Opinions of Sunday, 13 September 2020
The headline data concerning Ghana’s capital market does not look particularly enticing as the Ghana Stock Exchange is in its third consecutive year of a bear market. But look beyond those headlines and one sees one of the most vibrant securitized debt markets in Africa.
This should not be particularly surprising for investors and analysts familiar with the structure of business in Ghana – corporate Ghana has always preferred debt to equity as a financing model.
But what will come as a surprise is the sheer number of major new initiatives about to be unleashed by the Securities and Exchange Commission, the country’s capital markets regulator.
Combined they have the potential to transform Ghana’s capital market into a model frontier market which would set the pace for even the older, bigger markets across Africa to emulate.
First of all though, SEC has prudently wiped the old slate clean, commencing wide reaching reforms in the way capital market operators are allowed to conduct themselves.
This has culminated the abrogation of operating licenses of 53 fund management firms under its regulatory purview for a wide range of infractions, some of which had become a new normal in the market despite their illegality.
Inevitably this has cost investors large amounts of invested funds although government is striving to provide some degree of alleviation by refunding a capped sum for each affected investor who had funds under management with a liquidated fund manager.
The next step is to put new regulations in place to prevent the imprudent risk management behavior and in many cases outright malfeasant conduct of the affected market players from being aped in the future by those that have survived the purge SEC executed in 2019.
Most importantly, the ridiculously low minimum capital requirement of GHc100,000 to secure a fund management license is being raised to GHc2 million; instructively though SEC still believes this is not high enough and is considering a further increase to GHc5 million eventually.
At the same time SEC is now rigorously enforcing compliance with key directives that market operators had studiously ignored since 2012.
The new executive management, appointed in 2017 at the beginning of the tenure of the incumbent President Nana Akuffo Addo administration, is led by Reverent Daniel Ogbarmey Tetteh, an accomplished investment banker, fund manager and financial markets analyst.
Importantly, prior to his current appointment, he was a long standing senior executive at Databank, Ghana’s largest investment bank, working under current Finance Minister Ken Ofori-Atta.
Having the finance minister’s confidence and his ear will be a crucial advantage in his effort to transform Ghana’s capital market into one of the most sophisticated and efficient frontier markets in the world.
Perhaps the most crucial enforcement of key regulation that had been ignored for nearly a decade has been that relating to guaranteed returns. Fund managers had been guaranteeing returns to their clients in a manner akin to banks.
Inevitably, the effort to live up to their guarantees pushed many fund managers into excessively risky investment, which ultimately resulted in even the loss of capital invested.
This has been stopped along with several other imprudent – and illegal – types of conduct by SEC’s licensees; or at least those that survived 2019’s biggest purge in the history of Ghana’s capital market.
Now SEC is turning its attention to devising and implementing a plethora of risk management and wider corporate governance directives that will ensure that best practice guides conduct in the market going forward.
The new regulations will stem deliberate financial malfeasance such as connected funding between companies under the same ownership as well as ensuring prudent use of clients investments such as ensuring that prudential limits are adhered to in structuring investment portfolios for clients.
While these steps are out in the open, a host of equally crucial initiatives are being drawn up by SEC, aimed at significantly deepening and widening Ghana’s financial markets, capital, foreign exchange and commodities trading markets all inclusive.
One of these initiatives will introduce derivatives such as futures, forward trading and price hedging into the capital market. Actually this has been on the cards for several years now and has been given legal backing through the Securities Industry Law of 2016, but SEC has sensibly decided that it needs to further strengthen the regulatory framework and operating platforms for spot market trading first.
Besides, in introducing derivatives into Ghana’s capital market, SEC will have to consider the framework being created by the ongoing integration of the various stock markets across West Africa – comprising the Ghana and Nigeria Stock Exchanges as well as the pan francophone West African BRVM and the emergent stock exchanges in Sierra Leone and Liberia.
But there are several other pivotal initiatives that SEC is working on at the same time.
One is the establishment of a domestic market trading platform for foreign exchange trading in Ghana, a new regulatory initiative which could legalize foreign exchange trading on local Ghanaian platforms as early as next year. This would allow institutions to be licensed as dedicated forex market traders, and trade in foreign currencies on domestic Ghanaian trading platforms.
Currently, forex trading is increasingly being done by individuals in Ghana, but only on foreign trading platforms since none exist in Ghana and the activity has neither legal backing nor a regulatory framework. This means individuals in Ghana who trade forex can only do so on foreign markets using forex which they have domiciled abroad.
However, a new initiative being put together by SEC with the consent of the Bank of Ghana would allow the capital markets regulator to license and regulate enterprises as dedicated forex market traders who can carry out their activities on domestic trading platforms.
The capital markets regulatory institution was initially hoping to have a dedicated forex market trading industry up and running before the end of this year but its plans and efforts in this direction have inevitably been delayed by the COVID-19 outbreak.
While BoG has left SEC to fashion out a trading framework it will expectedly make inputs where such trading could affect its monetary policy implementation and impacts.
Interestingly, some foreign financial institutions including some major international banks are already expressing interest in setting up dedicated forex trading subsidiaries in Ghana when the new platform commences and licenses become available.
Emmanuel Ashong-Katai, Head, Policy Research and I.T. at SEC, who is spearheading the rollout of the new initiative enthuses that ultimately it will help strengthen the cedi.
He points out that the impending new platform will keep forex, that hitherto traders in Ghana were trading on foreign markets, within Ghana. Similarly their net trading income will stay in Ghana too as there are legal restrictions on the transfer abroad of forex generated in Ghana.
Just as importantly, as with other financial markets and indeed other types of markets, the more the number of players involved the more liquid the market and the more efficient the pricing, because trading margins would narrow.
In Ghana there is an increasing number of people who trade forex on international platforms, some of them with trading portfolios worth millions of United States dollars or the equivalent in other international trading currencies. However, because the cedi is not a convertible currency these traders can only trade one such currency against another.
But with a local trading platform this will change as traders domiciled in Ghana will be able to trade the cedi against convertible currencies at high levels of trading margin efficiency. This, added to increased forex liquidity, should benefit the cedi’s exchange rate.
Importantly though SEC is planning to license enterprises rather than individuals, ostensibly because the former would result in better regulatory compliance, larger trading volume capacities and better technical trading know-how.
Another initiative being pursued by SEC is the introduction of Crowd Funding, an increasingly popular business financing mode globally. Simply put this will enable small start up and early stage businesses to raise both debt and equity financing from investors in a manner akin to venture capital or angel investing but in a less bureaucratic framework, without the complex rules required by a stock exchange.. In a country where the informal sector is predominant this holds immense potential for raising business finance on behalf of micro, small and medium sized businesses.
While SEC wants to keep it as simple as possible to encourage both would be investors and needy businesses to get involved, the regulator nevertheless recognizes the need to come up with a regulatory framework that would eliminate fraud and other forms of malfeasance, and protect the interests of investors.
To ensure that crowd finance is done professionally, SEC intends to license dedicated companies that will play the roles that investment banks do in large scale financing such as bonds issuances and private equity. As with the forex market trading initiative, the regulator is targeting take off next year when hopefully the COVID 19 pandemic will have subsided.
But perhaps the most impactful ongoing efforts from SEC relate, not to the capital market but the commodities market. This involves enhancing the activities of the recently established Ghana Commodities Exchange.
SEC recognizes that the GCX is inhibited by its small trading volumes , inadequate warehousing capacity to store the agricultural produce that serves as collateral for financing and lack of education and training of the participants along the value chain, particularly the farmers themselves, many of whom are not fully aware of how the GCX works and how they can therefore benefit from its activities.
To get around the problem of small volumes, Ashong Katai suggests that the promotion of farmer co-operatives is the best way to go, since this would aggregate the produce of lots of farmers for each GCX transaction. With regards to warehousing SEC acknowledges that this should be driven by private sector investment by also asserts that government needs to take the lead by setting examples.
SEC is looking to take elements of successful commodity exchanges elsewhere in Africa, particularly Tanzania’s which has proved eminently successful.
Encouragingly though several major international corporations are showing interest in investing into GCX’s activities. These include globally renown investment bank JP Morgan as well as food producers, Kellogs and Tate & Lyle. However such global institutions fret about both the small trading volumes and the inadequate infrastructure.
Both standardization of produce quality and further training of potential participants are needed and SEC is looking at ways to achieve both.
All this means SEC has a lot to chew on. But if the efficiency with which it has gone about regulatory reform of Ghana’s capital market is anything to go by, then it can expected to deliver the profound financial markets transformation it is aiming at.
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