Unlike the loans from a commercial bank, ADF loans are largely interest-free and repayable over very long periods of time (50 years), with a 10-year grace period. The loans only carry a service charge of 0.75 percent per annum on outstanding balances, and a commitment fee of 0.50 percent per annum on undisbursed commitments. Countries at a moderate or high risk of debt distress, who therefore have reduced repayment capacity, receive part or all of their financing in grants. Also, in the 1970s and 80s, the ADF was small in size, only lending out limited volumes. As a result, the level of reflows (loan repayments) currently being received is not sufficient to provide a substantial amount of new financing to meet the continent’s development needs, reason why the Fund still needs to be regularly replenished. However, going forward, the volume of reflows will increase, and a number of countries are making progress in their economic and social development such that they are expected to graduate from the ADF window to the ADB. This will help the ADF to become the revolving (self-financing) fund that its founders intended.

Since its establishment in 1972, donor countries replenish the Fund with additional resources every three years. The Governors of the donor countries (currently 27) each designate a representative; these representatives are called the ADF Deputies. The ADF Deputies, Bank Management and four observing Regional Member Countries (RMCs) participate in three to four large meetings which take place in various locations over the course of approximately nine months. Together these constitute the replenishment process. During the meetings, the participants review the way the ADF’s resources have been spent over the past three years, and discuss a range of issues such as the development results achieved, the Fund’s long-term financial prospects and capacity, the policy framework as well as the operational priorities for the coming three years. At the final meeting the donors make their pledges for new resources. For every replenishment, a Mid-Term Review takes place approximately 18-20 months after the replenishment entered into force. The Mid-Term Review serves as a monitoring and accountability mechanism that allows the Fund to report on its progress and the ADF Deputies to monitor and if necessary, adjust core policies and procedures. The annual allocation of ADF resources to eligible RMCs is a six-step process. First, resources for the Regional Operations (RO) envelope and the Fragile States Facility (FSF) are set aside. For the ADF-12 cycle, UA 1,164 million (i.e. 20 percent of total available resources) were set aside for RO and UA 764 million were set aside for the FSF. Second, all countries are granted a minimum allocation, set at UA 1.67 million per year or UA 5 million per cycle until ADF-12. Third, the remaining resources are allocated to eligible countries based on annual assessments of country circumstances using a Performance Based Allocations (PBA) formula. Fourth, country-specific financing terms (loan, grant, or loan/grant combination) are determined using the agreed Joint World Bank-International Monetary Fund Debt Sustainability Framework (DSF). Fifth, debt relief to eligible countries under the Multilateral Debt Relief Initiative (MDRI) is deducted from beneficiary countries’ allocations, while donor resources provided to compensate the ADF for foregone reflows are re-allocated to all ADF-only countries on the basis of the PBA. Finally, all allocations that fall under the minimum of UA 5 million for the ADF cycle are topped up to reach that level.

Like most other Multilateral Development Banks (MDBs), the African Development Bank Group established a Performance-Based Allocation (PBA) system for allocating ADF resources based on a methodology that strikes a balance between the policy and institutional performance of its eligible RMCs and their development needs. During the ADF-13 negotiations, options for improvements to the PBA system for determining national country allocations have been proposed to ADF Deputies. While maintaining an undiminished focus on performance, including in the field of governance, and preserving the simplicity of the system, the objective of these options was threefold: (i) to align the allocation methodology with the Fund’s strategic and regional focus; (ii) to ensure a meaningful engagement with recipient countries through country allocations; and (iii) to strengthen the PBA framework for fragile states. Adaptation of the Bank’s PBA system has contributed to its consolidation and recognition by RMCs as a transparent and relevant approach for calculating PBA allocations. However, since Africa and the Bank have experienced major changes since ADF-11, the Bank Management deemed that the system should be adjusted in order to reflect these changes – an approach in line with the practice of other MDBs, which have also adapted their respective PBA.