EADB in yet another huge loss

Bad loans continued to batter the East African Development Bank, which posted a second straight loss for the past fiscal year as investors held on to money they had promised to advance the Bank for on-lending.

Five months behind schedule, the EADB annual financial report was quietly released last week, showing a loss of $8.79 million after a $13.5 million provision for bad loans.

This loss is just $70,000 less than the $8.86 million loss that the Bank posted in 2007, shocking markets that had seen a profitable operation in the preceding three years.

In that year, the Bank provided about $20 million to cover bad loans, many of which were blamed on political influence in approval, and weak supervision.

The Bank hardly raised any new funds for on-lending during the year in the face of plummeting investor confidence that is partly attributed to the poor financial health, but also due to litigation issues that currently oblige EADB to pay $100 to a borrower in Tanzania.

Uganda’s Finance Minister Syda Bbumba who seats on the Bank’s Governing Council told The EastAfrican that litigation liabilities capable of sinking the institution have had the worst impact on investor confidence.

First, EADB had not yet received the much anticipated $80 million line of credit from the African Development Bank (ADB), a year after it was expected.

Hidden bad loans

When The EastAfrican exposed the Bank’s poor financial health last year, it reported that AfDB had indefinitely suspended approval of that line of credit after suddenly learning that EADB had been suffocating with bad debts away from the limelight. EADB’s 2008 financial report stated that discussions to finally get money from AfDB were still ongoing.

Secondly, the report stated that the Bank was still negotiating a long standing deal with the European Investment Bank to engage directly in local currency facilities, yet a representative from that Bank had told journalists at EADB’s headquarters in Kampala in 2007 that the deal was almost done.

Equally, EADB is still waiting for $90 million promised under a recapitalisation programme by the East African Community Member States who own the Bank.

When the Member States agreed to recapitalise the Bank to this magnitude in 2007, Kenya, Uganda and Tanzania were to contribute $30 million each, although this adjusted to $22.5 million when Rwanda joined the Bank.

Besides the current ugly figures on EADB’s books, the Bank has litigation issues that could easily sink it.

Early this year, the Appellate Court of Tanzania ruled that the Bank pays John Lamba, a borrower $100 million in a legal battle that has lasted over ten years, a development that has lowered the rating of investor confidence in EADB.

Uganda’s Finance Minister Bbumba said, “Investors were waiting to see how that case would go, and what the way forward would be, otherwise the member states are committed to the Bank’s survival.”

Since The EastAfrican exposed EADB’s financial woes, management has always shied away from explaining what was going on at the Bank, and what strategies they had in place to resuscitate the ailing lender.

EADB has three main sources of funds for its operations namely; contributions from its owners who are the EAC Member States, investment from institutional investors such as the AfDB, and collections from loans already given out.

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THE $100m AWARD ‘TIME BOMB’

Early this year, the Appellate Court of Tanzania ruled that the East African development Bank pay a businessman, John Lamba,  a staggering $100 million after a legal battle lasting more than  a decade.

Mr Lamba was granted a loan of SDR (Special Drawing Rights) equivalent of $3 million to purchase machinery for a business tender.

The bank lent the businessman $4 million in 1994 but terminated the loan midway after what it claimed to be unclear use of the money and its recovery.

At one point, Mr Lamba was not repaying the loan and the bank sought court redress.

The businessman countersued the bank and was awarded $3 million.

The bank noted in its annual report of 2007 that it was involved in a court case challenging an award of $61 million against it. The case had been ongoing since 1994.

The bank then filed a petition to set aside the award but this was dismissed by the High Court in June 2007 on the grounds of limitation.

Legal experts at the East African Law Society urged the EAC member states who own the Bank not to pay the money.

If the court’s judgment is maintained and the award given, the case has the potential of bringing down the bank given its poor financial health.

The Bank, which plays the threefold role of lender, advisor and development partner of the member-states of the East African Community, provides a range of products and services tailor-made for the region’s development.

The currency value of the SDR is determined by summing the values in US dollars, based on market exchange rates, of a basket of major currencies — the dollar, the euro, the Japanese yen, and the pound sterling.

The SDR currency value is calculated daily and the valuation basket is reviewed and adjusted every five years.

According to the EADB Act 1984 (as amended by the Finance Act 2005), its assets are safe from confiscation until a final judgment has been made against the bank by the final appellate court.