BoG initiates framework to expand frontiers of commodities exchange

The Bank of Ghana (BoG) says it has initiated various frameworks to help expand frontiers of the banking system and also establish requisite financial infrastructure needed to fuel operation of the commodity exchange. 

Among the initiated frameworks is included introduction of a warehouse receipt system of financing, and also steps to implement the Basel Two Accord and aspects of Basel Three; targetted at strengthening resilience of the banking system. 

Under the framework, supervisors will need to conduct a better assessment of market risk factors of which commodity risk is key, as this will help meet challenges and place the financial system on a sound footing. 

Mr. Millison Narh, First Deputy Governor BoG, made this statement at the opening of a two-day seminar on Commodity Trading and Risk Management in Accra, aimed at exposing key actors in the commodities trade to risk management tools available for mitigating inherent risk as well as operating and trading in the commodities market and exchanges.

The seminar was organised by International FCStone Limited, a wholly owned subsidiary of INTL FCStone Inc., and brought together representatives from the business community including the banking sector, the cocoa industry, grain producers, mineral producers, and governmental regulatory bodies like the BoG and Securities and Exchange Commission.

The seminar explored the impact of developing local and regional commodities markets, and participants will acquire knowledge of developing local markets, promoting investment in commodity production, and developing hedging strategies to manage commodity price risk.

Some regional countries like Nigeria and Cote d’Ivoire are represented, besides multilateral institutions including the IFC and African Development Bank.

Mr. Narh said: “The commodities market in Ghana is less developed. As we are all aware, cocoa and crude oil appear to be the only commodities that have well-structured market infrastructure to facilitate their trading. 

This has hampered the domestic trading of these commodities and the ramifications are visible, and key among them are issues of price discovery and transparency.

“It is expected that Commodity-Backed Warrants (CBW) will be issued by market participants to fund their operations. These instruments are prerequisites for the establishment of a commodity exchange, and capacity building in this area has already begun.”

Recounting the importance of establishing a commodities market in the country, Mr. Narh explained: “Commodity trading could form the foundation for the emergence of futures markets in Ghana and other emerging economies on the African continent”. 

He said the commodities exchange offers significant developmental benefits with huge positive impacts on farmers and the wider economy.

He indicated that empirical studies show that commodities trading presents enormous benefit to economies, and these include mobilising credit to agriculture by creating secure collateral for the farmers and traders, and smoothing market prices by facilitating sales throughout the year rather than just after harvest. 

It will provide a way to gradually reduce the role of government in agricultural commercialisation. It will also encourage banks to extend credit to the agricultural sector, since lenders can create a charge on the commodities which are of standardised quality and have been monetised.

He however observed that the country is likely to suffer wider shocks if it fails to develop a commodities market. 

“We have been badly outpaced largely due to our underdeveloped commodity markets and poor market infrastructure,” citing that in 1970 the Gross Domestic Products (GDP) of Ghana and Malaysia were US$3.5billion and US$3.6billion with per capita income of US$258 and US$392 respectively. 

By end of 2014, Malaysia per capita income had shot-up to US$7,304 while Ghana recorded US$776.

He explained that country had worked on the establishment of a commodity exchange, and attention must be paid to the several actors in the value chain.

“No investors would like to trade in an instrument in which the underlying asset is toxic. It is for this reason that risk management is of paramount importance to commodity trading.”

He commended organisers of the seminar, as the initiative is anchored on the mutual benefits that will likely accrue to the country’s emerging commodities market.

“I believe FCStone Limited will be privileged to have a first-mover advantage in our commodities market as well as other African markets as it seeks to share its knowledge and experience and establish itself as a supportive partner in developing commodities markets across some selected African countries,” he said, adding that the seminar was timely as it came soon after the Ghana Commodity Exchange had been launched and will afford industry regulators opportunity to build capacity to confront emerging challenges.

President John Mahama launched the Ghana Commodities Exchange last month to usher-in a new pillar of the financial system to cover the real sector of the economy -- commodities, production and trade.

Mr. Philip Smith, the Chief Executive Officer, INTL FCStone’s Europe, Middle East and Africa operations, supporting Ghana’s decision to establish a commodity market, confirmed that it will bring security and transparency to the local market.

“We feel that this demonstrates the commitment of Ghana’s government to supporting its growing agricultural sector -- with half the Ghanaian workforce engaged in agriculture, an investment in a commodity exchange is vital.

“International FCStone feels this is an area where we can hopefully make a modest contribution to the success of this venture and the future of the sector generally,” Mr. Smith remarked.