February 5, 2025
Introduction
In July 2024 in Tunisia, the African Union’s Ministers of Finance and Central Bank Governors, at the African Union Specialized Technical Committee on Finance, Monetary Affairs, Economic Planning and Integration Meeting emphasized the critical role of African Multilateral Financial Institutions[1] (AMFIs) as pillars of the continental financial architecture, and affirmed that the rights conferred on the AMFIs by African governments under the treaties establishing them, including the preferred creditor status, are crucial to financing Africa’s development.
The Ministerial declaration affirmed the importance of the rights conferred on AMFIs by African Governments, including Preferred Creditor Status (PCS) as crucial for reducing borrowing costs and deepening capital markets.[2] The Ministers of Finance and Central Bank Governors therefore urged AU Member States to uphold their commitments to AMFIs and respect their treaty obligations, and further recommended that the AU Assembly mandate the African Union Commission (AUC) to work with the Alliance of African Multilateral Financial Institutions in engaging key stakeholders, including the G20. Treating AMFIs as MDBs with PCS is germane to the capacity of these institutions to continue to fulfil their mandates.
In this essay, I make four core arguments on why AMFIs[3] are multilateral development banks that must be treated as such own their own terms and with benefits – including PCS that allows the AMFIs to function optimally. Accordingly:
i) African Multilateral Financial Institutions should be treated as MDBs with PCS because it is inherent in their lending practice.
ii) African Multilateral Financial Institutions’ rates reflect the costs and risks associated with their role in areas with critical financial gaps.
iii) The PCS of AMFIs is not up for determination merely by the “recognition by other creditors”.
iv) The Reform of the Global Financial Architecture is incomplete without strong regional development banks such as the AMFIs that strengthen the African Financial Architecture.
Preferred Creditor Status
A preferred creditor in the international financial system is a sovereign or organization that is exempt from participating or that has priority in being repaid in debt-restructuring arrangements if a debtor finds themselves in debt distress. PCS is one of the key drivers of multilateral lenders’ financial strength. For international financial institutions with PCS, their loans would not be subject to write-downs during debt restructurings. Accordingly, the loans offered by multilateral development banks (MDBs) would be exempt from restructuring arrangements.
Since its origins, the legal basis of PCS has been questioned. Importantly, there is no legal basis for PCS. Occasionally, the preferred treatment of international financial institutions has also been called into question.[4] PCS is a market practice that is not grounded in contractual undertakings nor in international law.[5] It is widely accepted that MDBs, amongst other IFIs, maintain PCS. The phenomenon of PCS is a market convention as opposed to an express assertion or presumptive recognition by an institution endowed with authority to confer such a status. Thus, the current imposition of international PCS is de facto, or a matter of fact, rather than de jure, a matter of law. For many MDBs, PCS is not expressly embedded in their articles of association or agreement. PCS is thus a derivative of the practices of the relevant MDB and its borrowers and granted by member country shareholders. PCS is one of the key drivers of multilateral lenders’ financial strength.
As children of necessity, AMFIs are pivotal to Africa’s socio-economic development agenda. Today, AMFIs play a critical role in supporting the pursuit of development aspirations that are aligned with the vision of the relevant African states.[6] They have become an indispensable aspect of Africa’s financial architecture. In turn, the African financial architecture is an integral part of Africa’s agenda of continental renaissance and long-standing vision of collective self-reliance.
African Multilateral Financial Institutions’ Preferred Creditor Status Derive from their Establishing Treaties and not “recognition by Other Creditors”
There is a fundamental divergence of views between the perspectives of the AMFI and the IMF on the characterization of PCS. Whereas AMFIs conceptualize their PCS as a consequence that flows implicitly from their establishing treaties and practices, the IMF and other Bretton Woods institutions have a set of criteria that does not capture the essence of the AMFIs. On the one hand, AMFIs argue that they have PCS because of their practices and the treaties that establish them. On the other hand, the IMF argues that PCS is derived from the recognition of third parties, including the IMF and other creditors. AMFIs argue further that their PCS does not derive from third party recognition. The African Union has reinforced the position of the AMFIs that they have PCS.
AMFIs, such as AfreximBank, are a creation of treaties by African sovereign states and offer financing and ancillary services towards accelerating Africa’s development and closing the deep financing gaps in trade and infrastructure. Embedded in the treaty establishing the AMFIs and to enable them to effectively fulfill their mandates, AMFIs were granted special rights, privileges and in most cases, diplomatic immunities to safeguard and protect their assets and operations, including PCS to protect the valuable capital that African countries invested in these institutions. Consequently, calls for “international community – led by the G20 – to clarify the status”[7] of multilateral financial institutions such as the AMFIs miss the mark.[8]
In context, the African financial architecture and AMFIs are Africa’s response to the contemporary global financial architecture with privileged hierarchies that have historical roots in the post-colonial order of the post-Second World War era. Likewise, the claim that the IMF offers concessional loans misses the point of the historical and structural privilege that they enjoy. As such, an ahistorical approach to assessing the PCS status and treatment of AMFIs creates a presumed sense of superiority in comparison to other MDBs. Further, such an approach deepens the privilege and the structural and inequity issues in the current international financial architecture.[9]
AMFI PCS is therefore not derived merely from “recognition by other creditors”. For AMFIs, PCS questions strike at the heart of the existence and operations of the banks to meet their mandates. The establishment of these AMFIs and the granting of the institutions, rights and privileges, including juridical personality, was a sovereign exercise by the state parties to their establishment agreements collectively. In other words, a state party that fails to respect the privileges, immunities and rights conferred on these institutions by their treaties would be in clear breach of its treaty and domestic law obligations, especially when the treaties have been domesticated and incorporated into national law as part of the ratification process.
Flowing from the foregoing, African countries that are involved in debt restructuring should be weary of being encouraged to breach obligations in relation to their AMFI loans. For example, Article IX (2) of the Afreximbank Establishment Agreement (Treaty) provides that the Bank’s property, assets, operations and activities shall be free from restrictions, regulations, supervision or controls, moratoria and other legislative, executive, administrative, fiscal and monetary restrictions of any nature, in participating states. Similar provisions are found in other AMFI treaties. To this effect, participating states that have ratified such Agreements are legally constrained from including the AMFIs and their assets in restructuring arrangements, as such a restructuring would by its very nature, impair and restrict a key asset of the AMFI.
In addition, Article XV of the Afreximbank treaty guarantees that the Bank in its participating states, would enjoy treatment that is at least as favorable and shall enjoy all fiscal exemptions, financial facilities, privileges and concessions granted to international organizations, banking establishments and financial institutions by the Participating States. Consequently, countries that have signed and ratified such a treaty are legally obligated to provide the Bank, treatment that is no less favorable, than that which they provide to any financial institution or international organization, including the World Bank, IMF or any other MDB.
Hence, not according AMFIs equal treatment like other MDBs with PCS is not only dispiriting; it is dangerous, fundamentally anti-development, and risks entrenching African nations’ financial woes.
African Multilateral Financial Institutions’ rates reflect the costs and risks associated with their role in areas with critical financial gaps
As multilateral lenders, AMFIs provide important alternative financing for African countries. The uniqueness of the AMFIs and their lending practices to African states lies in their core alignment with the economic realities and needs of African states. AMFIs understand the economic vulnerability that dominates the financial landscape of African countries and increasingly offer products that respond to the challenges that African states confront.
The AMFI is a catalyst to addressing the deficit of inequitable and unjust governance in the global financial architecture. Beyond the role of AMFIs as bulwarks against imperialist international financial lending practices, the AMFI offers an important springboard for African states to re-order their voice, representation, and participation in a global financial architecture that otherwise does not prioritize their socio-economic development interests. Further, the AMFI shores up Africa’s vulnerability in a fast-increasing unfavourable global economy. The success of the alliance portends the emergence of a potential regionally influential financial institution that does not entrench African states in a path dependency that is dominated by the IMF and the World Bank and entrapment in the cycles of indebtedness. The AMFI offers an endogenous panacea to African-centred solutions for African challenges.[10]
Consequently, while AMFIs may sometimes charge competitive market rates, these rates reflect the cost of funds, and the risk premiums imposed on African countries—not an underlying commercial agenda. In fact, African nations, especially middle-income countries, often face similar or even higher interest rates from non-regional MDBs for less productive projects. Furthermore, these non-regional MDBs frequently impose policy conditions that can be costly and painful for citizens, whereas AMFIs do not impose such conditions, offering more tailored and flexible financing.
AMFIs financing packages[11] are a direct response to the flawed economic and financing models in Africa. AMFIs fill critical financing gaps that other institutions often neglect, and they are uniquely aligned with Africa's development aspirations, focusing on stimulating economic growth and driving structural transformation. This is a strength that must and should be accorded for the development cascading effect they have on the continent. While AMFI’s continue to strengthen, they strive to offer lower interest rates than the market and reinvest their profits to support grants and concessional funding.
The Preferred Creditor Status (PCS) of AMFIs is inherent in their lending Practices and not up for determination simply by the constitution of their Shareholding
In comparison to Eurobond lenders, AMFIs were established specifically to address financing gaps in Africa, particularly where other financing options are unavailable or too expensive. In many cases, AMFI financing is the most affordable option available to financially/economically challenged African countries for specific projects. Indeed, in some situations, it is the only viable option because of the unfair risk premiums imposed on African borrowers by international markets.
Where cheaper alternatives are available, African borrowers will not willingly opt for more expensive African financing. Notably, AMFIs exist precisely because global financial systems often fail to offer affordable, sustainable financing to African nations. AMFIs have been instrumental in challenging these unfair risk premiums and working to create more equitable financial conditions for African countries. Furthermore, AMFIs are designed to operate on a financially sustainable model, with profits being reinvested to further capitalize and strengthen the institutions. This is a necessary approach, given the capital constraints faced by African states.
Punishing the AMFIs for operating profitably and sustainably undermines their ability to serve their intended purpose. Instead, maintaining their PCS is essential to their continued ability to provide affordable, development-focused financing and to reduce Africa’s dependence on more expensive external lenders.
The Reform of the Global Financial Architecture is incomplete without strong regional development banks such as the AMFIs that strengthen the African Financial Architecture
The argument that AMFIs do not provide concessional loans and, therefore, should not have PCS overlooks the structural challenges they confront. Unlike institutions such as the IMF or World Bank, AMFIs are primarily funded by relatively poorer African member states, which limits their ability to raise consistent capital and provide concessional financing on a large scale. If AMFIs had access to the same resources and privileges as these larger institutions, they would be in a better position to offer concessional loans.
Given the barriers that African states confront in raising capital affordably, safeguarding the PCS of AMFIs should be everyone’s priority. Recognizing and maintaining PCS for AMFIs strengthens their ability to attract more favorable financing, which, in turn, enhances their potential to offer concessional lending in the future. This support is crucial for filling development gaps across Africa and aligns with the vision for African financial independence laid out in Agenda 2063.
Despite these challenges, several AMFIs are already making efforts to establish concessional financing windows, even in the face of high financing costs. Continuing to support AMFIs through the recognition of PCS is not only fair but essential for their growth and evolution into the robust financial institutions Africa needs for sustainable development.
Conclusion
Strengthening the institutions of the African Financial Architecture is critical to the financial sovereignty of Africa and its states. The preservation and promotion of diversity in the global financial architecture is essential – safeguarding the full and effective functioning of AMFI’s by not weakening them is critical to such futures.
Given the impact of PCS on the financial stability of financial institutions, characterizing AMFIs as institutions with no PCS portends dire consequences for the African financial architecture. Likewise, it would negatively affect the critical roles that the AMFIs play, especially when African states are confronted with emergencies. Accordingly, the AMFIs’ financial strength may be undermined without PCS. The implications that arise from such classifications impact three core constituencies: Africa states; AMFIs; and continental development projects, especially as envisaged by the African Union Agenda 2063. To be clear, a potential unequal treatment of AMFIs would widen the gap and capacity of the financial institutions in Africa to offer a meaningful alternative to the Western-dominated international financial architecture.
* Associate Professor & Purdy Crawford Professor of Business Law, Schulich School of Law, Dalhousie University. Allan Rock Visiting Professor of Law, Faculty of Law – Common Law, University of Ottawa. Co-Founder and Editor, www.afronomicslaw.org. Co-Convenor: The African Sovereign Debt Justice Network. Email: Olabisi.akinkugbe@gmail.com.
[1] They include: the African Export Import Bank; Trade and Development Bank; Africa Finance Corporation; African Reinsurance Corporation (Africa Re); and African Trade and Investment Development Insurance.
“AMFIs have broad ownership and participation by African states and have had a growing impact on financing and investment in the continent since their establishment. Collectively, AMFIs now hold assets more than US$53 billion, attracting equity investment of over US$8.6 billion, primarily from African countries, to support African growth and resilience. AMFIs are among the leading supporters of African integration through trade, investment, and infrastructure financing to help implement the AfCFTA and Agenda 2063.”
African Union, “Presidential Dialogue on African Union Financial Institutions; Reforms of the Global Financial Architecture; and Launch of the Africa Club”, African Union, February 17, 2024. Online: https://au.int/en/newsevents/20240217/presidential-dialogue-african-union-financial-institutions-reforms-global
[2] Marc Jones, “Smaller African Development Banks Preferred Credit Status under threat, JPMorgan warns”, Reuters, June 17, 2024. Online: https://www.reuters.com/world/africa/smaller-african-development-banks-preferred-credit-status-under-threat-jpmorgan-2024-06-17/; The Alliance of African Multilateral Financial Institutions welcomes African Union (AU) ministers' decisions on African Multilateral Financial Institutions’ preferred creditor status. (2024, Aug 01). http://www.africa-newsroom.com/press/aamfi-welcomes-au-ministers-decisions-onafrican-multilateral-financial-institutions-preferred-creditor-status?lang=en. See generally, Tito Cordella and Andrew Powell, “Preferred and Non-Preferred Creditors”, Journal of International Economics 132 (2021) 103491.
[3] This essay is part of my on-going project on the subject of African Multilateral Financial Institutions. See generally, Akinkugbe, Olabisi D., “African Financial Architecture: Voice, Representation, Preferred Creditor Status, and the Alliance of African Multilateral Financial Institutions” (December 02, 2024). Canadian Yearbook of International Law, Forthcoming, Available at SSRN: https://ssrn.com/abstract=5040741 or http://dx.doi.org/10.2139/ssrn.5040741 (Being the lead essay on the Symposium on African Multilateral Financial Institutions).
[4] See generally, Schadler, Susan. "The IMF’s Preferred Creditor Status: Does It Still Make Sense after the Euro Crisis?" Centre for International Governance Innovation, 2014.
[5] Rutsel Silvestre J. Martha, “Preferred Creditor Status under International Law: The Case of the International Monetary Fund”, (1990) The International and Comparative Law Quarterly, Oct., 1990, Vol. 39, No. 4, pp. 801-826; Martha, Rutsel Silvestre J, 'Preferred Creditor Status', The Financial Obligation in International Law (2015; online edn, Oxford Academic), https://doi.org/10.1093/law/9780198736387.003.0050, accessed 4 Feb. 2025; J. Atsu Amegashie, “On the Preferred Creditor Status of Multilateral Development Banks” CESifo Working Papers 10521, June 2023, https://www.cesifo.org/DocDL/cesifo1_wp10521.pdf
[6] See generally, Adebayo Olukoshi, “In Quest of the Right to Development: Prospects for an African Financial Architecture”, (2022) 63 Development, 153-160.
[7] Humphrey, C. (2025) What makes an MDB an MDB? Southern-led multilateral banks and the sovereign debt crisis. Working Paper. London: ODI Global (www.odi.org/publications/what- makes-an-mdb-an-mdb-southern-led-multilateral-banks-and-the- sovereign-debt-crisis)
[8] Hannah Ryder, “Why are some creditors more preferred than others”, African Business, 2 July 2024. Online: https://african.business/2024/07/finance-services/why-are-some-creditors-more-preferred-than-others
[9] See generally, Ndongo Samba Sylla, (Ed.) Imperialism and the Political Economy of Global South’s Debt, (2023: Emerald Publishing Ltd.)
[10] See generally, Afreximbank, “Afreximbank expands Trade Finance Intermediary Initiative”, December 15, 2020. Online: https://www.afreximbank.com/afreximbank-expands-trade-finance-intermediary-initiative/
[11] For example, see generally, “The Pan-African Payment and Settlement System”, developed by Afreximbank, https://www.afreximbank.com/pan-african-payment-and-settlement-system-launched-by-president-akufo-addo-foreseeing-5-billion-annual-savings-for-africa/; Afreximbank, “Afreximbank to double intra-African trade financing to $40 billion by 2026”, August 9, 2024, https://www.afreximbank.com/afreximbank-to-double-intra-african-trade-financing-to-40-billion-by-2026/.