BoG bemoans businesses’ over-reliance on loans

Millison Narh, Deputy Governor of the central bank, has bemoaned the over-reliance of businesses on banks for financing, which he says has thrown a big challenge to the Bank of Ghana (BoG) to tackle the menace of high interest rates.

“While we continue to rely on government securities for financing fiscal deficits, firms continue to be overly-dependent on bank borrowing and foreign borrowing. And with the developments in the foreign exchange markets, you can imagine the risks associated with foreign borrowing.

“There is too much reliance on loans and advances in our economy, which is why all the time the central bank is being challenged to do something about the high interest rate in the economy,” he said.

He urged businesses and other corporate institutions looking at financing and sustaining growth to look at other means, including bonds and other securities which provide long-term options.

Total assets of banks and non-bank financial institutions (NBFIs) grew by 40.3 percent to GH¢60.1billion at the end of 2014. The growth in total assets reflected mainly in loans and advances, which increased by 40.4 percent to GH¢26.4billion compared with an increase of 35.2 percent in 2013.

Speaking at a workshop on the Ghana Fixed Income Market (GFIM) organised by the Ghana Stock Exchange (GSE), Mr. Narh projected the advantages of having alternative financing mechanisms like the fixed income market where businesses can raise bonds to finance long-term needs.

“The bond market has comparative advantages in financing government agencies and infrastructural investment, and providing longer-term capital for companies to finance their expansion programmes,” he said.

The GFIM is a new market established by key stakeholders in Ghana’s financial market purposefully for the trading of fixed income and similar securities, as well as bringing secondary trading activities of fixed income securities in Ghana to international best practice standards.

In addition, quasi-Government of Ghana institutions’ money market instruments, notes and bonds; corporate notes and bonds; municipal and/or metropolitan bonds; supra-national bonds; repos; and other fixed income or money market securities may be admitted and traded on the GFIM.

Despite underdevelopment of the fixed income market in sub-Saharan Africa compared to the banking sector, Mr. Narh is very optimistic that the GFIM will help make efficient investments and financing decisions, and bring about efficiency in the design and implementation of monetary policy.

“Most of our CENTRAL BANKS in sub-Saharan Africa -- with the exception of Kenya and South Africa -- have few domestic fixed income instruments available for stabilisation, other than the short-term government debt.”

He is therefore of the view that a deeper market will provide wider and more effective fixed income instruments for monetary policy in the region.

“It also provides stability by mitigating roll-over risks and interest rate risk, and provides an alternative source of financing to firms -- thereby complementing the banking sector in effecting financial intermediation,” he said.

Over the years several reform measures were adopted and policy initiatives implemented with the aim of strengthening and enhancing the fixed income market’s efficiency.

In 1996, the BoG introduced the system of primary dealership in the government of Ghana securities market, with a view to strengthening the financing mechanism to government’s public sector borrowing requirements through the development of a strong money market.

This notwithstanding, the pace of development has been relatively slow and activities in the secondary market remain dull. This therefore calls for a deliberate policy action to revive the market so as to promote efficient price discovery, facilitate liquidity, manage risks, and strengthen development of the secondary market.

Accordingly, the Ghana Fixed Income Market has thus been created to provide a fair, orderly, transparent and efficient market for fixed income securities or instruments.

Mr. Narh stressed that development of the fixed income market is meant to be complementary to the banking system rather than otherwise. “We must continue to focus on leveraging more ways of mobilising investments within domestic financial systems like the fixed income market to help close the infrastructure and development gap.”

Ekow Afedzie, Deputy Managing Director of the GSE, explained the key stakeholders that have collaborated to set up the GFIM include the Bank of Ghana, the GSE, Central Securities Depository Ghana Ltd. (CSD), Ghana Association of Bankers (GAB), ACI Ghana (Association of Bank Dealers), and Licenced Dealing Members (LDMs) of the GSE.

He added that trading on the GFIM will be limited to an entity that is licenced by the Securities and Exchange Commission (SEC) to deal in securities: and in addition authorised by the Bank of Ghana as a primary dealer (PD); or licenced by the Bank of Ghana as a bank; or licenced by the GSE as an LDM.

“The Bank of Ghana, for monetary policy purposes, shall be permitted to deal in Government of Ghana and Bank of Ghana securities listed on the GFIM. Secondary trading of securities on the GFIM will be by way of an electronic trading and market surveillance system provided by Bloomberg LP, while cash settlement of trades will be done through the Bank of Ghana and securities settlement will be done at the CSD.”

The GFIM will be governed by an 11-member governing committee to be chaired by the first deputy governor of the Bank of Ghana.

There will be representatives from GSE, CSD, GAB, ACI Ghana, the Ghana Securities Industry Association and the Bank of Ghana, and the Debt Management Division of the Ministry of Finance on the committee.