…an array of new investment products aim to make it the model African capital market
Securities and Exchange Commission (SEC) a week ago, launched its Capital Market Master Plan (CMMP) to serve as the blueprint for developing the capital market in Ghana over the next ten years. The CMMP has the potential to dramatically improve the capacity of Ghana’s capital market in financing economic growth and development by providing long term funding for both government and private enterprise.
To be sure SEC has, over the past couple of years, been designing an array of new investment products and just as importantly, has introduced policies and strategies that encourage market operators to innovate in an orderly manner that will ensure that such innovations meet regulatory requirements and thresholds of responsible market conduct.
Now however the sheer scope of new initiatives being drawn up has made it imperative that a holistic plan is used to serve as a road map for their implementation. This is precisely what the CMMP aims to do.
The CMMP was developed by a Working Group drawn from key stakeholders in the financial sector.
Speaking at the launch of CMMP, the Honorable Minister of Finance and Economic Planning, Hon. Ken Ofori Atta in his keynote address underscored the importance of the capital market. He noted that the GHc100 billion Ghana CARES programme aiming at stabilizing the economy as well as triggering a revitalization and transformation requires improved access to long-term finance as a key enabler for achieving the objectives of the program, hence the need for the CMMP.
Also speaking at the launch, the Director-General (DG) of the SEC, Rev. Daniel Ogbarmey Tetteh asserted that the Capital Market is critical to the growth aspirations of Ghana and the ten-year CMMP would be the engine to facilitate this important transformation.
The vision of the CMMP is “In Pursuant Of A Deep, Efficient, Diversified And Well-Regulated Market With A Full Range Of Products Attractive To Domestic And International Investors”.
The vision will be achieved on the back of four keys pillars of the Capital Market Master Plan:
- Improving the diversity of investment products and liquidity of securities markets (to enhance investor participation and improve market liquidity),
- Increasing the investor base and promoting innovation and product diversification,
- Strengthening infrastructure and improving market services (to improve market integrity and accessibility), and
- Strengthening regulation, enforcement, and market confidence.
The CMMP incorporates an array of major new initiatives about to be unleashed by SEC. 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 in 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.
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 Capital markets operators of various genres have been given up to the end of 2021 to meet the new minimum capital requirements which, compared with the current minimums are massive.
The new minimums require a broker – dealer to have at least GHc1.5 million in tier one capital; a fund manager, GHc1 million; a corporate investment advisor, GHc1 million and an individual investment advisor, GHc200,000; an issuing house, GHc1 million; a margin trader GHc2 million; a market maker GHc3 million; a nominee GHc1 million and an underwriter GHc2.5 million.
While these are all regular activities for operators active in both the primary and secondary capital markets, the new minimums for operators whose tasks are to protect investors monies are much higher – custodians are to have at least GHc50 million in core capital and trustees GHc50 million. Similarly, firms seeking to provide securities trading platforms will require hefty minimum core capital too – to be licensed to run a stock exchange at least GHc10 million is required and to be a securities depository, having electronic custody of the securities being owned and traded the minimum will be GHc50 million. To be a clearing house at least GHc50 million will be required.
But the biggest minimum capital requirement is for primary dealers, who handle governments treasury securities. This is GHc400 million, which effectively reserves such activities for licensed commercial banks.
Even as capital market operators are staggered by the increases – some of which are high as 1000 percent -most operators, such as investment banks will require much larger minimum capital than that for any of the above listed activities. This is because where an operator is engaged in two or more of the above listed activities – as is the case for virtually every investment bank in Ghana, the requisite minimum will be arrived at by taking the highest minimum requisite for any of the activities to be engaged in, plus at least 75 percent of the minimum capital required for each of the other activities to be engaged in.
Effectively this means, for example that an investment bank that trades in securities, is an investment advisor, and manages investment portfolios for clients would require at least GHc 4 million will be required. If the company wants to also be an issuing house for new securities issuances and also underwrite such issuances, as many investment banks currently offer to do, the minimum would rise to nearly GHc6.7 million
To be a full range investment bank, acting as margin trader and market maker in addition to those other services, the requisite minimum would rise further to about GHc 10.45 million.
Crucially, unlike in the case of the banking industry, the sheer size of the increases, combined with the much smaller turnovers generated by investment banking means that consolidation is inevitable, with the alternative simply being liquidation.
At the same time SEC is now rigorously enforcing compliance with key directives that market operators had studiously ignored since 2012. 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.
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 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.
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.
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.
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.
Crowd funding is a relatively new means sourcing both debt and equity financing for promising start up and early stage private enterprises Crowd funding is the use of small amounts of capital from a large number of individuals to finance a new business venture. It makes use of the easy accessibility of vast networks of people through social media and crowd funding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives and venture capitalists, through a channel that is much more informally structured than the Ghana Stock Exchange and even the Ghana Alternative Market. This would make it attractive to micro, small and medium sized enterprises, who could use it to raise needed finance quickly from astute investors willing to put their money into promising new enterprises without going through long, time consuming regulatory processes, while still enjoying substantial protection from financial malfeasance.
Crucially, SEC’s regulatory framework requires that specialist financial firms will be licensed to provide crowd funding services, which will involve bringing together potential investors and deserving entrepreneurs, and ensuring that beneficiary enterprises are managed responsibly so as to meet their obligations to crowd-investors.
Crowd funding is one of the fastest growing business financing modes in the world, now being used to raise hundreds of millions of dollars annually in many countries around the globe.
Another new investment product which SEC is working to introduce into Ghana’s capital market is green bonds issuance. Here it is getting technical support from the International Finance Corporation which has considerable experience in the issuance of green bonds, having launched its Green Bond Program in 2010, which has helped catalyze the market and unlocked investment for private sector projects that support renewable energy and energy efficiency. IFC has issued roughly 170 green bonds in 20 currencies amounting to over US$10 billion.
Even as SEC identifies new investment products such as these it has taken the bold step of introducing sand box to get market operators to innovate. The Securities and Exchange Commission has announced a new “sandbox” regulatory regime aimed at encouraging the introduction of innovative new products for use in Ghana’s capital markets. Expectedly most of the new innovations will involve the use of technology to deliver products and services which means the new sand box regime is aimed primarily at financial technology firms. Instructively, since the Bank of Ghana began licensing fintechs (as they are popularly known) who want to design financial products either by themselves or in collaboration with financial intermediation companies such as banks, about 70 license applications have been sent to the central bank. A sandbox regime allows for the testing of a potential new product or service for an agreed limited time duration and covering an agreed limited target market. The idea is that this is the best way to discover whether a proposed new product or service can actually work as expected and it also enables the promoters, in collaboration with the regulator to iron out any wrinkles identified with regards to the product or service before it is offered to the market as a whole.
Under the new regulations SEC will begin issuing Regulatory Sandbox Licenses to companies deemed to deserve them. Depending on the capital market service or the provisions of support to the capital market service provider to be tested, the applicant involved and the application made, SEC will determine the specific legal and regulatory requirements which it is prepared to relax in each case.
In each case the duration of the testing period will be agreed although extensions may be granted where necessary. At the end SEC will determine whether the product or service can be offered to the entire market, although the Commission under certain circumstances retains the right to abrogate the testing mid-way.
The new sand box regime is expected to accelerate the design and introduction of a host of new capital market products and services by opening the door to private sector enterprises. For instance, SEC has been considering the introduction of forward contracts for securities trading for years. With the new regime, fintechs, in collaboration with licensed securities traders will have the chance to come up with workable models and frameworks.
Indeed, capital market analysts expect that the new sand box framework will see several new products and services introduced which would modernize both trading in listed securities on stock markets as well as private placement transactions and even over the counter transactions.
Incorporated into the CMMP, all these initiatives hold the promise of transforming Ghana’s capital market into one of the most sophisticated in Africa. And with investment services about to be integrated all around the continent under the impending phase two of the African Continental Free Trade Agreement, this will not just pave the way for deeper wider long term financing of both the public and private sectors in Ghana; it will also create a platform for Accra to become a financial services hub for the entire continent.