Afreximbank, a trade finance institution that spans across Africa, has raised concerns about an “inaccurate representation” from the rating agency Fitch regarding its potential losses. This comes amid scrutiny over the lender’s transparency about the risks associated with loans extended to Ghana and other financially strained countries.
Last week, Fitch Ratings highlighted that the multilateral lender based in Cairo might encounter losses on about $2 billion in loans to Ghana, Zambia, Malawi, and South Sudan unless it is designated as a preferred creditor. The agency also criticized Afreximbank for having “weak risk management policies,” using “flexibilities” in accounting to categorize loans as performing, and facing a “higher solvency risk.”
In a strong rebuttal this week, Afreximbank emphasized that it maintains a high level of financial transparency, adheres to international accounting standards, and is unable to participate in debt restructurings.
Concerns about the loans have intensified following a communication from Afreximbank to bond investors on May 15, insisting that Ghana was “up to date” with its payments.
However, later in May, Ghana’s finance ministry clarified that it had not made payments to the bank for two years, asserting that “no creditor has been treated preferentially.” A letter obtained by the Financial Times revealed that Ghana’s finance ministry requested discussions last month about restructuring $750 million in loans as part of an effort to resolve a prolonged default.
The growing tension revolves around differing opinions among creditors regarding whether Afreximbank is functioning like other multilateral institutions that lend at lower rates for development, or if it has taken on riskier loans aimed at generating higher returns, thus exposing itself to potential losses.
“For the past decade, [Afreximbank president Benedict] Oramah has embraced risks that most multilateral development banks would avoid,” stated Bright Simons, head of research at Imani, a Ghanaian think tank.
“In doing so, he has transformed an obscure institution into a powerful player in African capitals because he offers loans when others hesitate,” he noted. “Yet, this strategy has compromised its reputation as a reliable and conservative multilateral development bank.”
Founded in 1993, Afreximbank is owned by various African governments and institutions outside Africa including China’s Exim Bank. It initially focused on short-term trade finance and primarily lent to private borrowers, particularly in Nigeria and Egypt, which are its largest shareholder nations.
However, over the last ten years, the bank has shifted towards providing direct loans to governments that have struggled to access global bond markets due to elevated interest rates.
Afreximbank’s financial statements for 2024 indicate that only 2.3% of its loans were classified as non-performing as of last year. However, Fitch suggests that the actual rate is over 7%, attributing 2.4% of this to the disputed loans from Ghana alone.
In May, a court in England determined that South Sudan had been in default for several years on loans that constituted more than 2% of Afreximbank’s total assets. The bank secured a ruling to recover $650 million, although South Sudan—one of the poorest countries globally—did not participate in the legal proceedings.
Afreximbank has not commented on requests for further information but has previously indicated it is collaborating with South Sudan on a repayment plan.
Fitch noted that the bank’s ownership structure has induced pressure to expand lending activities, possibly compromising responsible growth strategies.
Last week, Fitch downgraded the bank to one rating level above junk status and warned it might withdraw its investment-grade designation if Afreximbank was included in a restructuring.
Nevertheless, Afreximbank and backers within the African Union insist that, akin to the IMF and World Bank, it should be recognized as a senior creditor and therefore not face losses in any restructuring processes. This week, the bank reiterated that it would not engage in any debt restructuring, referring to the treaty that established it. TDB, a trade-focused lender operating in East and Southern Africa, is also asserting a similar status in its negotiations with Zambia.
However, Simons contends that “no provisions in Afreximbank’s treaty grant it preferred creditor status.”
The bank’s claimed status is facing scrutiny due to the relatively high interest rates it charges compared to other multilateral lenders, and the payments made to its private shareholders. Unlike other multilateral institutions, its government clients often engage through private intermediaries, such as banks, which charge commission fees.
The bank reported nearly $1 billion in profits last year, distributing about $320 million in dividends for 2023, and anticipates its assets will rise to $50 billion this year.
Ghana, which defaulted in 2022 shortly after securing loans from Afreximbank at rates more than 6% above a benchmark rate, is actively seeking to include Afreximbank in its restructuring discussions.
The country previously reached agreements with official creditors to extend $5 billion in debt and restructure $13 billion in bonds, promising not to favor any creditors.
“If Afreximbank is treated as a preferred creditor, it would force other creditors to absorb greater losses to make up for a loan that should not have been issued in the first place,” commented Chris Humphrey, a specialist in development finance at the think tank ODI.
Ghana is required to inform bondholders by the end of the month about its adherence to its commitment for equitable treatment among creditors.
Humphrey observed that Afreximbank’s reluctance to engage in restructuring contrasts with TDB’s approach, which has been more cooperative in addressing Zambia’s 2020 debt default by integrating short-term trade loans that usually have protections.
“TDB does not feel the need to restructure its loans to Zambia but is engaging constructively with other creditors to move past this situation. In contrast, Afreximbank is adopting a more confrontational stance,” he remarked.
A downgrade to junk status would create challenges for Afreximbank, as many of its bonds are held by investors like insurers that typically only invest in investment-grade securities.
Additionally, around one-third of Afreximbank’s funding is sourced from cash reserves of borrowers and deposits from African central banks, which the bank utilizes to support its lending activities. These sources would become sensitive to the impacts of a downgrade.
“It’s a tale of evolving missions for Afreximbank,” remarked one investor. “If you’re aiming for high-cost sovereign bailouts in the most challenging environments, expect your financing costs to reflect that.”
