The Ghana Stock Exchange has initiated a process to formalise the trading of commercial papers – unsecured, short-term fixed-income securities issued by a corporation – on the local bourse.
Commercial paper is short-term debt securities or loans issued by corporate bodies, usually large banks or corporations. This debt security has a tenure of 60 to 90 days
In an interview with the B&FT, the Deputy Managing Director of the Exchange, Abena Amoah, said: “Another thing we are looking at is also growing or establishing a formal market for the issuance, listing and trading in commercial paper. So, in other markets, they have rules around it. You’ll find that many of them require a rating to give investors confidence that this credit is rated at B and so this is the risk level, and I can price it different from an A-rated institution for instance”, she said.
Ms. Amoah noted that the exchange is taking a multi-stakeholder approach, the same as what was used to set up the fixed income market, in order to come up with a framework for the commercial paper market. “There are regulations around that who can participate in it, who can invest in the market etc.? And that’s another product we want to launch to augment the Ghana fixed income market and help it grow faster,” the Deputy MD said.
Currently, there is an existing commercial paper market that is informal; however, the introduction of this formal market will offer investors more safety net against risks of default, and make investors more comfortable operating in the market.
“Lending is a critical part of capital formation. So for short-term loans, as long as the economy is growing, as long as businesses are growing, as long as our GDP is growing, companies have capital needs. So, where it can go is really where our financial institutions want to go, and our businesses want to go, too. When we look at existing markets on the FMDQ Securities Exchange [Nigeria’s largest Exchange], the commercial paper market is actually bigger than their corporate bond market significantly,” she said.
The total value of Commercial Papers (CPs) quoted on FMDQ Exchange in March 2022 was N72.06billion, according to FMDQ Exchange financial markets’ monthly report for March.
The Deputy MD stated that corporates will always need large short-term financing loans, as well as long-term. “So, we want to provide an organised market where investors have the confidence to say that this market is regulated.
So, that is what an organised commercial paper market can be. But we are very much interested and very much focused on growing the long end of the market as well because our key drive remains providing access to long-term capital which is missing largely in our market,” she explained.
This doesn’t mean that the formal trading platform will be the only place where commercial paper will be issued. Some investors would prefer to trade on the over-the-counter (OTC) market outside of the formalised market.