CREDIT RATING,BANKS,BONDS and SEPTEMBER


September 2008 was a good month.At least on the legislative and regulatory front.Two interesting developments that serve to deepen our financial markets occurred.

1.Credit rating regulations Gazetted by the Government.
Banks and other financial institutions can now share information on your payment(defaulting habits).Hopefully it will move to all businesses including your landlord.Any body with access to your credit information will be able to judge how honest you are on your promise to "send the check by Friday".
If it works like other countries it should make it easier for persons with good credit histories to get loans at good terms from their banks.Businesses with good history will find it easier to get supplier credit.
The flip side is that a bad credit rating will make it difficult to even rent a good house-(if ur prospective landlord sees that your score is bad, he may not want your tenancy).

2.Banks allowed to lend to each other using their securities as collateral
This may confuse those who don't deal with banks, how can a bank keep cash but run out of liquidity?Banks are like any business enterprise sometimes they need more cash than they keep at hand.When this happens, they have two ways of raising cash:-

A. Borrow money from the Central Bank (CBK)through REPOs(Repurchase agreements).These transactions involve the Commercial bank using its Treasury bonds and bills as security to borrow from the Central Bank

B.Borrow money from each other via the Interbank market
The new rules add a C option.

C.The new interbank master repurchase agreements.The transactions here are similar to REPOs the difference being that instead of having CBK and a bank transacting, we have a commercial bank to commercial bank transaction the borrowing bank gives securities to the lending bank as collateral for the lending.

Too bad the papers got it wrong and thought that everyone could trade bonds without going to the NSE.CMA came out with a clarification that this wasn't ain't so.