A proposed credit rating methodology for co-operative banks in South Africa

Abstract

When large banks have a shortage of liquidity, they solve the problem by either placing papers in the market, going to other banks, borrowing from other financial institutions or making use of its reserves. When entering the market, credit ratings facilitate the loan process by providing an indication of the lending banks' risk. However, when South African co-operative banks enter the market for finances, no rating can be applied as the method for rating these banks does not exist. This, in turn, leads to a slow-down in the loans process and co-operative banks being charged higher interest rates. The primary objective of this dissertation was the formulation of a credit rating methodology, amended from Fitch Ratings and Moody's Investors Service, for South African co-operative banks. A literature study was undertaken in order to determine the theoretical aspects of rating ban.ks as well as providing insight into the management structures of cooperatives and their business practices. A proposed credit rating methodology was then developed and tested by means of a questionnaire provided to South African credit unions of different sizes in Gauteng and the North-West. The history of credit unions and co-operative banks was provided as the point of departure and followed by the Co-operative Banks Act. This was done in order to facilitate the understanding for the need of the rating methodology along with the rating aspects provided for by legislation, especially regarding the operating and regulatory environment. The developed methodology was found to be adequately suited for co-operative banks in South Africa (CBSA) and could ultimately assist CBSAs in negotiating interest rates charged when entering the market for liquidity purposes. This in turn could have positive implications in the government's aim to reach the large un banked population of South Africa.