GSE to launch Commercial Paper market to provide alternative investment options

The Ghana Stock Exchange (GSE) will launch the commercial paper (CP) market on Friday May 10, 2024, providing investors with a much-needed alternative investment option amid the limited choices available on the market.

The domestic bourse sees the introduction of the commercial paper market as a crucial step in accommodating the increasing demand for diversification within the capital market. By offering this new investment avenue, the GSE says it aims to provide investors with additional opportunities and enhance the safety net against risks of default.

The commercial paper market is expected to offer a critical alternative for both investors and borrowers while enhancing liquidity in the debt capital market. The launch highlights the importance of developing a well-functioning commercial paper market for investors and borrowers in a thriving economy.

Preparation for the launch

The GSE has been collaborating with Stanbic Bank Ghana and the legal firm Bentsi-Enchill Letsa & Ankomah (BELA) to develop a robust framework for the effective operation of a commercial paper market in Ghana.

Globally, commercial paper markets have proven to be a practical, convenient and cost-effective means for businesses to raise short-term funding. Commercial paper issuances are ideal for fulfilling temporary cash flow gaps, meeting working capital needs and addressing immediate financial obligations.

Abena Amoah, the GSE’s Managing Director, sometime June 2023, expressed enthusiasm about the progress made in establishing the commercial paper market, with the Securities and Exchange Commission (SEC) granting its final approval.

One notable aspect of this commercial paper market is the requirement for ratings on these issuances. This new feature will provide investors with valuable information and enhance their confidence in the market.

Commercial paper issuances typically range from a 15 to 270 days and are usually unsecured, relying solely on the issuer’s creditworthiness and reputation. As a result, this feature guarantees investors a comparatively low level of risk and further elevates the appeal of commercial paper as a favoured investment choice.

Corporations and financial institutions view commercial paper as an alternative means of obtaining funds compared to traditional bank loans. By having access to multiple avenues for raising funds, businesses can spread out their borrowing sources and reduce reliance on a single channel, such as bank loans.

A regulated environment

The move toward a formal commercial paper market is a significant development for the financial landscape. While an informal commercial paper market previously existed, the formalisation of this market will enhance investor protection and instil a greater sense of security.

Crucially, the formal market will provide a regulated environment that assures investors of the credibility and reliability of commercial paper investments, highlighting the importance of lending and capital formation in a growing economy.

Ms. Amoah noted that the formal trading platform would not be the sole avenue for commercial paper issuance. Some investors might still prefer to engage in over-the-counter (OTC) trading outside the formalised market. The market structure’s flexibility aims to accommodate the diverse preferences and needs of investors.

Economic growth and market transparency

The introduction of a commercial paper market reflects the nations commitment to expanding and diversifying its financial sector. By offering a regulated platform for short-term debt securities, the GSE aims to attract more investors and foster economic growth.

The presence of a vibrant commercial paper market provides an additional avenue for investors to deploy their funds, increasing the variety of investment opportunities. This, in turn, boosts overall market liquidity, making it easier for investors to buy and sell financial instruments promptly.

Furthermore, an active commercial paper market facilitates efficient price discovery, enabling investors to readily assess prevailing market prices and make well-informed investment decisions. This price discovery process ensures fair financing terms for issuers, flexibility to enter and exit the market, and a well-functioning investor universe.

The launch of the commercial paper market in Ghana demonstrates the GSE’s dedication to providing a wide range of investment options and diversifying its financial markets in the face of currently limited options available to investors.