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Financial guarantee guide

Role of External Credit Assessment Institution in African Banking Systems


Financial integrity and solvency are crucial aspects for investors and financial partners. External Credit Assessment Institutions  (ECAIs) play a main role by providing scientific and independent ratings for regulatory purposes in banking markets, guiding market participants.

An External Credit Assessment Institution (ECAI) is an independent entity accredited by a market regulator, specializing in evaluating the solvency of companies and/or states, as well as their ability to repay debt.

Key Ratings from ECAIs:

Credit ratings can range from AAA, the highest, to D, the lowest.

  • AAA (Triple A): The best rating, indicating excellent solvency and very low default risk.
  • AA (Double A): High solvency, slightly below AAA, with very low default risk.
  • A (Single A): Strong solvency, with a bit more risk.
  • BBB (Triple B): Adequate solvency with moderate risk.
  • BB and B (Double B and Single B): Lower solvency with increased default risks.
  • CCC, CC, and C (Triple C, Double C, and Single C): Very low solvency with high default risk.
  • D: The lowest rating, indicating business default.


These ratings, often supplemented with plus (+) or minus (-) signs to indicate nuances, are essential tools for investors, lenders, and financial institutions to assess and compare risks associated with various debt issuers. They help investors make informed decisions.

ECAI Ratings and Credit Risk Weighting in Africa:

The rating assigned by an ECAI, recognized by market regulators as the central banks adhering to the Basel Committee’s prudential principles, plays a crucial role in the regulatory context. This evaluation allows the guarantee institution to offer banks the opportunity to calculate their Risk-Weighted Assets (RWA) according to the regulatory requirements defined by the regulator.

The independent rating from the ECAI serves as a reliable reference to quantify the level of risk associated with the guarantee institution’s commitments. By using this rating in RWA calculations, banks can adjust their financial exposures appropriately, ensuring strict compliance with regulatory requirements . This enhances the transparency of the process and contributes to prudent risk management in the financial sector.

Calculation of Credit Risk Weighted Assets (RWA):
  • The weight assigned to each exposure depends on its category and credit quality, determined by a fixed coefficient, an ECAI rating, or a consensus classification from Export Credit Agencies (ECA).
  • Credit Risk Weighted Assets (RWA) are calculated by multiplying the amount of the risk exposure by the weight determined based on these criteria.
Categorization of Exposures:

Balance sheet exposures and off-balance sheet commitments are distributed across various categories, including sovereigns, public entities, multilateral development banks, financial institutions, corporations, retail customers, residential and commercial real estate loans, non-performing loans, high-risk loans, and other assets. This approach aims to establish a rigorous classification of credit risk exposures, promoting transparency.

This directory of different risk categories and the nature of transactions, compiled by many regulators, indicates the Equivalent Credit Conversion Factor (ECCF) percentages for each type of transaction. This classification provides a clear guide for risk assessment based on the specific nature of financial commitments.

Recognition of External Credit Assessment Institution for Prudential Purposes by African Regulators:

Use of External Ratings:

For many regulators, financial institutions have the freedom to use evaluations provided by ECAI to calculate the levels of risk associated with their financial commitments. This approach allows institutions to leverage external expertise in credit risk assessment.

ECAIs Recognized by African Central Banks:

Most African Central Banks identify recognized ECAIs to evaluate the financial exposures of institutions. In addition to the primary big four rating  agencies, namelyStandard & Poor’s (S&P), Dominion Bond Rating Service (DBRS), Moody’s Investors Service, and Fitch Rating Services, there are the ECAI regulated by market authorities. This selection highlights the quality and reliability of accepted external evaluations.

The regulators specify, as is the case with BCEAO, for example, that the recognition of an ECAI can take two forms: direct or indirect.

Direct Recognition:

In the direct recognition process, the regulator assesses the compliance of the ECAI accreditation application submitted by the Rating Agency, based on criteria of the rating methodology used, the independence of the Rating Agency, access to information and transparency, communication of information about the rating system, resources, and credibility of the Rating Agency.

Indirect Recognition:

Regarding indirect recognition, the Central Bank accepts ratings assigned by an ECAI recognized for prudential purposes by a competent banking authority of a third country applying prudential regulations at least equivalent to its own. In this case, a non-objection opinion from said authority is sought prior to the recognition of the ECAI.

It is noteworthy that Rating Agencies accredited by Central Bank systems adhering to the Basel Committee can also be considered eligible ECAIs.

In summary, these processes aim to regulate and frame the use of external evaluations from ECAIs in determining credit-related risks, establishing recognition criteria, specific ECAI choices, and clear guidelines on recognition procedures. This approach aims to ensure consistent use of evaluations and avoid selective choices for weighting advantages.

Case Study: A3- Rating of ETC - Export Trading Cooperation.

ETC’s A3- Rating:

The A3- (investment grade) rating awarded to ETC attests to its financial strength and prudent risk management. This rating is granted by an ECAI, Modefinance, in accordance with Regulation (EC) No. 1060/2009, ensuring a transparent evaluation in line with European rules.

The recognition by the entire European System of Financial Supervision (ESFS) of ECAI Modefinance, confirming the relevance of ETC’s rating in the European financial landscape. ESFS consists of the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA).

Use of ETC’s Public Rating:

The use of ETC’s public rating can influence how a bank weights its Exposure at Default (EAD). Indeed, the bank can classify this rating based on the default risk indicator and adjust the risk exposure weighting accordingly in the calculation of regulatory capital.

ETC’s rating can, in fact, be used for regulatory purposes in banking markets whose central bank system adheres to the Basel Committee’s prudential regulation. Its resulting long-term weighting is 50% in Euro and, according to available correspondence tables, up to 80% depending on the relevant African currency.

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