Focus on Ghana: Bonds and equities activity set to increase

Paul Ababio was appointed Deputy Director General of the Securities and Exchange Commission in September 2017 following a two-year stint at UT Bank.

Ababio and the Commission’s Director General Daniel Ogbarmey Tetteh, have set out ambitious plans to grow private-sector participation in Ghana’s capital markets. African Banker spoke to Ababio about how they will achieve their goals.

You have been in your role for only a short time, but could you outline some of the key changes you hope to implement during your tenure?

The Securities Industry Act 2016 expanded the remit of the Securities and Exchange Commission (SEC) to include private equity funds, hedge funds, real estate and investment trusts, which had been on the sidelines in most economies but are now part of the mainstream. The Act also enhanced our scope and empowered us to better enforce regulations. 

Since 2016, the SEC has been implementing new guidelines to ensure that they reflect the Act – for example, minimum capital requirements for firms operating in the securities and capital market have been set at C100,000 ($22,345). In today’s Ghana, that’s not a lot of money and it means that anybody can participate, which makes regulation expensive, because it means we have to dedicate resources to monitoring a lot of small-scale players.

It’s a difficult task for some of these small players to keep up with anti-money laundering (AML) and ‘know-your-customer’ (KYC) regulations that we routinely implement because they are required to invest in expensive resources, such as software. AML guidelines have been enacted to prevent criminal activity, while KYC rules require financial institutions to conduct due diligence on prospective customers.

We’d also like to implement performance ratios that the market players would have to abide by, such as liquidity levels, and we will require key officials from the various firms to be registered with us, so that licence renewals take into consideration their performance. We’ve already sent out new draft guidelines and we hope to share more with the market before the end of the year so we can get feedback.        

What feedback have you had so far?

The market has been expecting these changes for a while so it hasn’t come as a surprise. It’s a welcome change and when the barriers to entry are so low, it makes competition fierce and it almost waters down the quality. Therefore, we believe market participants are looking forward to strengthening the framework and making the industry competitive but in a sustainable way.

The collapse of UT Bank and Capital Bank sent shockwaves across the financial services sector. What more could you as a commission have done to spot that these banks were in trouble and what lessons have been learnt?

In terms of Capital Bank, there is nothing we could have done because it was not a listed entity, however, UT Bank was listed. UT Bank wrote to us seeking exemption from the exchange and we liaised with their primary regulator, which is the Bank of Ghana (BoG).

We were quick to understand the gravity of the situation because the issues facing UT Bank were systemic and they could have led to contagion across the banking sector. We wanted to avoid a situation whereby people rushed to withdraw deposits from their banks, so we had to handle the situation delicately.

The BoG also had a short period of time to find a buyer of the two troubled banks, and the situation was compounded by the fact that the industry was aware that the central bank was considering increasing capital requirements. Eventually, Ghana Commercial Bank (GCB) took on the deposits from the two banks and everything worked out.

In terms of lessons we have learnt, we have enhanced our analysis of the accountant reports because, in the case of UT Bank, there were some early warning signs that its balance sheets were not in good shape. Therefore, we could have potentially warned investors earlier by suspending the bank’s shares.

But ultimately, it is up to investors to do their own analysis. However, we are cognizant that we also have a role in spotting issues earlier and the Ghana Stock Exchange (GSE) has been more proactive in suspending or delisting errant companies. Meanwhile, the SEC has also expanded its monitoring and enforcement duties, so we are better prepared now.     

The SEC has spoken before about introducing new market instruments, such as derivatives. What progress have you made towards this goal?

The SEC had success last year in advising on the structure of one of the largest energy bonds in Sub-Saharan Africa. The Energy Sector Levy Act (ESLA) bond, which was a Special Purpose Vehicle (SPV) that issued notes against receivables, was an innovative vehicle which helped reduce banks’ exposure to non-performing loans.

We’re looking to make significant progress on the introduction of additional instruments in 2018. But to introduce instruments such as options, we’ll need to create a benchmark of instruments because if there are not enough private sector bonds, for example, then you’d have to go with government yields and that might not involve an appropriate risk profile for an investor. Without the right benchmarks, implementing new instruments will be difficult.     

If you look at the stock market, the companies that have equity have not issued any bonds, which is a sizeable hindrance to the development of the exchange. Therefore, this year we’ll be encouraging more banks and insurance companies to issue bonds. Only after we’ve addressed these issues can we then look into more complex market issues.

What’s the outlook for 2018? Should we expect to see any major listings or new legislation introduced?

We expect market activity in both bond and equity markets to increase this year as macroeconomic fundamentals improve. The debt market is expected to see the most significant activity, especially for corporate issuers, which is something that we’ve been encouraging.
The SEC will also be drafting new guidelines to improve transparency because a few players have told us that they are holding back their investments because of lack of clarity on some issues.

We’ll also be targeting very specific sectors such as agribusiness and real estate to bring issuances to market. We’re even looking at fintech entities and other emerging areas of the economy that are underrepresented in the capital markets.