THE FINANCIAL MARKETS IN GHANA – ABSA REPORT

absa-africa-financial-markets-index-2018

ABSA, A SOUTH AFRICA-BASED FINANCIAL INSTITUTION WITH BRANCHES IN VARIOUS AFRICAN COUNTRIES, HAS FOR THE SECOND TIME PUBLISHED AN INDEX ABOUT FINANCIAL MARKETS IN AFRICA. IN THE FIRST INDEX, 17 AFRICAN COUNTRIES BUILT UP THIS INDEX; THIS TIME THEY WERE 20. SENEGAL, CAMEROON AND ANGOLA WERE ADDED COMPARED WITH THE FIRST EDITION.

THE INDEX IS BASED ON SIX PILLARS. THESE ARE:

  1. MARKET DEPTH,
  2. ACCESS TO FOREIN EXCHANGE,
  3. MARKET TRANSPARENCY, TAX AND REGULATORY ENVIRONMENT,
  4. CAPACITY OF LOCAL INVESTORS,
  5. MACROECONOMIC OPPORTUNITY, AMD
  6. LEGALITY AND ENFORCEABILITY OF STANDARD FINANCIAL MARKET MASTER AAGREEMENTS.

THE RESULTS OF THE VARIOUS PILLARS FOR EACH COUNTRY WERE THEN ADDED. THEN THESE NUMBERS WERE THEN DIVIDEDD BY TH NUMBERS OF PILLARS, SIX.

A) THE SITUATION AS DESCRIBED IN THE INDEX

AS WE COULD EXPECT, SOUTH AFRICA OCCUPIES THE TOP SPOT IN THE INDEX. THIS IS NOT ONLY BECAUSE ABSA IS A SOUTH AFRICAN BANK, BUT MAINLY BECAUSE THE PRE-CONDITIONS IN SOUTH AFRICA WERE SIMPLY BETTER THAN IN OTHER AFRICAN COUNTRIES. NEVERTHELESS, THE SITUATION HAS MUCH IMPROVED IN THE REST OF AFRICA. NATIONS LIKE BOTSWANA AND KENYA HAVE NARROWED THE GAP TO SOUTH AFRICA. OTHER MAINLY SUB-SAHARAN COUNTRIES LIKE NIGERIA FOLLOW UP.

BUT LET US FOCUS ON GHANA. OVER ALL, THE POSITION OF GHANA HAS NOT CHANGED. GHANA WAS 7TH IN THE FIRST EDITION, AND THE COUNTRY OCCUPIED THE SAME POSITION IN THE SECOND EDITION. BUT THE RESULTS IN THE VARIOUS PILLARS DIFFER A LOT.

WHEREAS GHANA OCCUPIES POSITION 4 IN THE MARKET DEPTH, AND GAINED 4 POSITIONS COMPARED WITH THE FIRST EDITION,  WE CAN FIND GHANA NEAR THE END OF THE LIST IN PILLAR “CAPACITY OF LOCAL INVESTORS”.

THE MARKET DEPTH CONSIDERS THE MARKET CAPITALISATION AND THE PRODUCT DIVERSITY. THE GHANA STOCK EXCHANGE (GSE) AND RELATED INSTITUTTIONS HAVE ONE OF THE HIGHEST MARKET CAPITALISATIONS ON THE CONTINENT WITH 118% OF THE GDP. THAT SHOWS THAT THE GSE HAS HAD A TREMENDOUS DEVELOPMENT SINCE ITS INAUGURATION.

WE CANNOT SAY THE SAME ABOUT THE CAPACITY OF LOCAL INVESTORS. THIS PILLAR IS WIDESPREAD NEGATIVE THROUGHOUT AFRICA. SOUTH AFRICA, NAMIBIA, MOROCCO AND BOTSWANA FORM AN EXCEPTION HERE. THESE FOUR COUNTRIES HAVE A VALUATION OVER 50 IN THIS PILLAR.

THE TERM MEANS SIMPLY INSTITUTIONAL INVESTORS LIKE INSURANCES, AND THERE ARE NOT MANY OF THEM IN GHANA. AND THE FEW THAT ARE THERE FIND RESTRICTIONS IN THE WAY THEY HAVE TO INVEST THEIR FUNDS.

ANOTHER PROBLEM IN CONNECTION WITH LOCAL INVESTORS IS THE LACK OF EDUCATION. KNOWLEDGE ABOUT NEW FINANCIAL PRODUCTS IS NOT VERY WIDELY SPREAD. THEREFORE, AN INVESTMENT IN MORE PROFITABLE PRODUCTS HAS ITS LIMITS IN THE REGULATORY FRAMEWORK AND IN THE KNOWLEDGE ABOUT THEM.

UNFORTUNATELY, THE PILLAR “LOCAL INVESTORS” IS NOT THE ONLY PILLAR IN WHICH GHANA PERFORMED POORLY. IN THE CATEGORY “MACROECONOMIC OPPORTUNITY”, GHANA PLACED 14 OUT OF 20 COUNTRIES. BUT HERE WE MUST CONSIDER THAT EVEN THE FIRST ON THE LIST, SOUTH AFRICA, ONLY SCORED 75/100 POINTS. GHANA AS 14TH SCORED 57/100 POINTS. THAT SHOWS THAT THE MACROECONOMIC SITUATION IS STILL NOT VERY FAVOURABLE ON THE WHOLE AFRICAN CONTINENT.

THE MACROECONOMIC SITUATION IN AFRICAN COUNTRIES HAS GENERALLY BECOME BETTER IN THE LAST YEARS. BUTIT STILL SUFFERS FROM EXTERNAL AND INTERNAL CHALLENGES. THE MACROECONOMIC INDICATORS IN MOST AFRICAN COUNTRIES ARE NOT STABLE, AND IMPORTS OF GENERAL GOODS ARE TOO HIGH. AS THEY ARE MOSTLY DENOMINATED IN DOLLARS, A STRONG DOLLAR MAKES THEM MORE AND MORE EXPENSIVE FOR THE COUNTRIES.

THISS SITUATION IS ALSO PREVALENT IN GHANA. THE GENERAL ECONOMIC PERFORMANCE IS QUITE SATISFACTORY. THIS ACCOUNTS FOR GDP GROWTH AND EXPORT COMPETITIVENESS. ON THE OTHER HAND, THE LIVING STANDARDS COULD IMPROVE. THIS ESPECIALLY IS TRUE WHEN LOOKING AT THE INCREASING GAP BETWEEN RICH AND POOR, AS THE WORLD BANK HAS STATED.

THE FINANCIAL RISKS ARE ANOTHER WEAK POINT IN THE ASSESSMENT OF GHANA. NON-PERFORMING LOANS ARE STILL HIGH, AND DEBTS ARE INCREASING, ALTHOUGH THE DEBT-TO-GDP RATIO IS STILL WITHIN THE ACCEPTABLE RANGE.

THE THIRD POINT WITHIN THIS PILLAR IS THE FINANCIAL TRANSPARENCY. HERE IS WHERE I GENERALLY DON’T AGREE WITH THE INDEX. FOR MY UNDERSTANDING, THE BANK OF GHANA DOES A RATHER GOOD JOB BY PUBLISHING ECONOMICAL ASSESSMENTS REGULARLY. THE GOVERNMENT ALSO RELEASES THE STATE BUDGETS IN TIME AND OPEN. HERE GHANA WOULD HAVE DESERVED A HIGHER ASSESSMENT.

IN THE REMAINING THREE PILLARS, GHANA RANKS AMONG THE TOP HALF OF THE INDEX. A FURTHER LOOK AT THESE PILLARS CAN BE LEFT OUT AT THIS PLACE. THIS IS BECAUSE THE PURPOSE OF THIS ARTICLE IS TO POINT OUT WEAKNESSES IN THE GHANA FINANCIAL SECTOR. FURTHERMORE, IN THE SECOND PART OF THIS ARTICLE,I WANT TO SHOW WAYS HOW TO IMPROVE THE SITUTION. INTERESTED READERS CAN DOWNLOAD THE ABSA REPORT AT THE TOP OF THIS ARTICLE. THERE YOU CAN READ THE ASSESSMENT OF ALL PILLARS BY THE BANK.

B) BRIEF ASSESSMENT OF HOW TO IMPROVE THE SHORTFALLS IN THE FINANCIAL SECTOR OF GHANA

ACCORDING TO THE ABSA REPORT, THE MAIN SHORTFALLS IN GHANA ARE A WEAK INSOLVENCY FRAMEWORK AND LOW CAPACITY OF LOCAL INVESTORS.

A SUCCESSFUL INSOLVENCY FRAMEWORK MUST INCLUDE A BETTER PROTECTION OF SMALL BUSINESSES. THESE ONES OFTEN SUFFER FROM TEMPORARY SHORTFALLS WHICH ARE NOT BASED ON GENERAL FAILURES. THIS IS ESPECIALLY TRUE FOR THE AGRICULTURAL SECTOR. HERE, PEOPLE APPLY FOR LOANS WHEN THEY NEED THEM TO PREPARE THE FARMS. BUT THE HARVESTS AND THE SALES OFTEN DON’T TAKE PLACE WHEN THE REPAYMENT OF THE LOANS ARE DUE. THIS OFTEN LEADS TO LOAN RECOVERY ACTIONS BY THE BANKS. IF THE LOANS COULD BE SYNCHRONISED WITH THE EXPECTED HARVESTS, THEN THE BANKS COULD AVOID MANY INSOLVENCY CASES.

ANOTHER ISSUE WITH THE INSOLVENCY FRAMEWORK IN GHANA IS THAT THE ONLY SOLUTION IT OFFERS IS LIQUIDATION. THERE ARE MANY OTHER WAYS OUT OF FINANCIAL CHALLENGES FOR BUSINESSES. ONE OF THEM IS THE FILING OF A BANKRUPTCY THAT OFFERS A RE-NEGOTIATION WITH CREDITORS. ANOTHER POSSIBILITY IS THE ELABORATION OF AN ALTERNATIVE DISPUTE RESOLUTION (ADR). UNTIL NOW, THERE IS NO COMPREHENSIVE ADR FRAMEWORK. YOU CAN PIECES OF PARAGRAPHS CONCERNING ADR EVERYWHERE IN RELATED LEGAL FRAMEWORKS. BUT NO FRAMEWORK IS FOUND THAT COVERS ALL ASPECTS OF THE ADR.

THE PROBLEM OF LOCAL INVESTORS IS MUCH MORE DIFFICULT TO SOLVE. THERE ARE NOT ENOUGH LOCAL INSTITUTIONAL INVESTORS IN GHANA WHICH COULD PUSH THE FINANCIAL SECTOR TO NEW HEIGHTS. AND  THOSE WHICH ARE THERE LACK THE WILLINGNESS AND/OR THE CAPABILITY TO GET INVOLVED WITH NEW AND MORE VALUABLE FINANCIAL INSTRUMENTS. ONE REASON MIGHT BE THAT THE LOCAL INSTITUTIONAL INVESTORS ARE LIMITED IN THEIR INVESTMENT IN FINANCIAL INSTRUMENTS.

BUT ANOTHER REASON IS THE LACK OF EDUCATION ABOUT NEW FINANCIAL INSTRUMENTS AND INVESTMENTS. THIS ACCOUNTS FOR THE GENERAL PIBLIC AS WELL AS THE FINANCIAL PROFESSIONALS. THE PROFESSIONALS MIGHT NOT HAVE THE COURAGE TO TEST THEMSELVES IN THE USE OF NEW INVESTMENT OPPORTUNITIES. BUT PERHAPS MORE IMPORTANTLY, THERE IS NOT SUFFICIENT FINANCIAL EDUCATION AMONG THE GENERAL PUBLIC. WHO KNOWS THAT YOU CAN EVEN START INVESTING WITH AS LOW AS 10 CEDIS A MONTH, IF YOU DO IT THE RIGHT WAY?

RECKLING ENTERPRISES THROUGH ITS WEBSITE www.ghanaresearch.org/wp  WILL MAKE AN EFFORT TO GIVE BASIC FINANCIAL AND INVESTMENT EDUCATION TO THE GENERAL PUBLIC. THIS WILL COME ON FROM THE BEGINNING OF 2019 ON.

JUST VISIT www.ghanaresearch.org/wp AND CLICK ON EDUCATION. THEN CLICK ON THE LINK AND REGISTER FOR THE COURSE OF YOUR CHOICE FOR FREE. START OF DISTRIBUTION OF COURSE MATERIALS WILL START ON 1ST OF FEBRUARY, 2019.

STAY TUNED!

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