Financial Policy Papers

Abstract: The Evolution of the Bank Group Credit Policy 1.1 Prior to the adoption in 1992 of the Country Exposure Policy (Document ADBIBD/WP/92195), the Bank’s lending operations were conducted on the basis of very broadly defined principles rather than on a formal credit policy. These principles were outlined in the Agreement Establishing the African Development Bank (amended in May 1979) which stipulates that: "the Bank should extend lending to borrowing countries paying due regard to the prospects the borrower would meet its obligations on schedule". 1.2 Following the African debt crisis in the late 1980’s and early 90’s, during which several ADB borrowers accumulated significant loan arrears, it became clear that an explicit credit policy to guide lending to borrowing countries and to manage the Bank’s exposure needed to be developed. Consequently, in September 1992, a country exposure policy was adopted by the Bank. The policy outlined detailed standards to guide new lending operations aimed at enhancing the soundness of the Bank’s loan portfolio. Among the new standards adopted was a uniform exposure ceiling for all countries that should not exceed 15% of the Bank’s portfolio. During this period, many of the other multilateral and bilateral lenders to African governments began switching away from traditional loans to grants and highly concessionary funds; the ADB, on the other hand, was less responsive to these circumstances and continued to extend non-concessional loans to these countries. 1.3 In 1993, an Exposure Monitoring Committee was established to oversee the implementation of the country exposure policy. The Committee met regularly from its inception through mid-1994 to review individual country lending strategy with a view to recommending appropriate changes. However, the immediate impact of the new country exposure policy was limited because only few countries were close to the 15% lending ceiling. As ADB loan arrears continued to m