The Arab Bank for Economic Development in Africa (BADEA) has just been rated AAA with a stable outlook by the Japan Credit Rating Agency (JCR).
The Arab Bank for Economic Development in Africa (BADEA) is a multilateral development bank (MDB) established by Arab countries (Members of the League of Arab States – LAS) to promote economic development in (non-Arab) African countries. Its three main activities are participating in financing economic development in the African countries, stimulating the contribution of Arab capital in African development, and participating in providing the technical assistance required for development in Africa.
The rating is based on the strong support BADEA enlists from the Arab countries which are its shareholders, the leading role it plays in coordinating Arab countries’ support for Africa, the preferred creditor status it enjoys, its sound financial structure and its ample liquidity. The outlook for the rating is Stable. BADEA undertakes development cooperation programs for African countries under its long-term plan “BADEA2030″ formulated in 2019 and its eighth Five-Year Plan (2020-2024), playing an important role in coordinating Arab countries’ assistance to Africa through participation in the “Arab Coordination Group” – ACG, a consortium of 11 Arab development finance institutions that work together to optimize the application of their resources. It has been receiving strong support from its Arab shareholders as evidenced by the latest USD800 million capital increase it carried out in 2022.
JCR holds that even when geopolitical instability should surface in some of the African countries BADEA lends, impairing the quality of its loan assets, it would be able to maintain its sound financial base backed by its high profitability and the strong support assured by its Arab shareholders.
(2) BADEA’s establishment was agreed upon at the sixth Arab Summit held in Algiers in 1973 and 18 Arab countries signed an agreement on its incorporation in 1974. The Bank began its operations in 1975. Its headquarters is located in Khartoum, Sudan, but due to the deteriorating security situation in the country, the headquarters was temporarily relocated to Riyadh, Saudi Arabia.
The evacuation from Sudan and the operation of the temporary headquarters facilities has been logistically and financially supported by Saudi Arabia, the largest shareholder. BADEA’s financial functions have long been performed by its office in Cairo, Egypt, where some of its headquarter staff have been evacuated. In 2015, lending to the private sector was added to its operations. So far, however, such lending has been limited to two-step loans made to banks in African countries, with minimal direct lending made to private non-financial institutions.
(3) The number of the member countries has remained unchanged at 18 since the signing of the 1974 agreement. The fact that African countries, which are borrowing countries, are not the shareholders of BADEA is a feature that makes it unique among MDBs. As of the end of 2022, Saudi Arabia was the largest shareholder with a 25.7% stake. Other Gulf shareholders include Kuwait (15.7%), the United Arab Emirates (10.7%) and Qatar (8.6%). These four and other high-income Gulf countries support the Bank’s financial base with a combined 62.1% stake. Egypt, a member of the Arab League, participates in BADEA as a shareholder, not as a borrower.
The Bank’s articles of establishment define its mainstay operations as (1) participating in financing economic development in the African countries, (2) stimulating the contribution of Arab capital in African development and (3) participating in technical cooperation required for African development. BADEA, like other MDBs, is provided in its articles of establishment with its privileged protections as an international organization, including immunity from expropriation of assets and taxation, legal and administrative restrictions of member countries, immunity of personnel from lawsuits, and protection of communications. Its long-term plan “BADEA 2030” sets four strategic pillars: (1) promoting infrastructure investment to achieve inclusive growth, industrialization and technological innovation, (2) developing agricultural value chains for empowerment and food security, (3) stimulating trade and private-sector development to support growth and job creation and (4) developing small and medium enterprises. The Bank is committed to implement its long-term strategy “BADEA 2030” in coordination with “AU2063 Agenda”, a long-term vision for the development and progress of Africa as a whole set forth in 2013 by the African Union (AU), a coalition of 55 African countries. As to trade stimulation listed as (3) above, it has been providing loans and technical assistance aimed to promote trade in accordance with the African Free Trade Agreement, which was signed in 2018 by 44 African countries in an initiative pushed by the AU.
(4) BADEA’s capital has been increased several times. Its paid-in capital was augmented by USD800 million through diversion from its reserve most recently in 2022. At the end of the year, its authorized capital stood at USD20 billion, consisting of USD10 billion in subscribed capital and USD5 billion each in paid-in and callable capital. BADEA pays no dividends to its shareholders, but accumulates all its profits as the reserve and puts them into its capital. Its paid-in capital including the reserve stood at USD5.31 billion. Loans (public sector loans and trade finance) totaled USD2.73 billion, accounting for 50.3% of its total assets put at USD5.42 billion at the end of 2022. Cash and investments totaled USD2.58 billion (48% of the total assets). While 90% of its loans were made to sovereigns rated B or lower, investments were put in bonds rated A or higher through asset management companies in Europe and the U.S. BADEA defines the combined amount of its USD5.31 billion capital and 20% of its callable capital pledged by shareholders rated AA or higher as its “Usable Capital”. It has adopted a financial policy to control weighted-average risk assets within the Usable Reserve. Its weighted-average risk assets were USD5.31 billion while the Usable Reserve was USD5.66 billion.
(5) Like other MDBs, BADEA has a track record of debt repayment as a preferred creditor and has not written off any loans since its inception. Its nonperforming loan ratio in terms of a percentage of 180- day delinquent loans rose to about 10% in 2016 but gradually declined later, standing low at 0.6% at the end of 2022. Risk management is conducted in conformity with its Risk Management Framework, which defines acceptable risk levels, through approval of individual loans by its Board of Directors and monitoring by its Risk Management Committee in reference to various indicators such as credit, market, ALM, liquidity and operational risks.
(6) LikeotherMDBs,BADEAisnotprofit-orientedbuthasbeenprofitabletodateasinterestincomefrom lending and investment income from its ample liquidity have exceeded the cost of operations. Despite the low interest rates charged on its loans to African countries, the Bank has made USD126 million in average annual profit over the past 20 years, well supporting its financial foundation. It ended 2022 in a deficit of USD188 million as its investment income had a valuation loss resulting from the global rise of interest rates and fall of equity prices. Its liquidity was ample as it had cash and other liquid treasury investments equal to 48% of its total assets at the end of 2022.
(7) As of the end of 2022, BADEA had no outstanding debt financing. It is considering borrowing euros from the viewpoint of ALM management in providing euro-denominated loans to CFA franc-zone countries in West Africa. It is setting up an EMTN program with expected initial issuances worth about EUR500 million. Borrowing of this scale will not bring any change in its net cash position and is unlikely to significantly change its financial structure.
