A major challenge has arisen for the world’s leading rating agencies Moody’s, Fitch and S&P. The African Union has launched an agency that will seriously challenge these giants. It has also been claimed that this agency will be able to represent the continent’s economic reality better than these giants. Both Africa and India have complaints from the world’s major credit rating agencies. Policy makers believe that global rating agencies are unable to understand the improvement in economic fundamentals. Due to which it is difficult to improve their rating. A new agency will be able to assess it better. The question is again very big. Proposing an alternative is easy, but convincing investors to believe it is more difficult. Let us try to understand it in detail.

An organization formed on the basis of complaints

This initiative has not been taken that way by African governments. Moody’s, S&P Global and Fitch have been accused of imposing risk premiums without reason. African governments have been making such accusations for years. This agency was started as there was no other option. African officials argue that these agencies rely too much on traditional criteria and ignore local conditions – such as informal economic activities, household savings and the ability to absorb external shocks.

Dennis Denya, executive vice president of Afreximbank, one of the institutions supporting AfCRA, told Reuters that when lenders do not have a clear picture of the situation, they charge higher prices to compensate for the uncertainty. He argues that Africa is paying the price for the haze created by Western-centric assessments.

The financial consequences of this are huge. A 2023 UN Development Program report estimated that interest payments and loan defaults cost African countries $74.5 billion in rating-related losses. The African Union says the continent’s annual external debt payments are set to rise from $61 billion in 2010 to $163 billion by 2024. Compared to the BB ratings of other emerging regions, Africa’s average sovereign rating hovers around B to B-minus.

These figures do not prove that Africa faced difficulties in borrowing only because of the ratings. Debt levels, shortage of foreign exchange, political instability and history of defaults are also important. But ratings affect the cost and availability of capital, making rating quality economically important.

Better information is the strongest argument for AfCRA

The agency does not aim to give African countries a better rating because the current rating is too tight. Its purpose is to better assess their ability to repay the loan. The extent of the lack of information is staggering. According to the Financial Times, the African Union estimates that less than a quarter of the continent’s approximately $4 trillion capital base is subject to credit rating.

At the end of 2025, there were fewer than 4,000 ratings in Africa, compared to 823,000 in the European Union and over 2 million in the US. According to a Reuters report, 23 African economies do not have a rating from the ‘Big Three’. AfCRA can help grow the home loan market by evaluating borrowers who currently have low coverage. The agency may focus on local currency sovereign and corporate debt, where rating demand may be greater than the relatively small market for foreign currency bonds of African governments.

Mishek Mutij, one of AfCRA’s founders and its chief expert on credit ratings, said the organization should help strengthen African capital markets and channel funds towards infrastructure, energy and manufacturing, the Financial Times reported. Better information could help domestic pension funds, banks and other investors evaluate long-term investments instead of keeping their money in short-term government bills. A higher rating does not automatically mean cheaper credit. Their value depends on whether investors believe they accurately distinguish between strong and weak borrowers.

Reliability testing

This is where AfCRA faces its biggest challenge. If his assessment consistently rates African borrowers better than Moody’s, S&P and Fitch, investors will want to know whether he has identified strengths that were previously overlooked, or whether he has adopted a more lenient metric.

Dennis Shane, a finance lecturer at the International School of Management in Berlin and a former sovereign analyst at Scope Ratings, told Reuters the new agency may start with promises, but ultimately investors look at its track record. He warned that the toughest test of its credibility would come in times of market stress, when its results might not be to one’s liking.

Former Nigerian Vice President Yemi Osinbajo told Reuters that AfCRA must meet global standards and cannot remain just a nationalist agency. In 2022, Moody’s downgraded Ghana’s rating from B3 to Caa1, indicating a high risk of default. Ghana’s Ministry of Finance accused the agency of institutional bias, arguing that it neglected fiscal consolidation and relied on an analyst who had never visited the country. But shortly thereafter, Ghana defaulted on most of its foreign debts. Ghana’s default does not end all controversy over Moody’s practice, but it does illustrate why an agency cannot simply dismiss adverse assessments as evidence of bias.

Extensive research is not entirely convincing for either side. FTA quoted Torsten Schmidt of Germany’s Lebanese Institute for Economic Research, who estimated that African countries were rated one level lower on average because of bias. This is important, but does not explain why many countries remain in the ‘speculative-grade’ (risky category).

AfCRA therefore has to disclose its working methods, explain its beliefs and protect analysts from political pressure. Its independence has to be proven through decisions, especially when the government opposes downgrading. According to an FT report, the AU (African Union) wants the government not to hold any stake in the agency to minimize conflicts of interest.

India’s experience with the ‘Big 3’

India has long argued that the ‘Big 3’ (major rating agencies) recognize its economic strength but are reluctant to translate it into better sovereign ratings. An entire chapter in the Economy Survey 2020-21 focused on whether India’s rating accurately reflects its fundamentals. The survey concluded that this is not the case. The country’s growth rate, ability to respond to external shocks and political stability were considered as evidence that the rating assessment was unusually conservative.

The debate became more important last month when the Japan Credit Rating Agency upgraded India’s rating to ‘A-‘ last month, restoring the ‘A-‘ category after more than 35 years. Earlier in 2025, Morningstar DBRS, S&P and Japan’s R&I also upgraded India’s rating. Still, Moody’s and Fitch kept the ratings at the lowest investment-grade level, while S&P upgraded them last year, the first since 2007.

India’s complaint is not baseless. The economy has grown rapidly over the past two decades, foreign exchange reserves provide protection from external shocks, and the banking system has become more robust. The government’s fiscal deficit has also come down significantly after peaking during the pandemic. On the other hand, agencies have their own logic. Fitch has taken issue with India’s high public debt and interest burden, as well as per capita income, which is low compared to highly rated economies. Faster growth increases debt servicing capacity, but does not remove financial constraints. India’s experience, therefore, shows the limitations of ratings that can lead to undervaluation of structural reforms, and treating growth alone as evidence of credibility is problematic.

The implications of sovereign ratings are not limited to government debt. After S&P upgraded India’s ratings to 2025, the ratings of seven banks and three finance companies were also upgraded. An improved sovereign rating can facilitate access to international capital for domestic companies and financial institutions, although its actual impact on borrowing costs depends on market conditions.

Is this the same problem against BRICS?

BRICS has also been thinking of creating this credit rating agency for a long time. India has also endorsed this, so that the rating can be revised according to the condition of developing countries. However, little progress has been made on this proposal. Its main difficulty is the one that AfCRA is facing right now. An agency set up by countries dissatisfied with its ratings will find it difficult to win investor confidence unless it can prove that its assessments are independent of those countries’ political interests. Neither AfCRA nor the future BRICS agency will be able to force investors to accept its ratings. This acceptance can only be achieved through transparent methods, comparable standards and a track record of justifying difficult decisions.