprises.

One of the mega projects partly supported by the EAC-backed bank is the 310-megawatt Lake Turkana Wind Power farm in Kenya. The EADB has also supported State-owned electricity utilities in Nairobi and Dar – Kenya Power and Tanzania Electric Supply Co.

Despite Kenya being the largest economy in the EAC bloc, Nairobi accounts for only a third or 32 per cent EADB’s loan book followed by Uganda (31 per cent), Tanzania (19 per cent), and Rwanda with 18 per cent.

The bank’s liquidity ratio stood at 1.67, higher than the self-imposed minimum threshold of 1.33 times the designated liabilities and budgeted commitments that are due in 12 months.

The EADB’s loan portfolio is largely foreign currency-denominated, with the dollar accounting for 79 of loans and advances, Kenya shillings (nine per cent), Uganda shillings (six per cent), and euro (four per cent). “The high level of US dollar lending means that asset quality will remain linked to exchange rate stability,” the report says.

The regional bank draws its funding from other multilateral lenders such as European Investment Bank, OPEC Fund for International Development, German Reconstruction Bank (KfW), and Arab Bank for Economic Development in Africa.

The EADB has shifted away from funding via bonds and borrowing from commercial banks in a bid to cut finance costs and be able to lend at cheaper rates. Sourcing credit from multilateral development banks and other financial institutions provides a stable and cheap source of financing, says Moody’s.

Created in 1967, the bank enjoys diplomatic status hence its property, income, operations and transactions are exempt from all taxation and custom duties within member-states.

A case study to gauge the EADB’s socio-economic impact showed that projects financed by the lender employed about 15,700 people in 2012, and generated $20 million in taxes to member-states. It has about 100 employees.