Africa Finance Forum
Financial rating, this notion that sends chills down the financial markets. Sometimes decried, sometimes extolled, financial rating remains indispensable and seems to have become the pillar of the assessment system of risk cost and return on investment.
Financial rating is the process whereby a rating agency assesses a borrower’s creditworthiness, which is his capacity and ability to meet his short, medium and long-term financial commitments.
There are three types of financial ratings:
- Solicited rating which is requested by the borrower;
- Unsolicited rating which is undertaken by the rating agency whose opinion is not binding on the rated borrower; and
- Mandatory rating which is imposed by financial market regulatory authorities.
Financial rating falls into five credit-risk categories:
- Corporate Rating (commercial and industrial corporations);
- Financial Institutions Rating (Banks, Insurance companies, Pension Funds, Investment Funds…etc.);
- Public Sector Rating (EPN, ESP, local authorities) ;
- Financial Instruments Rating (securitization, derivatives, other financial instruments); and
- Sovereign Rating (country and group of countries).
Although it has existed for more than 100 years, financial rating only started in Africa in the 1990s and is still generally unknown, especially in French-speaking countries. English-speaking countries which are more familiar with this system of assessment that started originally in an Anglo-Saxon country (the United States of America), have culturally and naturally embraced this instrument immediately it was introduced in Africa.
Experience has shown that English-speaking African countries were more inclined to adhere to systems of transparency and good governance. It has also shown that the culture of disclosing public information facilitated the introduction of assessment tools based on the availability of information.
West Africa is hosting three of the four African financial rating agencies: Bloomfield Investment Corporation (2012, Cȏte d’Ivoire), West African Rating Agency (2012, Cȏte d’Ivoire), (Agusto (2001, Nigeria) and Global Credit Rating (1996, South Africa).
Financial rating started belatedly in French-speaking West Africa. However, it has rapidly developed over the last three (3) years due, on the one hand, to the introduction of mandatory financial ratings on the financial market of the West African Economic and Monetary Union (WAEMU) for some players, in particular, bond issuers (excluding countries), companies listed on the Regional Stock Exchange (BRVM) and issuers’ guarantors, and on the other, due to increasing awareness of the importance of the exercise on the part of some corporate officials.
This new regulation, which came into force in September 2011, aims at making the capital market more transparent, efficient, effective and liquid by eliminating the obligation of a 100% first demand guarantee for all issuers who obtain an investment rating at the end of the financial rating exercise.
This 100% first demand guarantee increased the cost of borrowing, thereby making the WAEMU financial market unattractive to some players and inaccessible to others.
Furthermore, it created a system of inconsistency between the coupon cost and the borrower’s creditworthiness.
Prior to the introduction of this regulation the promotion and popularization of financial rating was carried out through training and information seminars within the entire WAEMU zone, in collaboration with the Regional Council for Public Savings and Financial Markets (CREPMF), WAEMU’s financial markets regulatory authority, and the French Development Agency.
In the upcoming months, two financial rating agencies - Bloomfield Investment Corporation and West African Rating Agency – will be accredited by CREPMF.
Despite the Anglo-Saxon origin and character of financial rating, its development within the French-speaking West African financial market is a sure reality.
Listed and unlisted companies had begun to voluntarily submit to this rigorous financial assessment, transparency and good corporate governance exercise even before the introduction of the new financial rating regulation.
This testifies that the WAEMU financial market environment is mature and ready for financial rating, even mandatory rating.
Financial rating is gradually gaining grounds in the financial market culture of French-speaking West African countries. For example, in Côte d’Ivoire, Bloomfield Investment Corporation has, in four years, conducted more than twenty voluntary and solicited ratings for several public and private corporations such as the San Pedro Port, Petro Ivoire, SIMAT, La Loyale Assurances SA, SIR, to mention just a few.
There is no doubt that the assessment system will strongly contribute to the development of the capital market, in general, and to the development of the financial market, in particular.
I have confidence in the evolving maturity of the French-speaking West African financial market with regard to financial rating because market players seem to be ready and regulatory authorities are acquiring efficient means to make the environment conducive to the development of this formidable tool.
This will have a very positive impact on the economic growth of countries of this zone.
Mr. Zeze is the Chairman and CEO of Bloomfield Investment Corporation, an Ivorian company, subsidiary of Bloomfield Financial Group. He acquired an extended and rich experience in financial and operational risk management from very prestigious institutions and organizations such as the World Bank in Washington as Senior Risk Analyst, Institute for International Economics in Washington DC as Projects Director, National Bank Of Detroit Ann Arbor Michigan as Credit Risk Manager, African Development Bank as Senior Country Credit Analyst and Shell Oil Product Africa Regional Credit Risk Manager for West and central Africa. Mr. Zeze is graduated from Michigan with a BA in Political Sciences and Economics and holds a MPA (Master of Public Administration) specialized in financial risk management and strategic planning for sustainable economic development. He also holds a Business Law degree from University of Nantes, France.
Housing finance (HF) in Africa is provided by financial institutions including primary mortgage institutions, development finance institutions, commercial banks and microfinance institutions. It is among the smallest assets in the banking sector, despite the various funding sources. In sub-Saharan African, it represents less than 1% of total GDP, except in Kenya and South Africa where it constitutes respectively 2.2% and 35%.
The weakest link of the mortgage industry is land entitlement. In many African countries, a limited portion of the land is sufficiently titled, limiting individual property ownership. People “own” land but without the title, making the land not mortgageable. The administration vested with land management lack resources and capacity to manage properly the process for creating title and charge over the land. In many countries, the Governments are not giving high priority to land management and titling. The housing policy is not getting resources for its effective implementation to help the mortgage industry grow.
The second aspect is the situation of the capital markets. HF is highly dependent on land management and capital markets development. HF is thus at the intersection of the two spheres, and for it to develop, it requires the development of both sectors. At this point in time, given the situation of the two sectors, it is not surprising to see in Africa a low score for Housing finance but the situation is changing alongside other economic and financial fundamentals in African economies.
Trends in HF
It is discernible that mortgage loans are one of the fastest growing segments of banking products, although they remain the smallest of the financial assets. Many reasons explain this situation. The growing urban population and the burgeoning middle class constitute positive factors that stimulate the banking sector to provide more HF to respond to the needs of the market. This positive trend can be observed in Senegal, Ghana, Ethiopia and Kenya. The main suppliers of funding are the housing finance banks and many other financial institutions.
The last 5 years have yielded positive trends for mortgage in Africa, thanks to the low inflation and low interest rates. The mortgage in many countries was around 12% in 2010. This was the situation for instance in Kenya, Senegal and Mali. Many financial institutions can issue bonds for its mortgage business (for instance Kenya in 2010). Many pan-African banks are building more capacity to provide mortgage loans, as the financing of the housing sector has been earmarked as a strategic objective for the business growth in the coming years.
New agenda of reforms for HF development
How can African Governments help to accelerate and consolidate the positive development trends for mortgages? The response is more reforms in the sector and more financial resources and leadership.
It is obvious that the land management, titling and takeover charge over the land should be done in a professional manner and should send a positive signal to all actors including the financial sector. Improved government leadership and productivity in this sector are fundamental. The land issue is one of the pillars. It requires the development of the primary and the secondary markets in a transparent way. The current situation is a limiting factor for the economic development and the Government is missing an important source of fiscal resources. Land and housing property are generally a niche for taxation.
The capital markets development: Many countries in Africa have implemented reforms to make capital markets a credible source of funding for many sectors including housing. Additional reforms will be needed to speed up the approval of requests for issuing, the reduction of issuance cost, and the enhancement of the level of financial literacy and understanding of all the actors. The secondary market is very important for the development of mortgages in order to make sure that all players can refinance their loans for mortgages in the long term at a reasonable cost. In many countries there are some good examples in this respect, such as the Tanzania Mortgage Refinance Company and Caisse Regionale de Refinancement Hypothecaire for the 8 countries forming the West African Economic and Monetary Union. Nigeria is about to set up a secondary mortgage liquidity fund to support the 100 primary mortgage institutions that are struggling to adjust to the change of regulation and access to liquidity at a reasonable cost.
The Government should promote a single digit mortgage interest rate for all households earning less than USD 500 dollars per month. The biggest issue in Africa is that the current mortgage rates are not affordable in many countries. This policy will have a very positive impact on the mortgage development and poverty alleviation due to the increased activities for the housing sector known for its ability to supply jobs to an unskilled population.
There is a strong correlation between housing development and poverty alleviation. Given the impact of housing development projects on poverty alleviation, international DFIs and Governments should be putting more money into affordable housing. This is one of the best approaches to alleviate poverty in urban and peri urban areas. In addition, the Governments should implement a fiscal policy that gives further incentives to investment in affordable housing. This policy may involve low value added taxation on building materials for low-cost housing, low stamp duties and low income tax.
Affordable housing development is really constrained by lack of housing developers which answer to the requirements such as capital, capacity and available land. There is high demand on risk capital to assist to develop the supply of affordable housing. Shelter Afrique has sponsored the Pan African Housing Fund (PAHF) to help the development of affordable housing.
It is important to assist the Governments and financial institutions to develop their capacity to service the mortgage industry International development institutions should promote adequate reforms related to land ownership such as the project financed by the World Bank in Morocco. This project has been having a transformational impact on the eradication of slums in Morocco and the promotion of HF through an affordable housing program.
The legal framework for repossession and loan collection for housing should be streamlined and the uncertainty on the foreclosure process reduced. This is one of the biggest constraints for the development of housing finance and the real estate business.
The promotion of HF can help Africa generate additional economic growth to the tune of 200 basis points per annum and can be one of the best ways to empower citizens to become active players in the local economy.
Alassane Bâ is the Managing Director of Shelter Afrique since July 2009. Before joining Shelter Afrique he spent 18 years at the African Development Bank. His last position was Division Manager for Industries and Services at Private Sector Development. He contributed over many years to the growth of the private sector operations. He sat in the Board of Directors of Afreximbank and Pan African Infrastructure Fund and was member of Investment Committee of Emerging Capital Partners (ECP).