A bill updating the 1993 Securities Industry Law is slowly making its way through the halls of Ghana’s Parliament. The existing law has become out of step with many of the advances of an increasingly global market. The new legislation would seek to tighten regulation, increase transparency, better facilitate cross-border transactions and allow for the introduction of derivatives and alternative investments.
Investment in the country’s growing real estate sector will be one major focus of the new law. The current legislation limits the amount mutual fund managers may invest in real estate to 10%. However, according to the National Pensions Regulatory Authority’s pension-scheme guidelines, private pension fund managers are allowed to invest only up to 5% of their funds in a broad asset class that includes real estate investment trusts (REITs), mortgage-backed securities and corporate debt.
Under the proposed law, the restrictions mutual fund managers face in investing in real estate-related securities are expected to be lifted. The REIT market in particular is beginning to gain traction in Ghana, although mortgage giant HFC Bank has long offered the option. The bank set up a REIT in 1995 to provide investors with a platform to invest in securities of real estate firms, and real estate development activities.
The updated securities bill also aims to usher in derivative products that will be listed on the Ghana Stock Exchange (GSE) and the Ghana Commodity Exchange (GCX). With the exception of a single gold exchange-traded fund (ETF) listed in 2012, ETFs and derivatives are not listed on Ghanaian exchanges.
The lack of these products on the local market limits the ability of participants to effectively manage risk and diversify portfolios. Furthermore, derivatives have the potential to add depth and liquidity to a market that suffers from chronically low trading volume.
In light of Ghana’s recent history of a volatile currency and rising interest rates, there is likely demand in the market for currency and interest rate derivative products, for use primarily as risk management and speculative tools. “The exchange is interested in derivatives and steps have been taken to facilitate that, but I think the players do not have that depth and at this stage we are still building our capacity,” Sampson Akligoh, managing director of InvestCorp, told OBG. “We have seen a listed ETF, but the demand and supply dynamics are not enough to make it exciting to follow.”
Natural resources and raw materials are expected to provide fodder for potential derivatives trading following the establishment of the GCX, which is expected by mid-2017. The introduction of commodities derivatives would help drive capital to the GCX.
Building support for derivatives, however, will pose several challenges. First, segments of the investor community may simply be unfamiliar with derivatives or their value. Ekow Afedzie, deputy managing director for the GSE, told OBG, “We do not have many institutional investors in Ghana, and when you consider retail, these investors are not very active in the market and are not very financially literate.”
The GSE and the Securities and Exchange Commission (SEC) have organised capital markets education programmes to better inform the investor community on the potential risks and benefits of the financial products available. A second hurdle the SEC must face in building support for derivatives is the burden of compensating investors for the level of risk inherent to derivatives. Akligoh told OBG, “A lot of our clients will not take time to listen to you talk about derivatives when plain-vanilla products such as shortterm government paper has its yield at 22-24%.”
As a pure investment, derivatives face a high bar in compensating investors above the high Treasury bill rate. As a risk management tool, however, benefits beyond the expected return may provide lasting support, despite current macroeconomic conditions.