SECURITIES AND EXCHANGE COMMISSION, GHANA

FAIRNESS | INTEGRITY | PROTECTION SECURITIES AND EXCHANGE COMMISSION, GHANA “Ensuring Investor Protection”

A PRESENTATION BY ADU A. ANTWI DIRECTOR-GENERAL SECURITIES AND EXCHANGE COMMISSION AT THE 2ND AFRICA CONGRESS OF ACCOUNTANTS (ACOA) ACCRA, MAY 14, 2013 STRENGTHENING FINANCIAL MARKETS AND INSTITUTIONS IN AFRICA “Ensuring Investor Protection”

Presentation Outline Introduction Financial Sector Reforms Making Financial Markets and Institutions Strong: Some Recommendations Conclusion “Ensuring Investor Protection”

Introduction -1 • Economists have long recognised the importance of the financial sector in the economy. The financial sector plays a central role to support the real economy. • A financial market is described as a market in which financial assets such as shares and bonds can be bought or sold. • Financial institutions facilitate the purchase and sale of the financial assets by allocating capital to meet the transactions. • Financial institutions in general intermediate by accumulating capital from excess funding units and giving it out as loans to deficit funding units like individuals, businesses and governments. “Ensuring Investor Protection”

Introduction -2 • The financial sector has a vital role to play in the ongoing transformation of our society, and our desire to bring a better life to all of our people. • Over the years strong, robust and comprehensive financial systems have played very vital roles in the economic growth and development of many countries. • Well-functioning and efficient financial institutions and markets are central to the optimal allocation of capital to new areas of growth and to facilitate economic transformation. • Strengthening financial markets and institutions means promoting principles and sound practices for financial stability through the development of well-functioning financial systems and market discipline. “Ensuring Investor Protection”

Financial Sector Reforms -1 • In recent years several African countries have undertaken extensive restructuring and transformation of their financial sector. • Ghana’s financial sector has for example undergone extensive restructuring and transformation starting with the implementation of the Financial Sector Adjustment Programs (FINSAP I and II), from the late 1980’s through to the mid 1990’s. • The implementation of FINSAP I and II resulted in the privatization of the banking sector and the establishment and licensing of several new banks and non-bank financial institutions. “Ensuring Investor Protection”

Financial Sector Reforms -2 • The Ghana government in the early 2000’s developed the Financial Sector Strategic Plan (FINSSP). • After the implementation of the FINSSP recommendations there were improvements in the country’s macroeconomic performance. • In order to consolidate the gains of the FINSSP and address emerging challenges including regulatory issues arising from the global financial crisis, the Government in 2012 adopted the second phase of the Financial Sector Strategic Plan (FINSSP II) to serve as the blueprint for Ghana’s financial sector development. “Ensuring Investor Protection”

Financial Sector Reforms -3 • The FINSSP II document identified the following weaknesses in the financial system of Ghana: ►Low Capital Market liquidity ►Substantial amount of money outside the banking system. ►Low financial capacity of banks and insurance companies to undertake large deals. e.g. financing of the oil and gas sector. ►Relatively few listed equities ►Mostly cash based transactions ►Little activity in corporate and Government bonds. ►Small size of many rural and community banks ►Very little medium to long term credit “Ensuring Investor Protection”

Financial Sector Reforms -4 • The FINSSP II report also identified the following six key objectives to be pursued to enhance the financial sector to which various strategic initiatives have been designed to facilitate the achievement of the objectives and strengthen the financial market and institutions in the country. ►To make the domestic financial sector the preferred source of finance for Ghanaian companies. ►To promote efficient savings mobilization. ►To enhance the competiveness of Ghanaian financial institutions within a regional and global setting. ►To ensure a stronger and more facilitative regulatory regime. ►To promote a diversified financial sector within a competitive environment ►To promote education, public awareness, capacity building and financial literacy • With many African countries sharing similar economic characteristics with Ghana, it is believed the above issues identified in the FINSSP II report are relevant for other African countries. “Ensuring Investor Protection”

Making Financial Markets and Institutions Strong • Various researchers have studied the financial sector in many countries around the globe and have made several recommendations to make financial markets and institutions stronger and more efficient. • Some of these recommendations and others that can strengthen financial markets and institutions in Africa are discussed below. Ensuring Investor Protection”

Further financial sector reforms • There is still a need for more reforms in many African countries. • Pensions Reform • Reforms should promote the establishment of new financial institutions and the introduction of new financial products. • Reform should be geared towards setting up a system of rewards and penalties such that market participants perceive (correctly) that it is in their own best interest to behave in efficient and prudent ways. ‘’Ensuring Investor Protection”

Strengthen corporate governance in financial institutions • Strengthen corporate governance in financial institutions and the role of market discipline in ensuring effective oversight over financial institutions. • Good corporate governance and an appropriate corporate structure are vital for ensuring that the incentives of managers of financial contribute to the soundness of the institution and reflect a professional assessment of all risks involved. • Enhance production and dissemination of information. A crucial component of financial sector reform is improvement in the quality and quantity of reliable and timely information. ‘’Ensuring Investor Protection”

Removal of barriers to entry in to the financial sector • Barriers to entry in various financial sectors remain high, both within countries in the region and across borders. This leads to higher costs and inefficiencies. • In view of the key role of the financial sector in allocating savings and investment, this represents a significant constraint on growth prospects in Africa and must be addressed. ‘’Ensuring Investor Protection”

Strengthen the foundations for a sound risk culture in the financial sector • A strong risk culture that promotes prudent risk taking and the long-term viability of financial institutions will become more important in the future financial landscape which is expected to be more diverse and competitive. • This can be advanced through; a) implementing measures to promote more risk-aligned executive compensation, and b) developing codes and practices, and training programmes that support a sound risk culture. ‘’Ensuring Investor Protection”

Develop the capacity of financial industry workforce • The capacity of industry workforce should be built through training. Upgrading the skills and competencies of the existing workforce will ensure that they are able to meet the changing needs of the financial industry as it undertakes higher value-added services moving forward and to enable them to perform in a more competitive and globalised environment. • More industry-ready entry-level graduates must be produced through enhanced collaboration and coordination between the financial industry and institutions of higher learning to ensure seamless transition of graduates into the financial industry workforce. ‘’Ensuring Investor Protection”

Improve efficiency in payments, settlement and clearing systems • Financial systems—either banking or securities markets—cannot function without efficient systems for payments, settlement and clearing, as these form the essential “plumbing” of the system. • All countries should work to improve these systems. E-payments infrastructure should be enhanced in various countries in the region by introducing improvements and new services that will significantly improve user convenience and access to payment services to further facilitate the adoption of e-payments. ‘’Ensuring Investor Protection”

Enhance the mobile banking channel • Enhance the mobile banking channel by driving the adoption of the mobile phone as a simple and convenient channel to conduct banking and payment transactions, by encouraging greater participation of financial service providers and merchants in the mobile banking and payments ecosystem. “Ensuring Investor Protection”

Promote financial education • Financial markets can hardly develop when all stakeholders are not well informed and educated to understand their functions, instruments/products and how they work. • Financial education must be used to empower the population to understand the financial market and use the products and services of the market. • Financial capability must be promote through education as an essential life skill from an early age through the integration of financial education into the formal curriculum at schools and higher learning institutions. • Enhanced financial education will increase the participation of all segments of society in the financial system. “Ensuring Investor Protection”

Promote Financial Inclusion • As a developing region, the financial systems in African countries have serious limitations, because it makes beneficial financial services available only to a minority of people. • Poor people – who, unfortunately, still constitute the vast majority of the region’s population – have only limited or no access to financial services. • Efforts ( including the use of microfinance concept) should be made at promoting financial inclusion in the region. “Ensuring Investor Protection”

Strengthen the informal financial sector • Governments should exploit the comparative advantage of the informal financial sector and strengthen the complimentarity between the formal and informal financial sectors. • Ghana’s example of strengthening microfinance, susu, money lending, etc institutions. “Ensuring Investor Protection”

Develop depositor protection schemes (including deposit insurance) • Deposit protection schemes should be developed. This will provide a mechanism that ensures that small depositors (i.e. those whose deposits fall within an explicit ceiling) do not suffer when the institutions keeping their deposits fail. “Ensuring Investor Protection”

Promote the bond market • Governments in the region should use infrastructure bonds to finance their infrastructural needs. • The issue of municipal bonds by local authorities should be encouraged. • Private sector companies must be encouraged to issue bonds to raise huge capital for their expansion. “Ensuring Investor Protection”

Encourage self-policing in the sector • Through the history of trade and finance, market participants have established institutions that ensure honest and prudent behaviour, lower transactions costs, and reduce risks. • Some of these self-policing bodies may eventually develop into full-fledged self regulatory organizations. • The government can help by providing the supporting legal and supervisory infrastructure. “Ensuring Investor Protection”

Promote regional financial institutions • These institutions play key role in the growth of intraregional trade and direct intraregional investment flows. • Regional financial institutions are complements for global financial institutions. They are better able to coordinate with other international financial institutions in order to promote initiatives with a view to furthering the region’s financial development. “Ensuring Investor Protection”

Encourage the mobilization of regional savings • The issue of regional bonds must be promoted within the region. Regional bonds would allow companies and governments to raise huge capital outlays from the region to finance their expansion and infrastructure without depending on donors. • Such bonds would attract international investors resulting in capital inflows into the region. To the companies, the huge capital outlays would see them become larger and more competitive by serving larger and better diversified markets. “Ensuring Investor Protection”

Strengthen prudential regulation and supervision • Governments should complement the creation of franchise value by adopting a regulatory regime based on rules designed to align the private incentives of market players with the social goal of financial stability, and by strengthening supervision. • Build the capacity of financial regulators and ensure their independence. • The use of peer review mechanism must be encouraged within the region. This process may have the potential to broaden the pool of experts available. Peer review will ensure the development of the financial supervisory and regulatory systems in the region. “Ensuring Investor Protection”

Strengthen regional and international financial integration • Countries in the region must strengthen ties with regional and international economies as these are key foundations in various African countries’ transition towards becoming high value-added and high-income economies. • Stronger cross-border linkages will serve to enhance trade and investment opportunities by expanding the market for final demand, increasing capital accumulation and improving factor productivity. • Such cross-border linkages will also enhance opportunities for African countries to capitalise on the diverse comparative advantages in the region. “Ensuring Investor Protection”

Deepen cross-border coordination and cooperation among financial regulators • To promote the orderly provision of financial services in the region,cross-border coordination and cooperation among regulators must be deepened. • This will ensure financial stability within the region is preserved while realising efficiency gains from increased activities of local financial institutions abroad as well as promote regional and international financial conglomerates in the various countries. • Countries in the region must pursue cross-border arrangements with other regulatory authorities with a view to achieve mutual recognition or to promote consistency of prudential and market conduct standards. “Ensuring Investor Protection”

Conclusion • As the world economy becomes more interlinked and more complex the nature of financial institutions has to evolve. But is has to evolve with care. • Given the economic importance of the financial sector and the dangers when it functions poorly, it is not surprising that governments in both developed and emerging market countries alike take a keen interest in regulating and supervising financial institutions and markets. • Sharing lessons, experiences, and challenges among policy-makers and regulators in the region will further enhance co-operation, which will eventually strengthen financial markets and institutions in Africa and lead to greater financial stability in the region. “Ensuring Investor Protection”

References • Cœuré,B. (2012). Challenges facing financial integration and financial stability • Financial Sector Strategic Plan II Report, Ghana, (2012) • Fullani, A. (2009). Financial supervision and measures to strengthen financial stability • Junbo, X. (2005). Medium-term strategy to strengthen financial stability and promote financial development • Kawai, M. (2013).Strengthening the Asian Financial Sector toward Sustainable and Inclusive Growth • Kuroda, H. (2002). How to Strengthen Banks and Develop Capital MarketsMorgan, P. J. and Lamberte. M. (2012). Strengthening Financial Infrastructure. • Mulya, B. (2009).The need to strengthen Indonesian financial market • Nienhaus, V. (2010). Capacity Building in the Financial Sector: Strategies for Strengthening Financial Institutions • Pomerleano, M., Litan, R. E. and Sundararajan, V. (2002). Strengthening Financial Sector Governance in Emerging Markets • Rambarran, J. (2012). Strengthening financial stability in Trinidad and Tobago – staying ahead of the curve • Sin, N. N. (2012). Strengthening Asia Financial Markets Through Regional Collaboration • Stiglitz, J. (1998). The Role of the Financial System in Development • Winkler, A. (2010). The Financial Crisis: A Wake-Up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies “Ensuring Investor Protection”

STRENGTHENING FINANCIAL MARKETS AND INSTITUTIONS IN AFRICA • END • THANK YOU FOR YOUR ATTENTION “Ensuring Investor Protection”

SECURITIES AND EXCHANGE COMMISSION, GHANA