Credit rating agencies play a vital role in the global financial market, by providing independent assessments of a company’s creditworthiness to investors. These agencies offer opinions on the financial status and ability of entities that issue financial instruments such as bonds, stocks, and other fixed securities to fulfil their obligations. Additionally, as a result of the financial difficulties experienced in the insurance sector and the over-publicized failures of several large life insurers, it has become important to rate the ability of an insurance company to meet claims from its policy holders. Credit rating agencies express their opinions using different rating systems such as AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. Higher ratings indicate a lower risk of default, while lower ratings indicate a higher risk of default, and these ratings play a significant role in determining the cost of borrowing for securities issuers .
Credit rating agencies have come under the scrutiny of regulators all over the world for their role in the 2008 financial crisis. To protect investors, ensure accountability, transparency, and prevent inaccurate ratings, credit rating agencies in Nigeria are required to be registered with the Securities and Exchange Commission (the “Commission”) of Nigeria, in addition to prior registration with the Corporate Affairs Commission under Part A of the Companies and Allied Matter Act 2020.
The Securities and Exchange Commission Rules (“SEC Rules”) outline the functions and registration requirements for credit rating agencies. These agencies are required to provide credit ratings to governments and other entities on debt and equities instruments, collective investment schemes, including other ancillary services. To be eligible for registration, a credit rating agency must demonstrate that it possesses a robust methodology for rating financial instruments, has sufficient resources and qualified staff, and have policies and procedures in place to manage conflicts of interest, protect confidential information, and ensure rating quality. Thus, credit rating agencies are required to file reports of their activities, methodologies and ratings to the Securities and Exchange Commission (the “Regulator”). The reports would enable the Regulator to perform its supervisory role and ensure compliance with approved regulatory standards. Additionally, credit rating agencies must adhere to the code of conduct or ethics issued by the Regulator, which prescribes the need to ensure their functions are performed with integrity, impartiality, independence, and provides guidelines for managing conflicts of interest and maintaining confidentiality of information.
Registration Requirements for Credit Rating Agencies
A company seeking registration with the Commission as a rating agency shall file a duly completed Form S.E.C. 3A, which shall be accompanied by:
- a copy of the company’s corporate documents duly certified by the Corporate Affairs Commission, which includes the memorandum and articles of association (which shall include the power to act as a rating agency); a copy of CAC Form containing particulars of the directors, and the original certificate of incorporation for sighting;
- a copy of latest audited accounts or audited statement of affairs for companies in operation for less than one (1) year;
- the profile of the company covering among others, brief history of the company, organizational structure, shareholding structure, principal officers and detailed information about the promoters;
- application for registration of a minimum of two sponsored individuals, one of whom shall be the chief executive officer and who must possess a minimum of first degree of professional qualification in accounting, economics, statistics or banking and finance with not less than ten (10) years post-qualification experience. The application shall be submitted alongside a minimum of two sets of completed Form S.E.C. 2 to be filed by the sponsored individuals;
- existing or proposed by-laws or rules, guidelines and code of conduct; details of rating criteria, methodology and principles; and an undertaking to promptly furnish the Commission with copies of any amendments to its memorandum and articles of association, certified by the Corporate Affairs Commission, or code of conduct, guidelines, etc, within fourteen (14) working days of such alteration;
- sworn undertaking to keep such records and render such returns as may be specified by the Commission from time to time, and to abide by SEC Rules and Regulations, and the Investment and Securities Act;
- code of conduct for management and staff which must include a provision prohibiting key officers of the rating firm from investing in clients’ shares; an undertaking to disclose to the Commission any shareholding interest of 5% and above of its directors and staff and their relatives in any issue to be rated; a sworn undertaking that undue advantage would not be taken of any unpublished price-sensitive information; and a provision on disciplinary measures for any misconduct or noncompliance by management and staff etc;
- a sworn undertaking that every employee of the rating agency shall display a high standard of professionalism and integrity in the conduct of his business, and not to carry out any rating where adequate, accurate and timely material information had not been obtained, and a declaration that a rating is an opinion and not a professional investment advice;
- evidence of minimum issued-share capital of N150 million and Fidelity Bond representing 25% of minimum paid-up capital.
Other Payments to be made include:
- Filing/Application fee of N50,000 (Fifty Thousand Naira)
- Evidence of Payment of Processing Fee of N200,000 (Two Hundred Thousand Naira)
- Evidence of Payment of registration fee of N 1,000,000 (One Million Naira)
- Evidence of Payment of Sponsored Individual fee of N50,000 (Fifty Thousand Naira) for each sponsored individual.
This list is not exhaustive, and the Commission may require such other documents or payments as it considers necessary for registration.
Currently, Nigeria has only three accredited and recognized credit rating agencies as listed by the Pension Insurance Commission. Recently, Moody’s Investors Service, a global sovereign investment rating agency, downgraded the credit rating of the Nigerian government. The downgrade was attributed to the government’s fiscal and debt position, leading to a decrease in the Federal Government bonds, and the increase in the nation’s sovereign-risk premium. This event emphasizes the significant role of credit rating agencies and highlights the importance of strict regulatory controls around their activities, rating criteria and methodologies. Also, it underscores the need for continuous monitoring and supervision to ensure accurate and reliable credit ratings in Nigeria.
Authors: Ifeoma Ezeribe and Oluchi Mgbenwelu
 Cristina Gumasa, Alexandra Onigaa, Irimie Popaa (2015). Emerging markets queries in finance and business: The rating of insurance companies during the financial crisis. Science Direct, Procedia Economics and Finance 32, 1494 – 1504.
 Bonds rated triple A (“AAA” or “Aaa”) are perceived to be of the highest quality and carrying the lowest level of default risk. However, the probability of default increases when the ratings start to go down. In addition to symbol based ratings, agencies provide an outlook on the ratings, which can be positive, stable or negative or other indications on the likely direction of the ratings such as ‘on review for downgrade’, Publication of the Corporate Financial Institute. What is Default Risk? (2022).
 Council on Foreign Relations. The Credit rating Controversy (2015).
 Section 115.
 In line with the ongoing reforms by the Corporate Affairs Commission (“CAC”), a Status Report can be obtained from the CAC post-incorporation portal containing details of directors, shareholders, secretaries etc.
 Agusto and Co, Datapro Limited and Global Credit Rating are the three verifiable and accredited rating agencies in Nigeria https://www.pencom.gov.ng/list-of-sec-approved-rating-agencies/ accessed on …
 Moody’s Investors Service, S&P Global Ratings (S&P) and Fitch Group are rated the Big Three credit rating agencies.