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.