The growth and challenges of the financial market in Ghana


A financial market according Brealey etal (2004) is a market in which financial assets such as shares and bonds can be bought or sold. One party transfers funds to the financial market by purchasing a financial asserts previously held by another party. Largely financial institutions aid this type of transaction. A financial institution is an institution whose assets are financial assets or financial claims e.g. stocks, bonds and loans. Financial institutions serve the purpose of facilitating the accumulation and allocation of capital by channelling individual savings into loans to governments and businesses. The transactions of financial institutions therefore consist of making loans to customers and the purchase of investment securities in the market place. They also offer a wide range of other financial services such as insurance protection and managing pension funds. In addition they provide a mechanism for making payments, transferring funds and storing financial information.

Financial market theories

Several theories have emerged in the field of financial markets. Irving Fisher (1906, 1907, 1930) was one of the early pioneers in this field. In his works ‘Nature of Capital and Income’ (1906) and ‘Rate of Interest’ (1907) he argued that all capital is ‘circulating’ capital and that, all capital is used up in the production process, and thus a “stock” of capital K did not exist. Rather, all “capital” is, in fact, investment. This assumption did not go down well with other experts likes Friedrich Hayek (1941). He argued that how Fisher could reconcile his theory of investment with the Clarkian theory of production, which underlies the factor market equilibrium.

Harry Markowitz (1952, 1959) also did not see eye to eye with Fisher and so came out with what became known as the theory of “Modern Portfolio Theory”(MPT. Markowitz argued that investors try to minimize risk while striving for the highest return possible. According to him investors will act rationally, always making decisions aimed at maximizing their return for their acceptable level of risk. The theory emphasized the importance of portfolios, risk, the correlations between security and diversification. His work changed the way people invested. It actually shows us that it is possible for different portfolios have varying levels of risk and return. It is up to each investor to decide how much risk they can handle and then allocate their portfolio according to this decision. Prior to Markowitz’s theories, earlier studies placed emphasis on picking single high-yield stocks without any regard to their effects on portfolios as a whole. Markowitz’s portfolio theory became a stepping-stone towards the creation of what become known as the Capital Asset Pricing Model. (CAPM)

Samuelson and Mandelbrot later introduced the “Efficient Market Hypothesis” (EMH): They agued that if markets are working properly, then all public information regarding an asset will be channelled immediately into its price. If price changes seem random and thus unforecastable it is because investors are doing their jobs: The investment theory that states that it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, this means that stocks always trade at their fair value on stock exchanges, and thus it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Thus, the crux of the EMH is that it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. (http://envy/

Restructuring of the financial market

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 is no exception to this new wave 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. The government of Ghana as part of the structural adjustment programme launched the Financial Sector Adjustment Programme (FINSAP) to address the deterioration problems in the financial sector. Years of mismanagement and government interference in the administration of credit rendered most banks uncompetitive and technically insolvent.

As part of the restructuring, monetary policy reforms was instituted and market for securities was created for monetary policy purposes. In 1986 a weekly auction in treasury bills was introduced. Again in 1988 Bank of Ghana bills was introduced to take care of excess liquidity in the system especially in the rural areas and also to provide an avenue of investment for banks. Around this time, there had been schemes (e.g. SAF) to allow government to put its house in order and to move away from borrowing from the banking sector. The central bank of Ghana shifted gradually from a direct system of monetary controls to an indirect system that utilized market-based policy instruments. As part of the process, the Bank of Ghana rationalized the minimum reserve requirements for banks, introduced new financial instruments, and open market operations for liquidity management. (Bank of Ghana Consultation Paper October 2007).

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. Unfortunately the money market dominates the financial markets in Ghana, bringing with it all the problems associated with it. 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.

The central bank also uses the money markets to manage liquidity in the financial system as a whole and also ensuring stability in the banking system. When there is too much money in circulation, it escalates the rate of inflation leading to high interest rates and consequently making the markets unstable and unattractive to investors. In order for the central bank to ensure stability, it issues more securities in the money markets in order to reverse the situation. (West Africa Magazine, 23 Sept 1996)

The growth

The bond market

One remarkable achievement of the restructuring is creation and growth of the bond market in Ghana. According to R E Bailey (2005) a bond is a contract that commits the issuer to make a definite sequence of payments until a specific time. He further explained that bonds are special forms of loans, which is commonly an agreement between a borrower and a lender (R. E Bailey- 2005 p282.) The bond market in Ghana has shown a tremendous improvement since the first trading of Ghana Stock Exchange Commemorative Registered Stock of 1990. These bonds were a 5-Year debt instruments issued to provide a foundation for active bond trading on the newly created Ghana Stock Exchange. This was followed by the by HFC dollar Housing Bond Series. The government’s aim of developing the bond market in Ghana cannot be over emphasis. Every attempt was made to sustain the market. In recent times the government inundated the market with forty-eight, 2, 3 & 5-year bonds worth a little over GH¢1 billion. This acts as boost to the primary market and was described by the GSE as ‘a significant landmark in the history of the Exchange’.

The government’s listings enhanced the bond market in Ghana and also showed the government’s commitment to the development of the bond market. As of December 2006, total outstanding government bonds stood at GFC 2,400 bn (USD 260 mn). Another major boost to the market was the listing of Standard Chartered Bank’s three year Medium Term Notes worth ¢350billion as well as preference Shares. The introduction of government of Ghana’s golden Jubilee bond in 2008 also signified a major transformation in the financial markets as well. This 5-year bond was listed in a bid to enhance the secondary trading on the market and to ensure liquidity. This has been viewed as a positive development in the market. (Bank of Ghana Consultation Paper October 2007)

Finally one other major boost to the bond market is the issuing in October 2006 of cedi dominated Africa Development Bank (AfDB) Bond. This is a two year bond linked to the Ghanaian cedis and its worth GHC 414.9 billion. The AfDB is reported to have plans of issuing cedi denominated bonds on the Ghanaian market. The purpose of this issue is to provide long-term local currency financing to support development projects. According to AfDB report this would be done by the means of direct project lending as well as lines of credits to financial institutions. Such a transaction simultaneously aims to deepen the bond market in Ghana. (Africa Development Bank (AfDB) report 2007)

This remarkable achievement of the market continued way into the later part of 2007. GSE described 2007 as the “golden” year for Ghana’s capital market including the Ghana Stock Exchange. According to GSE reports Market Capitalization shot up by 22.38% to close 2006 at ¢112,415.68 billion from a previous value of ¢91,857.28 billion in 2005. Volume and value of shares traded were 98.29 million shares and ¢476 billion respectively as against 81.40 million shares valued at ¢464 billion recorded in 2005. Trading in listed bonds recorded values of ¢1.6 billion compared to ¢0.1billion in 2005. The report went on to say that in 2007 secondary trading on the floor of the Exchange saw, a tremendous improvement over the recent past where secondary market trading of government securities, which were done over-the-counter through a network of primary dealers, saw a tremendous improvement.  The volume of shares traded rose by 193% from 98million in 2006 to 287million in 2007, the value of total shares traded rose from GH¢47.60million to GH¢140.71million. Also as of March 2007, the GSE had some 32 listed companies, with a market capitalisation of approximately GHC 112 trillion (USD 12 bn). (GSE Review 2006)

With the above achievement not withstanding this could be regarded as insignificant compare to the market capitalisation of the London Stock Exchange (LSE) where listed companies of the FSTE 100 as at 2006 must reach the threshold of £1.9 billion. And also the six biggest companies of the FSTE100 as at 2006 were each valued at over £60 billion giving and combined market capitalisation of £360 billion. Also a look at the ownership structure of equities on the GSE indicate that with the exception of 9 equities (out of the current 22), non-resident foreign investors (NRF) own more than 50% of the total shares issued. These NRF are usually institutional investors who want to immunise losses in their investment portfolios by investing in emerging markets where returns are usually higher than that of their local markets. As a result, a greater part of returns on the GSE accrue to foreign investors.

The derivative market in Ghana

A derivative instrument according to (Glen Arnold 1998) is an asset whose performance is based on (derived from) the behaviour of the value of an underlying asset (usually referred to simply as the underlying). The most common underlying are the commodities (e.g. tea pork bellies), shares, bonds, share indices. Glen Arnold explained that derivatives are financial contracts, which do not represent ownership rights in any asset, but have their values based on the value of some other underlying commodity or other asset. This underlying variable can be referred to as underlying asset. These may include crude oil, bond, equities, exchange rate, interest rate gold, wheat, just to mention a few. Usually, derivatives are contracts to buy or sell the underlying asset at a future time, with the price, quantity and other specifications defined in the present. Contracts are binding for both parties or for one party only, with the other party reserving the option to exercise or not. Derivatives contracts include futures, options, swap, forward rate agreement (FRA), and forwards. Derivatives are traded in organized exchanges as well as over the counter (OTC derivatives). (Glen Arnold1998)

Ghana has a fairly new derivative market, which is developing steadily. The swap was introduced in 1997. At its inception it had only CAL merchant bank and Barclays bank of Ghana engaging in Forward Rate Agreements (FRA). Ashanti Goldfields Company Ltd. also used options, futures and FRA to hedge against price fluctuations in gold on the commodity market. For example Ashanti Gold sold 4.1m ounces forward at an average of $432 an ounce and also sold call options covering 1.1m ounces to expire over 5 years at an average strike price of $459. Total hedging position of 5.4 represented less than 2.5 of its gold reserve. (Glen Arnold, 1998) The situation is differently today with more companies involved in the derivative market.

According a Bank of Ghana report (Bank of Ghana WP/BOG-07/02) the derivative market would improve the capital structure and profit-making ability of the commercial banks, as well as corporate bodies in Ghana. It would strengthen the effect of monetary policies and absorb more international capital into the country, thus accelerating the economy’s future growth prospects. Derivative contracts provide an easy and straightforward way to both reduce risk (i.e. hedging), and to bear extra risk (i.e. speculating). Derivatives could also be used by equity investors to serve as protection against risk (i.e. insurance against price volatility) in the market. With the establishment for instance credit derivatives market in Ghana, whose primary purpose is to enable the efficient transfer and repackaging of credit risk that otherwise would have been borne by commercial banks and other entities. In their simplest form, credit derivatives could provide banks and other users with a more efficient approach to replicate in a derivative form the credit risks that would otherwise exist in standard cash instrument. In their more exotic form, credit derivatives can enable the credit profile of a particular asset or group of assets of participating banks and other end-users to be split up and redistributed into a more concentrated or diluted form that appeals to the various risk appetites of investors. (Bank of Ghana reports 2007 WP/BOG-07/02).

The equity market

Government and Institutional shareholders dominate the equity market. For example, as of 2003, four of the six bonds listed on the Ghana stock exchange belonged to the Home Finance Company and the remaining two belonged to the government. Also in 2007, two of the three shares offer on the Ghana Stock Exchange belonged to the Government. The remaining one belongs to Ghana Star Resources. The only right issue for the period was offered by Ghana commercial bank, which is owned by the government. For the market to expand government must encourage more private participation just like any market in the developed world.

The size of capital market in Ghana in the 1990s in terms of instruments traded and the number of participants was small relative to that of other developed markets. However the market has leap frogged from its embryonic state since its creation into a force in the sub region. From 2000 onwards there were significance increase in trading on GSE. A study conducted by IMF in 2006 revealed the stock market under performed in the first 4 years of its establishment. In the mid 1990s the story was different. In 1994 the stock market capitalization in proportion to GDP reached a record peak of 35 percent. This, according to the study is close to the world average of 38.2 percent. (I MF Working Paper 2006 WP/06/201)

Major players on the markets

Comparatively the equity and the bond markets in Ghana are small with less foreign or private participants. The major players in the capital markets are the government, investment banks and Corporations. The bond market is dominated by corporate and government bonds. Currently apart from the government bonds the other bonds available on the market are the corporate bonds from Standard Charted, Barclays bank and Home Finance Company. Governments plan to lift restriction on borrowing by metropolitan and municipal authorities (AMA, KMA & TMA) and also to launch their own bonds on the market to fund their medium and long term financial needs would be a plus to the market. This would create access to cheaper and long-term funding for these local authorities.

Besides the proposed revision of the SSNIT law to allow other private pension funds to compete with SSNIT is likely to boost the bond market if it is implemented

The challenges

Investor confidence

The above achievement not withstanding, fluctuations in interest rates, high rate of inflation and instability of the cedi, have made it difficult for traders to predict the long- term effects of the capital market and as a result find it difficult to either invest or borrow from the market. According to Bank of Ghana report, for the fifth consecutive month, headline inflation went up from 12.8 percent in January 2008 to 13.2 percent in February 2008.This was attributed to price increases in the first two months of the year. This increase the report said is driven by surges in food prices and rising crude oil prices. (Bank of Ghana Monetary Policy Report: Vol. 3 NO. 2: 2008 1)

This condition one would argue flies in the face of the argument put forward by Samuelson and Mandelbrot in their “Efficient Market Hypothesis” (EMH): They are argued that when markets are working properly, then all public information regarding an asset will be channelled immediately into its price. If price changes seem random and thus unforecastable it is because investors are doing their jobs: The investment theory that states that it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, this means that stocks always trade at their fair value on stock exchanges, and thus it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices

Unpredictability of the market

The capital market in Ghana is small in terms of instruments traded and the number of participants relative to that of the UK. Fluctuations in interest rates, high rate of inflation and instability of the cedi, have made it difficult for traders to predict the long- term effects of the capital market and as a result find it difficult to either invest or borrow from the market. An evaluation on the real return on the stock exchange by the Bank of Ghana revealed “the total annual returns on stocks listed on the Ghana stock exchange have followed an undulating pattern since 1991 falling every two years and rising every two years”. (Bank of Ghana report)

Price forecast

Unstable Prices has been the bane of the market over the period of its existence. Prices of goods and services are so volatile. The same can be said of interest rates, inflation and foreign exchange rates. These conditions make its very difficult for any meaningful forecast or prediction for share prices thus reducing investor confidence in the market. Interests on government securities on the money markets are higher than securities on the capital markets such as bonds. Even though Samuelson and Mandelbrot in their “Efficient Market Hypothesis” (EMH): argued share prices are unforecastable and that stocks always trade at their fair value on stock exchanges, many investors would want to be sure of where they put their hard earn money


For the derivative market to thrive it requires strong legal systems for enforcement of contracts. The legal system in Ghana could not be said to have the capability to enforce such contracts. Aside of this there is also the lack of enough financial regulation to ensure the disclosure of adequate information by participants in the capital markets. There is also not enough information available to investors to make investment decisions about the markets. These unfavourable conditions create lack of investor confidence.

Positive changes


One big boost to the financial market is the re-denomination of the Ghanaian cedi in July 2007. Expert predicts this would strengthen the financial market in Ghana. This is because it would reduce high transaction costs and also reduce the inconvenience and high risks involved in carrying loads of currency for transaction purposes. It would further ensure compatibility with data processing software and the strain on payments system, particularly Automated Teller Machines (ATMs). Above all it would reduce the difficulties in maintaining financial and statistical records. (Ghana News Agency report 2008)

Foreign investors

Non-resident foreign investors can now hold more than ten percent (10%) of any security listed on the Ghana Stock Exchange. Some few years ago they were only allowed a limit up to ten percent. For the first time in the non-resident foreigners are permitted to invest in money market instruments of a tenor of three or more years. For instance non-resident foreigners are allowed to invest in the Government of Ghana’s listed 5-Year Bond due December 2011. Again non-residents are also allowed to maintain foreign currency accounts with local banks, which can be credited with transfers in foreign currency from abroad or other foreign currency accounts. These are very positive changes that will go a long way to boost the market

Investment taxation

Another positive development is a new regulation, which offers a temporary exemption on capital gains on securities listed on the Ghana Stock Exchange. This exemption would be in place till the end of 2010. Venture capital companies Ghana have been offered a 5-year tax holiday. Financial institutions investing in venture capital subsidiaries may deduct 100% of their equity investment from their taxable income for the year of investment.


The market in Ghana has down tremendously well for the last few decades is it robust enough to withstand the shocks from external factors such as the slow down of the USA economy as well as the credit crunch across the globe. What of fluctuation in oil price prices? Some few months ago crude oil prices breached the US$130 per barrel. Though the crude is currently trading $48 per barrel there indications that this could go higher because of the cuts of crude production by member countries of OPEC.

Also indications on the world market show that food prices are rising and are causing souring inflation as well as instability in developing economies. UN’s Food & Agriculture Organisation (FAO) report has predicted higher food prices may prolong as demand from developing countries and production costs rises. The report was also concerned about the increasing use of crops for bio fuels. If these problems persist for a long period of time it would likely ruffle the market.

Credit: Francis Kwaku Egu

Source: GHP

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