Companies must be encouraged to issue bonds
Capital market is defined as the market where medium and long-term finance can be raised.
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Although a preferred form of raising funds, bonds issued by corporate institutions on the Ghana Stock Exchange (GSE) have been minimal, mainly due to the relatively new nature of the market to the private sector.
Howbeit, capital market offers a variety of financial instruments that enable economic agents to pool, price and exchange risk. Through assets with attractive yields, liquidity and risk characteristics, it encourages savings in financial form. This is very essential for the government and other institutions in need of long-term funds.
Economic growth in a modern economy hinges on an efficient and effective financial sector that pools domestic savings and mobilises capital for productive projects.
The absence of an effective capital market could leave most productive projects which carry developmental agenda unexploited. Capital market connects the monetary sector with the real sector and, therefore, facilitates growth in the real sector and economic development.
It fulfils the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors, in exchange for reimbursing a greater purchasing power in future.
This way, capital market enables companies to raise capital or funds to finance their investment in real assets.
These are very good reasons why companies with cash flow or liquidity challenges should take the advice of the Chief Executive Officer of Axis Pensions Trust Limited, Mr Afriyie Oware (See our front page).
His reasons are not far-fetched. With the benchmark 91-day Treasury bill (T-bill) selling at 12.09 per cent and predicted to fall further, it is obvious that companies should shift attention from securing bank loans, which interest rates are between 26 and 30 per cent, to issuing bonds on the GSE to be able to minimise their financing costs.
The development will be an attempt by corporate institutions to try and profit from declining interest rates on the capital market, where rates have virtually halved in the first five months of the year.
We believe that bond issuance will engender a lot of economic activities. Consider a bank with a balance sheet of GH¢120 million but which now has a bigger purse of GH¢300 million. That bank will lend more, and businesses will be able to have more access to capital.
The implication will be an increase in productivity within the economy leading to more employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital.
Furthermore, it encourages broader ownership of productive assets by small savers and enables them to benefit from economic growth and wealth distribution. It also provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialisation.
Therefore, the time for companies to look to bond issuance through our stock exchange is now.