The African Union is protesting what it calls a mischaracterisation of the financial status of the African Export-Import (Afrexim) Bank, whose credit rating has now been downgraded.

And the African Peer Review Mechanism (APRM), a governance programme of the African Union, said the decision by Fitch to lower the grade of the bank, often known as Afreximbank, was erroneous because it miscategorised credit.

“The APRM calls upon Fitch Ratings to re-examine its criteria and assumptions in this case and engage in technical consultations with Afrexim Bank and other relevant African stakeholders,” APRM said in a statement on Friday.

“Objective, transparent and context-intelligent credit assessments are critical to ensuring fair treatment of African institutions in the global financial system. The APRM reaffirms its commitment to promoting accuracy in the credit ratings.” APRM routinely undertakes independent analyses of rating actions and commentaries issued by credit rating agencies on African sovereigns and multilateral financial institutions.

On June 4, Fitch Ratings downgraded Afrexim Bank by lowering its long-term foreign currency issuer default rating from ‘BBB’ to ‘BBB-’ with a negative outlook.

Fitch justified its decision by citing a perceived increase in credit risk and weak risk management policies based on its estimate that the lender’s bad Loans stood at 7.1 percent.

Fitch’s estimate stemmed from its classification of the lender’s exposures to the sovereign governments of Ghana (2.4 percent), South Sudan (2.1 percent) and Zambia (0.2 percent) as NPLs.

APRM argues that the agency’s estimation that Afreximbank’s NPLs stands at 7.1 percent is significantly higher than the 2.44 percent ratio reported by the lender in its own disclosures.

“The APRM notes with concern Fitch Ratings’ misclassification of Afrexim bank’s sovereign exposures to the Governments of Ghana, South Sudan and Zambia as NPLs. This classification raises critical legal, institutional, and analytical issues which the APRM strongly contests,” says APRM.

“The assumption that Ghana, South Sudan and Zambia would default on their loans to Afrexim bank is inconsistent with the 1993 Treaty establishing the Bank to which Ghana and Zambia are both founding members, shareholders and signatories.”

APRM notes that the multilateral treaty signed in 1993 is legally binding on all member countries, imposing specific legal obligations related to the Bank’s protection, immunities and financial operations.

By virtue of this treaty, loans extended by Afrexim bank to its member countries are governed by a framework of intergovernmental cooperation and mutual commitment, rather than typical commercial risk principles.

“It is therefore, legally incongruent to classify a loan to member countries as non-performing, especially when the borrower states are shareholders in the lender institution, no formal default has occurred and none of the sovereigns have repudiated the obligation,” said APRM.

“Fitch’s unilateral treatment of these sovereign exposures — as comparable to market-based commercial loans — despite their backing by treaty obligations and shareholder equity stakes, is flawed. Doing so reflects a misunderstanding of the governance architecture of African financial institutions and the nature of intra-African development finance.”

According to APRM, Fitch has misinterpreted the invitation extended by Ghana, South Sudan and Zambia to Afrexim Bank to discuss the loan repayments as signaling an intention to default and /or to lift the Preferred Creditor Status.

A preferred creditor is an individual or organisation that has priority in being paid the money it is owed if the debtor declares bankruptcy.

However, Zambia’s Treasury Secretary Felix Nkulukusa said on Friday the country’s Afrexim bank loan is commercial and will be restructured.

"We are still negotiating with them. The debt will be restructured," Mr Nkulukusa told Reuters in Lusaka in response to a question on the status of Zambia's loan with Afrexim bank.

"It's not a concessional loan, it's a commercial loan."

Afrexim Bank has argued that as a multilateral institution like the International Monetary Fund (IMF) or World Bank, which lends on concessional terms, below market rates, it is exempt from taking losses when countries default.

However, some of Afrexim bank's lending is at commercial rates, which is generally in scope for restructuring.

Sources told Reuters in April that the Paris Club group of official lenders has made it clear that Zambia must restructure their debts to Afrexim Bank.

Zambia owes Afrexim Bank $45 million, according to the independent global think tank ODI.

Fitch downgraded Afrexim Bank’s credit rating to one notch above junk with a negative outlook, citing high credit risks and weak risk-management policies.