Ghana's Experience

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Financial Markets and Institutions:

Ghana’s Experience

By Sam Mensah, Ph.D Presented at: The International Programme on Capital Markets and Portfolio Management Indian Institute of Management September 8-20, 1997

Abstract
This paper reviews Ghana’s experience with the development of financial markets and institutions. The review uses a framework which reviews various stages of financial development against three basic attributes of an effective financial system: a monetary system, the savings-investment process and a claims-to-wealth structure. The paper makes the observation that the financial system which was inherited at independence only satisfied the attribute of a monetary system. The recognition that there was a need for a more effective financial system in the immediate post-independence era led to an extreme solution under which the entire economy and the financial system was brought under a planned economy. By the early 1980s, the planned financial system had ceased to function because of macroeconomic instability and severe financial repression. The transition and reform period was ushered in by the Financial Sector Adjustment Program (FINSAP) in 1988. The program is a farreaching effort to restructure the baking sector, encourage the growth of nonbank financial institutions and to liberalize markets. The FINSAP process has been underway for close to a decade. It is, however, recognized that financial system development is a dialectical process whereby new structures emerge as a result of a dialectical confrontation between an initial set of conditions and an antitheses which renders the initial conditions untenable. In the Ghanaian context, FINSAP has represented the new synthesis after the financial repression period which followed the planned economy period. By the same logic, the financial system will continue to evolve in response to the new set of conditions which were ushered in by FINSAP.

Financial Markets and Institutions: Ghana’s Experience
The objective of this presentation is to trace the evolution of Ghana’s financial markets and institutions. This will be done within a framework which recognizes the attributes of an effective financial system. The extent to which Ghana’s financial system satisfied these attributes at various stages in the country’s development will be highlighted. A concluding section will identify the current constraints and the responses that are needed.

BASIC REQUIREMENTS FOR AN EFFECTIVE FINANCIAL SYSTEM
There are three basic requirements for an effective financial system: 1) An effective financial system must have an efficient medium of exchange for

exchanging goods and services. Such a medium of exchange serves as a unit of account. The medium of exchange needs to be universally accepted and its value must be reasonably stable if it is to be widely used. Finally, the medium of exchange should be a convenient means of paying for goods and services provided. 2) The financial system must make it possible for the creation of capital on a scale large

enough to satisfy the needs of the economy. In a developed economy, capital formation takes place indirectly. Surplus spending units deposit their funds with financial intermediaries who in turn transfer the funds to deficit spending units. The process works well only if proper legal instruments and financial intermediaries exist. 3) An effective financial system provides markets for the transfer of financial assets such

as stocks, bonds and shares and for the conversion of such assets into cash. Markets support capital formation by providing investors with opportunities to quickly convert their investments to cash. A summary of the attributes of an effective financial system is presented in Figure 1. The three attributes of an effective financial system are depicted as the monetary system, savings-investment process and the claims-to-wealth structure. A financial market is a market in which financial...
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