The Credit Rating Agencies (CRAs) play a major role in the financial markets through the reduction of information asymmetry in the market amongst the Lenders, Investors, Issuers and other Stakeholders about the credit worthiness of companies, state, government and countries. The Securities and Exchange Commission (SEC) in Nigeria regulates the Credit Rating Companies, and set rules in 2012 for investors’ protection in the issuing debt of securities and public issue of shares.
Thus, Rating agencies have become a cardinal part of the global financial landscape. The importance assigned to the ratings of participants of all financial markets cannot be overemphasized and overestimated – it will be difficult for capital markets to function effectively and efficiently without the rating agencies. As financial firms and bond issuers begin to rely more on real-time analytics and data analyses, rating agencies, on which much of the function of the market depends, must also adopt and adapt to new technologies and approaches to understanding the capital market.
Currently, in Nigeria, there are three major players in the Credit Rating industry that are duly approved by SEC to operate in the market. These CRAs are: DataPro Ltd, Augusto & Co Ltd & Global Credit Ratings Co Ltd. All these three CRAs commenced operations as ratings agencies in the early 2000s.
The Credit Rating Agencies’ operations, from inception, have grown significantly over time along with the economy hence the need for alignment with changes in the economy. The impact of globalization on the economy has been manifested through various positive changes and growth trajectory since the early 1970s, along with immense contributions and role of credit ratings agencies. As the global economy grew more complex and capital markets expanded, ratings agencies became more essential to the functioning of capital markets.
In contemporary times, ratings agencies (and the industry as a whole) are faced with the challenges posed by the demand for efficient analysis of large volumes of financial data. As transaction volumes in the bond market have increased exponentially, the demand for ratings and the amount of available data has similarly increased. For ratings agencies, the ability not only to analyze the large volumes of data but to do so efficiently, accurately, and in real-time will dictate their future success and competitiveness.
In order for Nigeria to regain economic stability during and post COVID-19 pandemic period, there is great and urgent need for collaboration and synergy between the public and private sectors with active involvement of the ratings agencies otherwise it will become an onerous and herculean task. Already, industries and global corporations are still being affected as a result of COVID-19 pandemic coupled with the aftermath of its variants and waves.
Despite this, it must be noted that big data along with new methods of analytics can help cushion the effect of the economic downturn. This has proven to be true as increase in human knowledge and learning has always resulted in an increase in economic and commercial activities. Examples abound in the industrial revolution of the 1800s and the digital revolution of the 1970s (Op-ED Contributor., 2020)
Obviously, the possibilities of big data in Information and Communication Technology (ICT) are very exciting and germane for financial institutions (including banks), organizations and ratings agencies. The phenomena of big data and analytics provide necessary opportunities, potentials and leverages to various capital market stakeholders based on their analytical, diagnostic, predictive and prescriptive capabilities. The global big data and business analytics markets was valued at 169 billion U.S dollars in 2018 and is expected to grow to 274 billion U.S. dollars in 2022.
In recent years, rating agencies have placed big data at the centre of their strategy, and are investing heavily in developing their analytic proficiencies. In 2015, S&P Global, then called McGraw-Hill (the parent company of Standard & Poor’s) purchased SNL Financial—a data-driven financial information firm, in order to bolster their data analytics offerings in the years ahead. According to S&P Global 2015 Annual Report, “both S&P Capital IQ and SNL possess strong and sophisticated content delivery platforms”. In addition, “the combined team is now determining how to most effectively consolidate into one best-in-breed product platform” (VuK Magdelinic.,2018)
Chris Iervolino, a research director at Gartner, stated that the ability to incorporate analytic tools directly into financial systems allows companies to turn big data into relevant information. “We can look at and understand more information because we have more data”. He went further to indicate that predictive and statistical methods that weren’t useful with less data are now quite important. As a result of emerging technologies and transformations, the development of more powerful tools that are able to process volumes of data like never before seen in capital markets. These will now allow firms to reduce latency between the completion of a transaction and the enhance their ability to analyze them hence increasing the speed at which this is done on a large scale and will allow firms (including ratings agencies) to derive value from their data more quickly and accurately in a cost effective and operational efficient manner.