![credit scores](/resource/image/4444652/portrait_ratio1x1/320/180/d7f641bca8b8ca05eb8789edf3eb5593/wX/credit-score.jpg)
As ratings become common, the models and technology are expected to converge.
| ShutterstockOur Columnists
Premium
Credit rating – finance sector leaders step forward
I had the privilege of moderating the second Africa Summit this week. On hand was a panel of finance sector professionals and leaders.
Vivienne Yeda, Director-General of the East Africa Development Bank, Philip Mulaki from Africa Trade and Investment Development Insurance (ATIDI), Simon Rutega, Mahesh Kotecha in New York, and John Ngumi. Dozens of other professionals joined the conversation.
As an aside, the covid lock down had at least one positive impact. It accelerated video conferencing. Fifteen years ago, government had installed a video conferencing facility at the Kenya School of Government.
You had to book weeks in advance to host one. Today, you can host a global meeting, workshop or summit from the comfort of your office. Some conferencing platforms like Zoom have achieved market dominance.
The webinar discussed the use of credit rating in capital raising and pricing. It was soon clear that current crisis around sovereign credit ratings in Africa may have started off on the wrong foot. Government leaders on the continent and further afield have complained against credit ratings. The latest is the US Secretary of the Treasury.
If you are happy with your credit rating, there is something wrong with you, an expert said. You should be aspiring for better. You ought to figure out what rating agencies are looking for, before you get rated.
One way to do that is to get yourself a ratings adviser. Criticising rating agencies is counterproductive. Credit Rating Agencies (CRAs) have to maintain independence, have very professional approach to rating, and exercise high quality control of the assessment methods.
Rating are critical in accessing capital. They provide a yardstick to assess investment propositions. And a poor rating is better than no rating at all.
Many believe our organizations are AAA. But we should be putting our best foot forward. And while in some areas in financial sector there is common understanding and practice, credit rating is yet to achieve that status. For example, in financial reporting, there is acceptance to adhere to international financial reporting standards.
As ratings become more common, the models and technology are expected and need to converge. Rating agencies are licensed by capital market authorities on the basis of the models they run. However, regulators should tighten regulation, while also expanding the scope and use of ratings.
The experts drew parallels between the current nascent state of credit ratings with the growth of credit information bureaus. Twenty years ago, there were hardly any credit bureaus on the market. Today, lending to individuals and small business would be inconceivable without the bureaus. A similar effort is necessary for credit rating to take hold. EADB and ATIDI are well placed to provide leadership of such an effort.
Getting convergence and widespread acceptance is a long-term prospect. We should use what is available. There are a number of rated entities, including banks and insurance companies. There is an opportunity to rate the many institutions. At the moment though, there is hardly any price differentiation in the domestic market.
Regulators need to make ratings attractive for investors, by creating positive incentives. For instance, if you invest in a rated product you should be allowed to get a bigger slice. Similarly, regulators could also lower the level of capital requirements for banks.
Mandated ratings are taking place in some countries. African regulators could encourage things along by requiring one or two ratings from the institutions they regulate.
We need to localize ratings. The stepping up of African-owned or located credit rating agencies is a welcome development. Methodologies used, local knowledge and their presence on the continent should also result in lower prices, encouraging broader use.
@NdirituMuriithi is an economist