financial markets and instruments in ghana

ACF 554 Corporate Finance

Ghana's financial market: classification and description of the key instruments and

institutions under each.

Abstract

This piece of writing seeks to classify Ghana’s financial market whiles describing the key

instruments and institutions under each. It begins with a brief historical introduction of Ghana’s

financial system which underwent a holistic restructuring in the late 80s. It then describes the

financial institutions, the Ghana Stock Exchange, the securities market and instruments. This is

capped by a brief exposé on the central bank. The conclusion emphasises on the performance of

the financial market based on the institutions and instruments.

Introduction

A financial market is a market in which financial assets (securities) such as shares and bonds can

be purchased or sold. One party transfers funds to the financial market by purchasing a financial

asserts previously held by another party.

Ghana’s financial markets and institutions have come through a unique development since

independence from the British.

The financial system of the colonial era was characterized by minimalist conditions in the sense

that the colonial government concentrated on providing a basic currency infrastructure and

banking services for the foreign trading enterprises within the colonial system. The post-

independence era represented the first major attempt to establish a broader financial

infrastructure. This period, also characterized as the period of a centrally planned and closed

economy marked the use of state power to create a broad array of financial institutions. In the

1 Kwesi Banson Jnr |PG4701510


years following independence, the economic and political environment changed significantly.

However, the regulatory structure of the financial system did not change.

Restructuring of the financial market in Ghana

Financial markets have become vital tools for sustaining the economies of developing countries.

Due to this, many developing countries have embarked on a number of financial sector

development programs in mid 1980's in order to revamp their economies. Ghana joined the

bandwagon of development. The country has undergone a process of financial sector

restructuring and transformation in the 1990s in order to achieve emerging financial market

status. The reforms aimed at moving the financial sector from an era characterised by controls to

a market-based regime.

Results of the restructuring

The restructuring of the financial sector resulted in the creation of the financial market in Ghana.

The market in Ghana is made up of the bond, equity, foreign exchange and the derivative

markets. The money market dominates the financial markets in Ghana. The major participants in

the money markets are the Central banks, brokers or discount houses, corporate, banks and other

financial institutions. The money market provides a market for the banks where they can lend

when they have excess liquidity and also borrows when they are in short of liquidity.



Financial Institutions

A financial institution is an institution whose assets are financial assets or financial claims –

stocks, bonds and loans. Financial institutions serve the purpose of facilitating the accumulation

and allocation of capital by channeling individual savings into loans to governments and

businesses. The transactions of financial institutions thus consist of making loans to customers

and the purchase of investment securities in the market place. Financial institutions also offer a

wide variety of other financial services ranging from insurance protection to the sale of

retirement plans and the provision of a mechanism for making payments, transferring funds and

storing financial information. When the institutions, markets and arrangements for transferring

financial assets are put together, we have a financial system

Companies, governments and international organizations issue securities. Such securities are

issued to raise funds for the activities of the issuer. When securities are issued they have to be

traded. It is an advantage to have an organization that brings into contact potential buyers and

potential sellers of securities. This organization is called the Stock Exchange. The Stock

Exchange is a place where securities are traded. The Stock Exchange can be a physical place, it

can be a system of telephone links or as is becoming more common it can be a network of

computers.



Ghana stock exchange

The Ghana Stock Exchange (GSE) is the principal stock exchange of Ghana. All types of

securities can be listed. Criteria for listing include capital adequacy, profitability, spread of

shares, years of existence and management efficiency. The GSE is located in Accra.

Operations

Since its inception, the GSE's listings have been included in the main index, the GSE All-Share

Index. The manufacturing and brewing sectors currently dominate the exchange. A distant third

is the banking sector while other listed companies fall into the insurance, mining and petroleum

sectors. Most of the listed companies on the GSE are Ghanaian but there are some

multinationals.

Although non-resident investors can deal in securities listed on the exchange without obtaining

prior exchange control permission, there are some restrictions on portfolio investors not resident

in Ghana. The current limits on all types of non-resident investor holdings (be they institutional

or individual) are as follows: a single investor (i.e. one who is not a Ghanaian and who lives

outside the country) is allowed to hold up to 10% of every equity. Secondly, for every equity,

foreign investors may hold up to a cumulative total of 74% (in special circumstances, this limit

may be waived). The limits also exclude trade in Ashanti Goldfields shares. These restrictions

were abolished by the Foreign Exchange Act, 2006 (Act723).

There is a 8% withholding tax on dividend income for all investors. Capital gains on securities

listed on the exchange will remain exempt from tax until 2015. The exemption of capital gains

applies to all investors on the exchange. There are no exchange control regulations on the



remittance of original investment capital, capital gains, dividends, interest payments, returns and

other related earnings.

Hours

The exchange has pre-market sessions from 9:30am to 10:00am and normal trading sessions

from 10:00am to 12:00noon on all days of the week except Saturdays, Sundays and holidays

declared by the exchange in advance.

Licensed brokers

Licensed dealing members, or "LDMs" (Licensed brokers) of the Ghana Stock Exchange

include:

IC Securities

Databank Group

Gold Coast Securities

NTHC

Securities Discount Brokers.

The Ghana Stock Exchange comprises of the following

Ghana Stock Exchange Govt. Securities Dealers - 17

Ghana Stock Exchange Registrars – 3

Ghana Stock Exchange Brokers – 18

Ghana Stock Exchange Associate Members - 33



The Securities Markets

The securities market can be divided into different segments based on the

characteristics of the securities being traded or the type of transaction that takes

place in the market or the needs of investors. For example we have Money market

and Capital market. The securities market can also be viewed as Primary or

Secondary market.

Money Markets

The money market is designed for the provision of short-term funds. It is an institution through

which corporations and individuals with funds meet the needs of borrowers with temporal

shortage of funds. A security or loan maturing within one year or less is considered as a money

market instrument. One major function of the money market is to finance the working capital

needs of corporations and provide the government with short-term fund.

Capital Market

Capital markets are designed to finance long-term investment by government corporations and

households. Securities traded in the capital market take more than one year to mature and range

in size from small loans to multimillion credits. For instance, if the government wants to

undertake road construction, it will have to go for a long-term loan.



Primary Markets

Companies can raise external funds through borrowing or issue of shares. If securities are issued

they are sold in the Primary Market. The Primary Market is purposely for trading of new

securities (lPOs) never before issued. That is to say, securities available for the first time are

offered through the Primary Market. The principal function of the Primary market is to raise

financial capital to support new investments in building, equipment and inventory.

Though companies can sell directly to the general public, they usually use underwriters

(investment bankers) who handle the details of the new issue and sale to the investor.

Underwriters normally buy the new issue at an agreed price from the issuer and sell it at a higher

price to the public. Sale through the investment bankers (underwriters) can take the form of "best-

efforts" or agency agreement. Under such agreement, the investment banker does not buy the new

issue but uses his best effort to sell it. Any unsold securities are returned to the issuer.

Secondary Markets

Once an investor purchases new issues, they Change hands in the Secondary Market. Secondary

markets are for existing securities that are currently traded between investors. These markets

create price and allow for liquidity. If secondary markets did not exist, investors will have no

place to sell their investment. Without liquidity many investors will not invest at all. Thus, the

chief function of the secondary markets is to provide an avenue for converting financial



instruments into ready cash (liquid asset). Volumes of trading in securities take place in the

secondary market than the primary market. However, the secondary market does not support new

investment. Broadly, there are two types of secondary markets namely organized exchanges

(Stock exchange) and over the counter (OTC) markets

Financial instruments

Financial instruments can be thought of as easily tradeable packages of capital, each having their

own unique characteristics and structure. The wide array of financial instruments in today's

marketplace allows for the efficient flow of capital amongst the world's investors.

Short term instruments

These instruments mature within a year. Such instruments are normally used to utilise idle funds

to earn a return while considering long – term investments. It is popular among those wishing to

earn something on idle funds in the short – run and conservative investors. Short – term

instruments include savings account, money market deposits, mutual funds, certificates of

deposit, treasury bills and commercial paper.

Saving deposits

They provide the bulk of the funds available to the savings and loan industry. There has been a

shift in deposit mix in recent years from those savings accounts earning the lowest interest rate to

deposits earning higher and more flexible returns.



Certificate of deposit

A certificate of deposit is an instrument issued by a bank or other depository institutions

representing funds placed on deposits at the bank for a certain period of time. It is considered

money market instrument because they can be traded among investors after their initial issue.

Because of this characteristic, they are sometimes called negotiable certificate of deposit. They

are not redeemable before maturity but an investor who purchases it may sell to another investor

before the maturity date.

Commercial paper

It is a term for short – term promissory note issue by large corporations with high credit ratings.

Funds raised from commercial paper are normally used for current transactions; to purchase

inventory, pay taxes, meet payrolls and cover short – term obligations; rather than for capital

transactions. It is traded mainly in the primary maket.

Money Market Fund

It represents a vehicle to buy short-term fixed income security through a mutual fund

arrangement. An individual with small amount to invest may pool funds with others to buy high-

yielding large certificate of deposit and other similar instruments indirectly through the fund.

Money Market Account

It is similar to money market fund. However, institutions rather than mutual funds offer them.

Financial institutions introduced money market account in USA to compete with money market

fund. It pays rate normally competitive with money market fund and allows three withdrawals a

month without penalty.



Treasury Bills

Treasury bills are short-term IOUs issued by the government. It is safe and popular investment

medium for individuals, financial institutions and companies of all sizes. It is one of the best-

patronized short-term investments in Ghana. Most individual, corporations and financial

institutions corporations and financial institutions invest large sums of money in the treasury

bills issued by the Ghana government.

Long Term instruments

Common Stock

Common stocks are equity investment representing fractional ownership in a company. It is the

most important form of corporate stock. It represents a residual claim against the assets of the

issuing company entitling the owner (holder) to share in the net earnings of the firm when it is

profitable or share in the net market value of the firm's assets if it is liquidated.

Preference Shares (Preferred Stock)

Preference shares are technically equity interest in a company but its characteristic is more like

those of a bond. It carries a stated annual dividend expressed as a percentage of the stock's par

value. This characteristic makes it a fixed income security. Preference shares occupy the middle

ground between debt and equity including advantages and disadvantages of both forms of raising

long-term funds.

Fixed Income Securities



They are investments that offer a fixed periodic return to the investors. Some have contractually

guaranteed return, example bond, while others have specified but not guaranteed return, for

example preference shares. Fixed income securities include bonds, debentures and preference

shares.

Bonds

Bond is a debt obligation issued by a business firm or a unit of government that covers several

years usually over five years. Normally, bond represents a long-term contractual obligation of a

firm or government unit issuing it to pay interest to the bondholder as well as the face value of

the bond at maturity. The interest rate (corporate rate) on the bond is paid semi-annually.

Debentures

A debenture is a document issued by a company containing an acknowledgement of

indebtedness, which need not give, though it usually does, a charge on the assets of the company

issuing it. Debenture can be secured or unsecured. It can be secured by a charge upon the whole

or a specific part of a company's asset or it can be secured by a floating charge upon the assets of

the company.

Convertible Securities

A convertible is a fixed income security that can be converted into equity at the option of the

holder. Thus, the holder has a fixed-income security that can be transferred to common stock if

and when the performance indicates that such a conversion will be profitable. The characteristics

of convertible securities are that, while they are sold initially as fixed-income securities receiving



an appropriate rate of interest, the holder is given the option of converting this security within a

given time period into equity shares at a specified price.

Derivative (Speculative) Investment Vehicles

Derivatives are securities whose value is derived from the value of some underlying assets such

as stocks and bonds. The speculative investment vehicles include options, futures and swaps.

An Option

An option is a contract giving the holder the right to buy or sell a stated security at a specified

price, called the strike or exercise price on or before a specified date. Options can be a call or put

option. A call option gives the holder the right to purchase securities at a fixed price during a set

period of time. A put option on the hand gives the holder the right to sell a given number of

securities at a specified exercise price during a set period of time.

Futures

A futures contract is an agreement between two parties to exchange at some future date an asset

for cash at a price that is fixed today. Futures are more liquid in that they are traded on a

regulated exchange.

A swap

It is an agreement between two parties to exchange cash flows at a stated future

times according to the terms of the agreement. Swaps are usually entered into for

currency and interest rates.

Real Assets



Real assets include gold, art works, real estate and land. These are assets that can be touched and

seen. They normally have high unit values. Most of the time they appreciate in value over time

and therefore good for long term investment.

An Exposé on the Central Bank

The Bank of Ghana is the supervisory and regulatory authority in all matters relating to banking

and non-banking financial business with the purpose to achieve a sound, efficient banking

system in the interest of depositors and other customers of these institutions and the economy as

a whole.

The Bank of Ghana is therefore, charged with the responsibility of ensuring that the financial

system is stable to ensure that it serves as facilitator for wealth creation, economic growth and

development.

The functions and responsibilities of the Central Bank as a Regulator are defined in Act 612 and

Act 673 as follows:

To regulate, supervise and direct the banking system and credit system to ensure the

smooth operation of a safe and sound banking system

To appoint an officer designated as the head of Banking Supervision Department, who

shall be appointed by the Board

To consider and propose reforms of the laws relating to banking business



Consequently, the Central Bank exercises its mandate to ensure that:

depositors’ funds are safe

the solvency, good quality assets, adequate liquidity and profitability of banks are

maintained;

adherence to statutory and regulatory requirements is enforced;

fair competition among banks

the maintenance of an efficient payment system

In summary, the laws governing banking operations have provisions regarding licensing,

withdrawal of license, and arrangement for examining and monitoring banks, powers, and duties

as well as protection of the supervisor.

Finally, to enhance the legal and regulatory framework, the Bank of Ghana supervisory functions

are designed to be consistent with the Basle Core Principles for Effective Banking Supervision.

Licensed Banks and other financial institutions

The number of licensed banks in Ghana (February 2011) – 30

Finance houses – 19

Savings and loans companies – 18

Mortgage finance companies – 1

Leasing and finance companies – 7 *

Licensed forex bureaux - 278

* Leasing is a permissible activity under section 11 of the Banking Act, 673 (Act 2004) and

Ecobank Gh. Ltd has merged its leasing company with the main banking operations, though the

license has not been revoked.



Conclusion

The above piece clearly shows that Ghana’s financial system and hence its market has been able

maintain a respectable performance since the first restructuring of the country’s economy took

place in 1987. The pace of development has been encouraging and this give hope that the market

will grow even more. The past two decades gives every player in the financial sector a solid

platform to put in more effort to maintain the pace of development. This is evident in the

institutions and instruments.

References

1. Sam Mensah, Ph.D 1997, Financial Markets and Institutions: Ghana’s Experience. The

International Programme on Capital Markets and Portfolio Management. September 8-

20, 1997. Indian Institute of Management

2. Frimpong Siaw, 2006, Investment Management. [Handout] 2006 ed. University of Cape

Coast, Cape Coast

3. Bank of Ghana official website at: http://www.bog.gov.gh

4. Ghana Stock exchange official website at: http://www.gse.com/gh

5. Ghana Stock Exchange at: http://www. wikipedia.com

6. Financial market available at: http://www.answers.com/topic/financial-

market#ixzz1GNIgrPTN

7. Financial Instruments available at:

http://www.investopedia.com/terms/f/financialinstrument.asp


http://www.investopedia.com/terms/f/financialinstrument.asp

http://www.answers.com/topic/financial-market#ixzz1GNIgrPTN

http://www.answers.com/topic/financial-market#ixzz1GNIgrPTN

financial markets and instruments in ghana

Documents