BACKGROUND OF THE STUDY

The Ghana Stock Exchange was incorporated in July 1989 as a private company listed by guarantee under the Companies code of 1963 (Act 179). The following year , in October 1990,the Ghana Stock Exchange was given recognition as an authorized stock exchange under the Stock Exchange act of 1971(Act 384). On 9th January 1991, the council of the Ghana Stock Exchange with approval of the secretary for finance, brought into being regulations governing the Exchange.

The establishment of the Ghana Stock Exchange is a turning point in the financial market history in Ghana. Prior to its establishment, there was no capital market to mobilize long-term capital for companies. Its establishment has therefore made it possible for companies to mobilize long-term capital for their operations through initial public offers and the sale of additional shares when the need for funds arises. It has also encouraged ordinary Ghanaians who could not hitherto own shares in companies due to financial constraints to take up share ownership.

INTRODUCTION

A financial market according Brealey et al (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

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or financial claims e.g. stocks, bonds and loans. Financial institutions serve the purpose of facilitating the accumulation and allocation of capital by channeling 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 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 1980s 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 characterized 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.

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.

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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

CLASSIFICATION OF FINANACIAL MARKETS IN GHANA

MONEY MARKET The money market is designed for the provision of short-term funds. It is an institution through which corporations and individuals with funds meet the needs of borrowers with temporal shortage of funds. A major function of the money market is to finance the working capital needs of corporations and provide the government with short term funds.

The banks 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
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money market provides 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 viceversa. The Central Bank also uses the money markets to perform its function of lender of last resort.

CAPITAL MARKET

Capital markets are designed to finance long-term investments by governments, corporations and households. Securities traded in the capital markets take more than one year to mature and range in size from small loans to multimillions credits.

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 United Kingdom. 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
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assess the credit worthiness of borrowers. Also, until 2003, Ghana had not been rated by any international credit rating agency like Moodys 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

THE EQUITY MARKET

Equity market is designed to finance long-term investments by Governments, corporations and households. Securities traded in the equity market take more than one year to mature and range in size from small loans to multimillions credits.

Government and Institutional shareholders dominate the equity market in Ghana. 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 equity 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 fogged from its embryonic state since its creation into a force in the sub region. From 2000 onwards there were significance increases in trading on Ghana Stock Exchange. A study conducted by International Monetary Fund 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

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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

THE BOND MARKET

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 governments 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 GH1 billion. This acts as boost to the primary market and was described by the Ghana Stock Exchange as a significant landmark in the history of the Exchange. The governments listings enhanced the bond market in Ghana and also showed the governments commitment to the development of the bond market. As of December 2006, total outstanding government bonds stood at GFC 2,400 billion (USD 260 million). Another major boost to the market was the listing of Standard Chartered Banks three year Medium Term Notes worth 350billion as well as preference Shares. The introduction of government of Ghanas

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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 Africa Development Bank 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 Africa Development Bank 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 Ghanas 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

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by 193% from 98million in 2006 to 287million in 2007, the value of total shares traded rose from GH47.60million to GH140.71million. Also as of March 2007, the GSE had some 32 listed companies, with a market capitalization 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 capitalization 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 capitalization 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 immunize 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 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.

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THE DERIVATIVE MARKET

A derivative instrument according to (Glen Arnold 1998) is an asset whose performance is based on (derived from) the behavior 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 Forward Rate Agreements 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.

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(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 economys 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).

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CONCLUSION

The Financial market in Ghana has performed relatively well as an emerging market since it started operating in 1999. In 1993, the Ghana Stock Exchange was the best sixth performing emerging stock market index with capital appreciation of 113.74%. In 1994, it was the best performing market among all emerging markets with an appreciation of 124.3% in its index level. The international financial community described the Ghana Stock Exchange as the worlds best performing stock exchange in 1998. According to London based financial analyst, the Ghana Stock Exchange all-share index, which is used as a measure for the performance of the market increased by more than 60% in dollar terms. This was repeated in 2003 when the market was judged the best performing stock market with capital appreciation over 140% in dollar terms. In 1994, the Ghana Stock Exchange was one of the biggest exchanges in Sub-Saharan Africa with market capitalization of over USD 2 billion.

The market in Ghana has done tremendously well for the last few decades. It is 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.

Potential changes at the exchange include the introduction of automated trading and the listing of some state banks. The Bank of Ghana plans the development of mutual funds, unit trusts and municipal bonds at a subsequent date. These changes are aimed at making the exchange more relevant, efficient and effective. The exchange was also involved in preparing the draft law on collective investment vehicles.

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REFERENCES S.C Myers and N.S Majluf: Corporate Financing and Investment Decisions when firms have information that investors do not have, Journal of Financial Economics, 13:187222(June 1984. W.A. Sahlman: Aspects of Financial Contracting in Venture capital, Journal of Applied Corporate Finance, 1:23-27(Summer 1988. Brealey Richard A. Stewart C. Myers: Principles of Corporate Finance, 7th edition 2003.

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