CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

Economics development has always constructed a major concern of most of government in both development and developing countries. In achieving this economic development, the setting up of financial institution is always the first step to be taken having recognized the importance of finance in economic development. The mainstream business of banking enterprise retune banking and practiced by specialist institutions. While these categories of banks share a common role of facilitating the mobilizational conversion of resource into invertible funds they differ in their economic objective and investment policies. Whereas the commercial and merchant banks are propelled and sustained in the investment activities in the drive towards profit maximization for the benefit of a social subgroup comprising shareholders, worker creditors and associated interest.

The African Development Bank Group (AfDB) is a multilateral development finance institution. The AfDB was founded in 1964 and comprises three entities: The African Development Bank, the African Development Fund and the Nigeria Trust Fund. Kenton, Will (2020), [“African Development Bank (AfDB)” (2019)] The AfDB’s mission is to fight poverty and improve living conditions on the continent through promoting the investment of public and private capital in projects and programs that are likely to contribute to the economic and social development of the region. Fund, Green Climate (2016) The AfDB is a financial provider to African governments and private companies investing in the regional member countries (RMC). While it was originally headquartered in Abidjan, Côte d’Ivoire, the bank’s headquarters moved to Tunis, Tunisia, in 2003, due to the Ivorian civil war; before returning in September 2014.

Established in 1972, the African Development Fund started operations in 1974. “The African Development Fund” United Nations Convention to Combat Desertification (UNCCD) 2004, no longer available (2006). It provides development finance on concessional terms to low-income RMCs which are unable to borrow on the non-concessional terms of the AfDB. In harmony with its lending strategy, poverty reduction is the main aim of ADF activities. Twenty-four non-African countries along with the AfDB constitute its current membership. The largest ADF shareholder is the United Kingdom, with approximately 14% of the total working shares followed by United States with approximately 6.5 percent of the total voting shares, followed by Japan with approximately 5.4 percent. The Federal Reserve Bank of New York was designated as the depositor bank for the fund according to telegraphs sent from the U.S. Embassy in Abidjan in 1976. “Unclassified wire to U.S.-Abidjan Embassy” (2013)

The African Development Bank was born after the defeat of the proposed Special United Nations Fund for Economic Development [“SUNFED”]. With the culmination of independence movements throughout Africa, many African leaders looked to the United Nations as the agency to take the lead in financing development projects and programs in Africa. The proposed fund was appealing to African and other Third World leaders, because, as a United Nations agency, the voting power of all members would have been equal. This feature provided a greater degree of influence for the Third World nations than they would have had in the World Bank, where voting power is contingent upon the volume of subscriptions that are drawn. By having equal voting power with their capital exporting country counterparts, African nations would have had a significant impact on the policy and investment decisions of the proposed United Nations fund. Despite the attractiveness of the United Nations proposal, the idea for creating a special fund for economic development was abandoned when the World Bank proposed the creation of a soft loan window for the International Bank for Reconstruction and Development [“IBRD”].

The AfDB’s Effectiveness

In order to understand and explain the AfDB’s effectiveness, especially in reference to African transitional economies, it must first outline the governance structure as it is a serious problem. The AfDB is comprised of 54 regional members, many of whom are beneficiaries of the African Development Fund. Many non-regional (that is, members that are not located in Africa) members hold significant shares, including Japan, the United Kingdom, China, and the United States. One unique factor of the AfDB is that it explicitly limits the power of non-regional partners. However, this paper will argue that the legacy of international institutions as the dominating power in development assistance allows the United States to hold indirect control over many AfDB policies.

Furthermore, development assistance in Africa through the AfDB is actually very small in proportion to other aid agencies, including the World Bank, IMF, UNICEF, and the UNDP. Also, the effectiveness of the organisation according to its shareholder perceptions are among the weakest compared to other aid organisations according to the Overseas Development Institute (Burall, et al. 2007). While there are many reasons for the lack of effectiveness of the AfDB, including insufficient capital growth, poor governance, and unfair competition compared to larger international donors, this essay is more concerned with its loan structures.