The Addis Abeba Chamber of Commerce & Sectoral Association (Addis Chamber) has embarked on a pioneering venture to establish the country's first credit rating service, a move many in the private sector see will boost Ethiopia's nascent capital markets. This initiative, a partnership with the Dubai-based International Credit Rating Agency LLC (ICRA Rating), marks a crucial step towards improving financial disclosure for businesses.

The agreement, signed at Dubai's Prism Tower a month ago, represents a strategic partnership designed to leverage the expertise of ICRA Rating.

Under the terms of the memorandum of understanding, the Chamber will take on the responsibility of collecting initial documents and screening financial statements, while ICRA Rating will conduct in-depth evaluations and assign credit ratings. Shibeshi Betemariam, the secretary-general of the Chamber, envisions this partnership as a stepping stone towards the establishment of a full-fledged credit rating agency, aspiring to address the longstanding issue of financial access for local enterprises.

"Most businesses have an issue when accessing finance," he told Fortune.

The move comes at a time when Ethiopia's financial sector is witnessing the genesis of a formal capital market, with the Ethiopian Capital Market Authority (ECMA) recently starting to license various financial market participants. To obtain a license, rating agencies must meet several requirements, including membership in the International Organisation of Securities Commissions (IOSCO), a recommendation letter from their country of origin, and a minimum capital of 15 million Br. Brook Taye (PhD), the director general of the Authority, stressed the importance of a letter of good standing from the equivalent authority in the origin country for acquiring a license.

"We're welcoming qualified operators," he told Fortune.

A credit rating industry that has been both influential and, at times, controversial. Dominated by giants like Moody's, Standard & Poor's, and Fitch, credit rating agencies have faced scrutiny and regulatory pressure following their role in the 2008 financial crisis. The history adds a layer of intricacy to establishing a credit rating system in Ethiopia, demanding rigorous scrutiny, unambiguous laws for accountability and transparency, and sound analytical methods to address systematic risks.

Estifanos Melkamu, a senior legal advisor at the Authority, disclosed that rating publicly traded companies will require a green light from the Authority.

Despite the embryonic stage of the capital market, the need for a domestic credit rating agency is real, according to Yohannes Arega, a senior advisor at the Authority. He warns of the challenges ahead, noting the stringent safeguards and compliance requirements that make the path to licensing a domestic agency steep. However, Yohannes believes that joint ventures might offer a more feasible route, pointing to a potential avenue for overcoming the current lack of local expertise in this sector.

Million Kibret, a business consultant, emphasised the critical balance that must be struck between credibility and stability in the financial markets.

"The balance is essential to maintaining confidence in a financial system that is still in its infancy," he told Fortune. "A sensible tradeoff between these will be crucial."

With its 17,000 members, the Addis Chamber has long advocated for the private sector's interests in the stock market, reflecting a commitment to improving the business environment. Its efforts to establish corporate governance standards through its Institute of Directors further illustrate this dedication.

However, the path towards establishing a fully functional credit rating agency is not without roadblocks, not least of which is the absence of a legal framework governing these entities.

Martha H. Mariam, an advisor to the Vice Governor of the National Bank of Ethiopia (NBE), raised ongoing dialogues to determine whether the oversight of credit rating agencies should reside in the private or public sector, coinciding with a broader review of the Central Bank's regulatory framework.

This initiative comes at a time when the financial sector is recognising the potential benefits of improved credit rating evaluations.

Aklilu Wubet, president of Wegagen Bank, a bank with 27 years of operation, sees the involvement of a reliable credit rating agency as a boon for the industry, potentially enhancing loan evaluations and enabling the provision of non-collateral and project loans. The Bank disbursed 32.89 billion Br in fresh loans last year with a provision for impairment of loans and other assets of 593.66 million Br in the last financial year.

"The importance is self-evident to the financial industry," said Aklilu. "We'll evaluate the compatibility of the service with our current standards."

Ermias Amelga, known for his background in Wall Street and as a businessman, lauded the Chamber's initiative as a bold move towards establishing a robust financial infrastructure. He pointed out the crucial role of credit rating agencies in simplifying complex risks for investors. This feature is well-established in more developed financial markets but notably absent in Ethiopia.


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