In recent times, the Financial Sector in Ghana has come under strict scrutiny from its regulators. The Central Bank of Ghana (BOG) for instance, has been very stern in whipping both Financial and Non-Bank Financial Institutions into shape.
The result of this exercise has led to the collapse and revocation of the license of seven (7) local banks to form the Consolidated Bank of Ghana (CBG) which, has now become stronger, bigger and better. Industry watchers believe that, these exercises have really yielded the needed results that is, it has restored confidence in the financial sector.
Like me, if you thought it was the end of the “showdown in little Tokyo”, you were wrong. The exercise embarked on was the beginning of the game. The BOG took a further decision and lifted its cane to whip the Micro Finance and Micro Credit sector also into shape. This subsequently led to the revocation of operating licenses for over 377 institutions – and the rest is history. The good thing about this exercise was that, the BOG reserved some GHS900m aimed at paying off affected clients. This somehow slowed down the usual fear and panic that usually accompanies such moves in the industry. Kudos to the Governor of the Central Bank and rest of the team.
I read with shock, a report published on myjoyonline online sourced from Bloomberg by which, Mr. Paul Ababio the deputy director general of the Securities and Exchange Commission (SEC) indicated that SEC is investigating money managers for locking up as much as 5 billion Cedis ($921 million) in risky investments they’re struggling to retrieve for clients. The funds are stuck in short-term unlisted bonds, direct private-equity stakes and related-party deals for small- and medium-sized businesses. Mr. Ababio added that with efforts to retrieve the money proving futile, SEC is starting forensic audits to determine how to retrieve money for investors, which may include selling off the fund managers’ assets.
Considering all the turmoil that has hit the financial sector in the country, I ask myself these questions; what do investors/individuals look for before investing their funds in some of these ‘mushroom’ and ‘boutique’ institutions? Are these investors/individuals driven by the overnight magnificent and flamboyant offices, massive advertisement, promotions, campaigns, sky rocket interest rates and the likes of these firms? I do not believe so.
Really, what are the key indicators to consider before you entrust your hard earned personal or institutions funds to a particular financial institution. I may not be able to exhaust all the key aspects in this paper however, I believe the indicators below shall be useful.
Point Number 1: Check for operating license and other registration certificates.
One of the interesting revelations from Bank of Ghana during the Financial sector clean-up was that, some institutions were operating with false or fake licenses which led to the revocation of license of some of the banks. This is very fundamental. Every investment firm must be licensed and regulated in one form or the other. For example, Bank of Ghana regulates and provides license for all Commercial Banks, Micro Finance and Micro Credit Institutions. In the same vein, the Securities and Exchange Commission (SEC) and National Pension Regulatory Authority (NPRA) regulate the activities of Custodians, Asset Managers, Pension Fund Managers etc. In this day and age where information is readily available online, the smart investor should be an informed investor. Ask for copies of the operating license of any institution you wish to invest with. Do not stop there, also ensure that you confirm the existence of the financial institution with the requisite regulatory bodies to be sure that you are dealing with a certified institution.
Point Number 2: Undertake robust due diligence
Performing a due diligence on an investment is an investigation or audit of a potential investment or product. This is to confirm all facts which, might include the review of financial records. In effect, due diligence refers to the research done before entering into an agreement or financial transaction with another party. This process can also be viewed as the investigation the buyer performs on the seller to ensure that on maturity the seller can honour its obligations. It is therefore imperative for any investor, to look out before agreeing to the terms of a transaction.
Many of us have at a point in time made some investment decisions without following due process to ensure that the owners of the business were the owners of the company. There have been several instances in Ghana where investment funds were diverted to support other related entities and business where funds were locked up due to maturity mismatches of tenor of transactions. In other words, funding longer term assets with shorter term liquidity.
Point Number 3: Financial performance and strength of the company
According to J.B. Maverick, a company’s bottom line profit margin is the best single indicator of its financial health and long-term viability. As an investor, you should be constantly searching for the one golden key measurement that can be obtained by looking at a company’s financial statements for evaluating the shares (stock), but it is simply not that easy. So, to accurately evaluate the financial health and long-term sustainability of a company to invest, several financial metrics must be considered.
Four main areas of financial health that should be examined are liquidity, solvency, profitability and operating efficiency. However, of the four, the best measurement of a company’s health is the level of its profitability. While liquidity, basic solvency and operating efficiency are all important factors to consider in evaluating a company, the bottom line remains a company’s net profitability. Companies can indeed survive for years without being profitable; operating on the goodwill of creditors and investors, but to survive in the long run, a company must eventually attain and maintain profitability.
The best metric for evaluating profitability is net margin, the ratio of profits to total revenues. A larger net margin, especially as compared to industry peers, means a greater margin of financial safety, and indicates a company is in a better financial position to commit capital to growth and expansion.
Figure 1: progressive investment growth requires prudent decisions
Point Number 4: The quality of management team
In an article, I wrote and published on myjoyonline and Business and Financial Times (BFT) on the topic ‘’Why Standard Chartered is the most credible bank in Ghana’’, I referred to the solid management team, board and level of management experience which has successively ensured sustainable growth of the Bank for the last 120years. It is not prudent to invest your hard-earned money with any individual or a body corporate that lack the credentials and experience to take investment decision.
It is interesting to note that, some of the Micro Finance and Micro Credit institutions uses the service of high school leavers who do not in my respectful view, have the requisite experience and qualifications on fund management, basic accounting and book keeping skills. As an individual investor, you need to thoroughly access the managers of your investments. We have witnessed cases in Ghana where it has later been revealed that some company directors have diverted investors’ funds for personal gains and other related activities.
An informed investor therefore needs to have a view of the entire management of the investment institution and their Outside Business Interest (OBI). I do not mean to say that having multiple business is not good, however, there is the need to know the funding source of such related activities.
Point Number 5: Track record of Company
If I talk of the track record of the company you would like to invest in, I am referring to the past performance, achievements and even failures of the said company. The unfortunate thing is that a lot of mushroom or boutique companies are springing up in every corner in Ghana. Investors are no longer taking note of their previous investment cycle and profile. Today`s financial environment is also plagued with hidden fees, complicated and fine prints. As an investor, you should be interested in knowing the number of years the company has been operating, how long it has been in existence, investment decisions, non-performing loans ratios and recovery rates. Investment firms like Databank among many others have over the years shown a good track record as an investment hub. For such institution, you can be assured of right decisions on investments.
Point Number 6: Relative strength in the industry
Relative strength is a momentum investing technique that compares the performance of a stock exchange-traded fund (ETF) or mutual fund to that of the overall market. By using specific calculations, you as an investor can identify the strongest performers compared to the overall market, creating recommendations for investments.
When used as part of the aforementioned investment strategies, relative strength assumes that a share whose price has been rising will continue in its upward trajectory. Investors can use relative strength to identify the top performers within a selected group of potential investments.
This allows the performance of each security to be directly compared to another or to a selected benchmark index, such as the Databank Stock Index (DSI), etc. Traditionally, investors use relative strength to compare shares to each other or to an index. Investors only use relative strength to compare mutual funds to each other based on their associated net asset value (NAV) divided by the number of shares.
Point Number 7: Seek for professional investment advice
Many investors- both corporate and individuals- have burnt their fingers on unadvised investment decisions at a point in time. I personally think some investors do not value the worth of professional investment advisors on their transactions. Let me tell you some reasons why you need the services of an Investment advisor.
A Financial Advisor, as the name suggests, basically gives advice on cost saving measures and guides you on the path to profitability on investment. With the needed advice from the right source, complex tasks can be taken care of quickly. This would enable the investor to make important financial decisions from a position of strength. For example, a financial advisor can use his or her experience to establish internal accounting processes for monitoring expenses. Learning through experience can be one of the best ways to learn a lesson.
Not every small business owner needs to go through bankruptcy. To avoid this, one needs to learn the best ways to handle their finances. A financial advisor can help you avoid costly mistakes, saving you the pain of going through painful and unnecessary rites of passage. Companies like Firstbank, CDH Securities among many others have the expertise to offer such advice.
The list for the key things to look out for before taking investment decision to invest in a particular company or shares can continue on and on. The important point is that, funds are hard to come by these days. Inflation and other macro-economic indicators and economic realities do impact on investments returns. It is therefore critical to consider these fundamentals, seek the necessary professional advice to take the right investment decision. In a nut shell, a smart investor is an informed investor, take the right decision today!
Disclaimer: The views expressed are personal views and doesn’t represent the institutions the writer works for.
About the writer
Carl Odame-Gyenti is a third year PhD (Financial Management) candidate, a Finance and Telecom enthusiast, managing local and global Investors, Intermediaries, Non-Bank Financial and Financial Institution relationships with an international bank in Ghana. He has embarked on several international assignments in London, Singapore, Dubai, Kenya, Nigeria and Southern African markets. He has passion for youth and community development. Contact: Carl.firstname.lastname@example.org, Cell: +233-200301110