A proposed credit rating methodology for co-operative banks in South Africa / Johan Williams van Huyssteen

When large banks have a shortage of liquidity, they solve the problem by eitherplacing papers in the market, going to other banks, borrowing from other financialinstitutions or making use of its reserves. When entering the market, creditratings facilitate the loan process by providing an indication of the lending banks'risk. However, when South African co-operative banks enter the market forfinances, no rating can be applied as the method for rating these banks does notexist. This, in turn, leads to a slow-down in the loans process and co-operativebanks being charged higher interest rates.The primary objective of this dissertation was the formulation of a credit ratingmethodology, amended from Fitch Ratings and Moody's Investors Service, forSouth African co-operative banks.A literature study was undertaken in order to determine the theoretical aspects ofrating ban.ks as well as providing insight into the management structures of cooperativesand their business practices. A proposed credit rating methodologywas then developed and tested by means of a questionnaire provided to SouthAfrican 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 ofdeparture and followed by the Co-operative Banks Act. This was done in order tofacilitate the understanding for the need of the rating methodology along with therating aspects provided for by legislation, especially regarding the operating andregulatory environment.The developed methodology was found to be adequately suited for co-operativebanks in South Africa (CBSA) and could ultimately assist CBSAs in negotiating interest rates charged when entering the market for liquidity purposes. This inturn could have positive implications in the government's aim to reach the largeun banked population of South Africa.