Regulators and Experts push for Adoption of a Credit Rating culture

Financial sector regulators and experts at the Africa Credit Rating Conference 2024 have called for the adoption of a credit rating culture to save the continent from high interest rates that countries and corporates are paying for debt.

In his opening address, Kenya’s Principal Secretary for Investment Promotion Abubakar Hassan, underscored the limitations of traditional credit rating systems, which often fail to account accurately for Africa’s unique markets and opportunities. The resolution to promote Africa based credit rating agencies aims to address these gaps, allowing the continent to define its own financial narratives, foster increased investment, and offer a more nuanced assessment of creditworthiness that aligns with African economic realities.

“The time has come for Africa to take charge of its financial identity. High quality, Africa based credit rating agencies with deep local knowledge will not only provide fair assessments that reflect Africa’s true economic potential but also pave the way for greater investment and growth across the continent,” remarked the Principal Secretary.

The Capital Markets Authority (CMA) Chairman, Mr. Ugas Mohamed, observed credit ratings can foster informed investment decisions, enhance risk management, and ultimately contribute to Africa’s economic growth. Mr. Mohamed said, ‘’regulation and oversight of credit rating agencies is critical in ensuring transparency and credibility. A streamlined regulatory framework helps enhance the accuracy and reliability of ratings.

By collaborating across borders, African countries can harmonize standards, promote cross-border investments, and fast-track approval processes that are often hindered by regulatory delays. We therefore believe that by fostering a culture of transparency and accountability, we can unlock the full potential of credit ratings to drive sustainable economic growth and development’’.

Also Read: Metropol Advocates for Structured Conversation on Credit Rating in Africa

Mr. Mohamed added that credit rating comes in handy as a universally recognized tool for assuring that an entity will borrow at a fair cost, while expressing CMA’s committed to working closely with industry stakeholders to facilitate a favourable environment and partnership for improved use of credit ratings in Africa.

According to the UNDP Reducing Cost Finance Africa Report 2023, African nations could attract an additional US$15.5 billion in new funding from international investors through a one-level credit rating improvement.

Additionally, 16 economies could potentially save nearly US$46 billion in total interest costs if they had a fair credit ratings system.  The full cost of credit rating idiosyncrasies in Africa is estimated to be US$74.5 billion in excess interest and foregone funding for the countries,” reads the report.

Currently, 22 African countries lack credit ratings from international rating agencies, presenting a significant market opportunity for the new breed of Africa-focused rating agencies.

Africa based CRAs are better positioned to understand the unique domestic contexts across Africa, providing more relevant and detailed ratings compared to their western based counterparts.

The high costs associated with maintaining ratings from western based agencies limit access to credit ratings for many entities. Africa based agencies can serve as affordable alternatives, filling this gap.

African based CRAs will also provide Environmental, Social, and Governance (ESG) scores and foreign direct investment ratings—services urgently needed to support the development of domestic financial markets in Africa.

Western based credit rating agencies use dollar risk to rate companies who do not even trade in dollars.”. “Further data must be given the same interpretation. For instance, Argentina, which has defaulted many times still gets a better rating than Africa countries who have never defaulted!” said Mr Ndiritu Muriithi, the managing director of Ecocapp Capital and former Laikipia Governor, whose county was one of the five to be credit rated during a bond issue.

DataPro Nigeria Managing Director Abimbola Adeseyoju noted that for decades, African nations have often found themselves evaluated by westernbased credit rating agencies that may lack a comprehensive understanding of regional markets, leading to overly conservative or inconsistent assessments.

“This often results in limited access to affordable financing, discouraging investment, and stifling economic expansion, added Mr Sam Omkoko, the Group CEO of Metropol Corporation, which has operations in East Africa.

Simon Rutega  of Diaspo Capital Uganda said fair rating of African countries would level the playing field for African countries in global financial markets, fostering a better understanding of regional economic climates and empowering African nations to drive sustainable development.

The promotion of a credit ratings culture will proceed with collaboration among member states of various economic blocks, central banks, financial regulators, and private-sector stakeholders.  It will enhance better utilization of the Tripartite Free Trade Agreement and the continentwide Africa Continental Free Trade Area, both operational.

“African investors such as pension fund manager are keen to use rating”, and rating models should not penalize African companies with perception of high risk based on low sovereign ratings,” said Geoff Odundo from CPF.

The conference will be an annual event to be held across the continent.