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Opinions of Saturday, 18 September 2004

Columnist: Glimeti, Bernasko

Financial Markets In Ghana: What, Why And Where Now?

Abstract: The importance of financial markets for the development of a country's economy cannot be overemphasised. For this reason, many countries have embarked on a number of financial sector development programs since the mid of the 1980's in order to revamp their economies. For example Chile, 1980-1986, Bangledesh, 1980-1996 and India. India's Financial markets are now developed that most firms in the UK are moving there. For this reason, the question that needs asking is, "WHAT IS THE POSITION OF GHANA'S FINANCIAL MARKET, WHY IS IT AS IT IS AND WHERE IS IT GOING (THE FUTURE)?

Key words: Financial Markets, Efficiency, Competition and Innovation



Financial markets are mainly made up of money markets and the capital markets. Out of these markets exist other markets like the derivative markets, foreign exchange markets, the bond markets, the equity markets and their institutions and operational instruments.

There are both domestic and international capital and money markets. Transactions in these markets are mainly on wholesale basis. Due to different regulations and economic developments of different countries, there are different market structures, pattern of growth and different instruments traded in these markets. Usually the developed countries such as the United States, the United Kingdom and Japan have fully fledged financial markets than developing countries like Ghana and Nigeria.

The financial markets in Ghana are made up of the bond markets, equity markets, foreign exchange markets and the derivative markets which just started in the late 1990's.The money markets dominate the financial markets in Ghana. The size of both the capital and money markets in Ghana is small relative to that of the UK for instance. The dominance or larger size of the money markets is due to the volatility and unattractive nature of the capital markets.

Prices of goods and services, interest rates, inflation and foreign exchange are all not stable in Ghana. Furthermore, interest on government securities on the money markets are higher than securities on the capital markets such as bonds. For example, the poor performance of the one year government bond issued on the stock exchange in 1990 was far below the yield on treasury bills, which was in excess of 30% at that time.

An evaluation on the real return on the stock exchange by the Bank of Ghana revealed that "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". (Souce: Bank of Ghana website)

Again, the Cedi was 90 Cedis to US$1 in 1983. By 1993, 720 cedis was equivalent to US$1" and toady it is 8600 cedis against the US$1 and 12,400 against the pound sterling (

The above factors cumulatively have made investors prefer to invest in high interest rate and risk free short- term securities where they can get their money back easily.

The main cedi money markets or instruments traded are the short and medium term government debt instruments (91 day treasury bill, the 182 treasuy bill and the one year note) issued weekly through banks, brokers and discount houses. Commercial papers issued by companies through the discount houses, 30 Days REPO, call money and the inter- bank markets. The 91day government bills is the traded instrument in the money markets and it is also the benchmark for setting the interest rate. The major participants in the money markets are the Central banks, brokers or discount houses, corporate, banks and other financial institutions.


The UK money market is fully developed and large relative to that of Ghana. Apart from the sterling money markets in UK, equivalent short ? term markets in other currencies also exist in London as a consequence of London?s role as a major international financial centre (the Euromarkets).

All the instruments or money markets traded in the Ghana money markets are similar to that of the UK except that the REPO market is gilt REPO market in the UK and it is also the primary market. The UK government?s three and six months treasury bills are issued to the banks every Friday and sold through auction. It is similar to that of Ghana but just that discount Houses take part with the banks in the auction.

Because the UK markets are well developed and involved a lot of international investors and borrowers (Eurocurrency markets) relative to that of Ghana, there is a high degree of allocative, operational and informational efficiency.


The above factors have resulted in a high degree of competition and use of high technology in the UK markets. The above factors are due to the high liquidity and stability of the UK markets in terms of changes in foreign currency, interest rates, inflation and ability of the market to withstand shocks relative to that of Ghana. For example, in 1990 the average annual rate of inflation was 37.3% rose to 59.5% 1995 and fell again to 46% in 1996 in Ghana. The UK inflation rate have never half any of the figures above. Also refer to the diagram below for the changes in the rates of inflation from 1991-2003 in Ghana:


The banks in both UK and Ghana use the money markets for their assets ? liability management and liquidity mainly through the use of the inter-bank, certificate of deposit and the REPO markets. The money market provide markets for the banks where they can lend when they have excess liquidity and also borrow 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 and vice-versa. The Central Bank also use the money markets to perform its fuction of lender of last resort.


As a result of investors interest in the money markets as explained above, the equity and the bond markets are small with less foreign participants in Ghana. The major capital markets or instruments traded are debt instruments such as debentures, different types of preference shares, bonds and ordinary shares (equity). The major players in the capital markets are the government, investment banks and Corporations. The bond market is dominated by corporate and government bonds. 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.

The Ghana stock exchange is the main secondary market for the capital markets. The capital market 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.

Couple with the above factors is the fact that, since independence, there has not been any credit rating agency in Ghana. As a result, domestic investors find it difficult to get information to assess the credit worthiness of borrowers. Also, until 2003, Ghana had not been rated by any international credit rating agency like Moody?s international service. As a result, Ghana could not issue bonds in the international markets. Foreign investors also could not have confidence to trade in the capital markets.

Conversely, the UK capital markets are rated by international credit rating agencies, the rate of interest is stable and the rate of inflation is also low. The legal system is efficient to enforce contracts couple with the presence of quality financial regulation to ensure the disclosure of adequate information by participants in the capital markets. As a consequence, both international and domestic investors have confidence and enough information to make investment decisions about the markets. This accounts for the large number of both domestic and foreign firms in the UK capital markets with its associated numerous financial instruments relative to that of Ghana. See the table below:

Number of firms in UK and Ghana (Listed Companies)

Year 1995

Country Domestic Foreign

UK 2078 525

Ghana 15 0

One foreign bank from Tanzania joined the Ghana Stock Exchange in 2002


Keith Pilbean; Fianace and Financial markets (1998)


Ghana Stock Exchange (

However, one must not lose sight of the fact that there have been countries with almost all the above conditions but have had problems with their financial systems as noted by (Stiglitz, 1998). "Some of the worst industrialised country crises in the last decade occurred in Finland, Norway and Sweden among the most transparent countries in the world. By contrast, Germany has not had a major banking crisis recently, despite the fact that German corporate governance is so complicated and information so scarce that most German firms cannot, or at least choose not to satisfy the listings requirements for the New York Stock Exchange" (Stglitz; 1998, p.1).

Due to the greater number of firms in the UK there is a high degree of competition resulting in innovation with the use of high technology in the UK capital markets. For instance, where as trading on the London stock exchange which serves as the major secondary market for the capital markets is screen based and quote most stock on continuous basis by market makers, trading on the Ghana stock exchange established in 1990 to expand the secondary market for the capital markets, had only 24 members in 2002 and is floor based (Some changes expected to be made now). It is based on the auction trading system and the settlement period is T +5. As a result, there is high efficiency providing speed in the pricing, clearing and settlement with less default in the UK capital markets relative to that of Ghana. The greater number of firms in the UK is also partly due to the recent changes in financial regulation in the UK which allows easy entry.

Changes in demographic factors in favour of the old in the developed markets (UK) have attracted fund managers such as pension funds, insurance companies, mutual fund and unit trusts into the UK capital markets. This has also contributed successfully to the large size and different financial instruments being traded on the London capital markets compared with that of Ghana. Though the revised Social Security and National Insurance Trust (SSNIT) permits other private pension funds to compete with SSNIT in Ghana, this is at its infant stage in.

Couple with the above factors is the availability of different derivative markets and instruments such as special purpose contract, exotic derivatives, financial options contracts, financial futures contracts and forward rate agreements in the UK. These instruments or markets assist both investors and borrowers to manage their exposures to exchange rate risk, default risk, settlement risk and interest rate risk.

Conversely, the derivative market has just begun in Ghana. The swap was introduced in 1997. Two banks CAL merchant bank and Barclays bank of Ghana are the only banks that engage in Forward rate agreements (FRA). Few firms including Ashanti Goldfields Company Ltd. also uses options, futures and FRA to hedge against price fluctuations. The under- development of the derivative market is due to the poor legal system to enforce contracts and unavailability of skilled personnel. The small number of financial instruments traded in Ghana is also a contributive factor for the lower trade of derivative instruments in Ghana.


A number of changes have taken place in the financial markets in Ghana with the aim of ensuring eficiency in the financial system and the banking system in particular.

One major change or development that has taken place recently is the establishment of the Home Finance Company that has brought about a great change in the loan portfolios of banks in Ghana. Since the introduction of Banks in Ghana, their loan portfolios have consisted of short- term facilities granted to their customers who were mostly international traders. But since the mid 1980?s, most of the banks have started to expand their loan portfolios by granting mortgage facilities to customers. In order to provide a secondary markets for the banks in this direction, the Home Finance Company Ltd. was established in 1987 to provide secondary mortgage finance (SMF) to the banks.

"The SMF scheme is designed to enable Decree 225 banks (foot notes) to grant mortgage facilities which can in turn be sold to Home Finance Company to improve the liquidity of the participating banks" (source:T.A Anin pg 115.)

The SMF scheme apart from providing liquidity, also helps the banks generate more income and also help them diversify their risk portfolio of assets. Secondly, it also enables the banks to grant long- term loans and reduce their risk exposures to default. Thus it can be said that, the SMF scheme provides the banks with the opportunity to manage their asset-liabilities and liquidity efficiently thereby preventing failures in the banking system.

In addition to the above, until 1992 the discount houses remained the main institutions providing intermediary function (secondary market) between the local banks and the bank of Ghana. The Banks could only buy or sell securities to the discount houses. They provided the daily liquidity needs of the banks. They were the only institutions that served as the primary market for the Bank of Ghana and secondary market for the commercial banks and other institutions for government of Ghana stocks and bonds, bank of Ghana bills, cocoa bills and bank acceptances. In 1992, there was a great change when the wholesale market was established to enhance competition in the secondary market for these instruments. Under this scheme, the banks are now allowed to deal directly with the Bank of Ghana through the establishment of the REPO MARKET. The scheme also encouraged the establishment of the inter - bank market to compete with the discount houses for short -term funds. In addition, selected brokerage firms have also been allowed to participate in the weekly wholesale auction.

The consequence of the above institutional changes has been an increased competition in the money market and led to the development of new instruments like the REPO in1992. This new change and development has provided a means for the banks to manage their liquidity better than before because they can now trade directly with the bank of Ghana. They can also trade among themselves in the inter-bank market, brokers, and the discount houses. They now have a more lager and better primary and secondary money market where they can easily borrow and lend when they are in short of funds or have excess liquidity. This is important as it reduces bank failures and systemic risk as a result of commercial banks important role in the payment system.

In addition to the above, in order to further increase the size of the secondary markets for the capital markets, the Ghana stock exchange was established in 1989 and started operations in 1990. After its establishment, it introduced the GSE all index in 1994 to help traders in the financial markets especially those who are concerned with general price movements to measure market trend (gives signals). This is expected to help investors in their investment decision making in the financial markets. Also, the GSE now serves as a secondary market where especially non bank financial institutions can both lend and borrow money through the equity and the bond markets. Hence, it is likely to expand the secondary capital market and also reduce the excessive reliance on banks for borrowed funds. This effect probably is yet to be seen as banks lendings continue to increase in Ghana.

The over reliance on banks for loans would mean the government has to bail out the big banks when they are in difficulties as their failure may cause panic and bank runs. But as the government bail out the failing banks, it may lead to moral hazard.

The banking law of 1970 was also replaced with the "1989 banking law decree (Decree 225)" which has a greater international dimension and the Bank of Ghana was also strengthened. Under this program not only was the management of the bank restructured but foreign expertise were included. More powers have also been given to the Central Bank to enable it perform its supervisory functions effectively. The essence of this is to enable the central Bank to monitor the financial institutions effectively to ensure they comply fully with both conduct and prudential regulations therefore reducing inefficiencies in the banking system and reducing the risk of bank failures and its spread in the banking system.

The Foreux Bureux was established in March 1988. This was to stabilise the cedi and also reduce inflation as a result of more foreign currencies being introduced into the financial markets and also reduce smuggling and illegal trading of currency which was escalating the depreciating of the Cedi against the major currencies such as the US Dollar, the Pound Sterling and the Euro and consequently making the financial markets attractive to investors. The effectiveness for the establishment of this policy is questionable as it was reported in 2003 that the government was losing billions of cedis as a result of illegal foreux dealings



What is the future of Ghana's financial markets?, Can the financial markets withstand the global competition?, Would there be a collapse? and what lessons should we learn? WATCH OUT FOR SECTION TWO FOR THE ANSWERS

Bernasko Glimeti
Finance Student UK.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.