Rating agencies willing to join the upcoming Ethiopian capital market are expected to pool over USD 250,000 if a draft directive crafted by the Capital Market Authority is ratified. The rating agencies also have to be a share company or privately owned company (Plc).
The Ethiopian Capital Market Authority (ECMA) and project office of the Ethiopian Stock Exchange (ESX) are currently preparing a dozen of directives and two regulations aimed at licensing and regulating the upcoming capital market, which is expected to be operational in one and a half years.
About sixteen service providers will be licensed to operate in the capital market ecosystem. The draft directive on “capital service providers’ licensing and supervision” is one of those pieces of legislation drafted.
A credit rating service firm will determine the creditworthiness of a company, a security, or a security issuer based on a predetermined and well-defined rating system or category, according to the draft directive. Since most rating agencies are expected to be from outside of Ethiopia, the minimum amount of capital is also set in US dollars.
Credit rating agencies are rare globally, and there will be few local companies to engage in this highly professional business, according to Yohannes Arega, a senior capital market advisor at ECMA.
Moody’s Investment Services, Standard & Poor’s (S&P), and Fitch Group are the top three credit rating firms worldwide.
Credit rating companies evaluate bonds and other financial instruments before they are made available to the general public and assigned a rating. If a credit rating agency determines that a company can reliably make its payment obligations, they might give it “AAA” rating.
Investors are compensated for taking on risk; therefore, high-interest debt instruments offer a smaller return. But when rating agencies assign a “CCC,” it suggests that the firm might default or is risky, which means that the bond’s interest rate rises.
The directive defines a credit rating service agency as a domestic or foreign entity authorized by ECMA to issue credit ratings. If a foreign credit rating agency submits a full application and all extra papers requested by the Authority, it will process the application within 10 business days.
Three directives from the Authority have been adopted by the Board this week. These were published this week for public review and feedback, including Licensing and Operating Securities Exchanges and Trading Platforms, Capital Market Service Providers’ Licensing and Supervision, and Recognition of Self-Regulatory Organizations’ Directives.
“Basically, we expect all stakeholders and members of the public who aspire to participate, either as service providers, investors, or even issuers, to go through the directives and provide their comments and concerns on specific issues listed in the directives,” Yohannes said.
The Authority will hold a public event within two weeks to review all comments and feedback received. It also looked at the threshold from a variety of perspectives, which will be discussed during the forum.