The African Development Bank has stopped disbursement of a $8.2 million equity injection into Shelter Afrique after a whistleblower revealed that the housing financier cooked books, which the Bank relied on to make the investment.

Sources said AfDB has now decided to withhold the disbursements, pending an audit by Deloitte. The Bank is expected to discuss the matter this week and make its position public.

“AfDB’s board will be meeting on November 22 in Abidjan over the matter. But, as it stands, they have stopped the equity investment indefinitely,” a source told The EastAfrican.

In February, AfDB announced that it would inject the money into Shelter Afrique to strengthen its balance sheet. But documents seen by The EastAfrican show that the finance department had stated $38 million as non-performing loans, but the statements sent to AfDB showed $27.19 million. Internal documents showed substandard loans at $14.1 million, but only $2.04 million was disclosed to AfDB.

Shelter Afrique is owned by 44 African states, AfDB and African Reinsurance Company.

A week ago, rating agency Moody’s downgraded Shelter Afrique from Ba1 to Ba3 and placed it under investigation. It said the lender had not succeeded in securing capital committed by shareholders. It said risky credit lines to financial intermediaries also threatened already weak shareholder support.

“The key driver of the two-notch downgrade is the material, structural deterioration in Shelter Afrique’s credit metrics, driven by rising leverage, deteriorating capital buffers and weaker liquidity position. Due to limited increases in capital subscriptions from its sovereign shareholders, and weak profitability lowering its ability to generate capital organically, Shelter has relied heavily on debt to fund the expansion of its balance sheet,” said Moody’s.

“Capital adequacy, as measured by the asset coverage ratio, has halved, compared with when we rated the bank in 2011. Leverage has increased by 1.7x, and the recent loosening of the bank’s liquidity policy coupled with its debt-funded growth strategy point to a structurally weaker liquidity position.”

READ: Bad loans put Shelter Afrique boss in eye of a raging storm

But Shelter Afrique’s compliance, risk and legal director Vipya Harawa said the basis of the downgrade is not the ongoing audit but rather the structural changes at the lender.

“The basis of this downgrade was that our expansion doesn’t ensure sustainability in capital structure and liquidity. It has nothing to do with the current issues the board is investigating,” Mr Harawa said.

AfDB’s revelations come barely a fortnight after documents leaked by the firm’s former finance director Godfrey Waweru alleged creative accounting and subprime lending.

In his whistleblower email to the board, Mr Waweru accused the company’s managing director James Mugerwa of presiding over a regime that was restructuring overdue loans by rescheduling such facilities to appear as performing, effectively understating the volume of toxic mortgages.

Classified as non-performing

“The loans are restructured multiple times to ensure they are not classified as non-performing and are therefore hidden NPLs that are not disclosed,” Mr Waweru’s e-mail to the lender’s financiers reads.

According to the ex-finance chief, the loan impairments are made based on the desired net results, despite a large proportion of the company’s projects having repayment problems and being restructured several times or swapped against assets that do not have a market at the swap rate in a bid to reduce the NPLs and loan impairment charges on the loan portfolio.

Mr Waweru told The EastAfrican that under instructions from senior management, some of the loans that have been non-performing have been restructured more than four times in a bid to hide their non-performance status.

“The company’s true position is that it is loss-making, if we were to capture the non-performing loans as guided by the international accounting standards, without massaging or cooking the books. This has led to a significant understatement of the NPLs and loan impairment charges,” Mr Waweru said.

But Mr Harawa denied that the bank has misrepresented its books.

“I think the finance director got it wrong when he tried to benchmark our reporting with that of the Central Bank. We do our provisions after 182 days and not 90 days as he said in his e-mail. But the board has hired an auditor to look at the books and give us a report,” Mr Harawa said.

The bank has also been accused of turning a blind eye to the conflict of interest of one of the board members, Hardy Pemhiwa, who owned 34 per cent shareholding in Amana Capital, allowing him to do business with the lender without the board’s approval.

“I was asked by the managing director to send $500 million to Amana’s accounts, as Mr Pemhiwa had said he could secure better returns for us. The MD even signed the cheque, but I refused to append my signature. However, after the 2014 Christmas break, we processed the payments and Amana received this amount. I didn’t see any board approval for this, nor did Mr Pemhiwa declare any conflict of interest,” Mr Waweru said.

Shelter Afrique confirmed that the transaction took place but Mr Harawa said only the former finance director and the managing director could give a true position on the matter.

Board’s approval

“I sent an email advising against this transaction. I told the management that they had limits on what amounts they could approve and what the board could. For this transaction, they needed the board’s approval and the director needed to declare his interest. None of them responded to my counsel,” Mr Harawa said.

Shelter Afrique’s board chairman Jean Paul Missi said that they will give Mr Waweru’s allegations the appropriate attention.

“We have appointed a reputable firm to conduct an independent forensic audit on the allegations and are confident that any issues that arise will be handled effectively,” he said.