To further safeguard investors’ interest, particularly from pension funds, Chief Executive Officer of Axis Pensions Trust – Afriyie Oware, has proposed a transitioning of the fixed deposit market from its current arrangement to a negotiable market, which provides a structured arrangement – including more access to information – for issuing bank fixed deposit securities.
A fixed deposit (FD) is an investment instrument offered by banks, where a sizeable amount of money is invested at a predetermined rate of interest for a fixed period.
In an interview with B&FT, Mr. Oware said the financial sector clean-up has removed the mistaken impression some investors have had; that bank fixed deposits are bankruptcy-protected.
“The financial sector clean-up exposed the reality as no such seniority claim rights were accorded fixed deposits,” he said.
The current arrangement for bank fixed deposits does not allow for an active market in bank securities, he added.
“I believe it’s time to build a structured market around bank securities featuring issuer credit rating, programmed issuing calendar by banks, offer document publication, and admission of securities to securities depository to make them tradable. This should be a minimum requirement for pension funds to invest in bank deposits,” he proposed as a remedy.
Per the latest National Pension Regulatory Authority’s investment guidelines, pension funds may be invested in bank securities such as fixed deposits, negotiable certificates of deposits (NCDs), repurchase agreements (Repos), commercial paper, and bankers’ acceptances issued by any bank. However, pension funds are limited in terms of the quantum that can be invested in the securities of a particular bank, if the total amount so placed would be more than 10 percent of the funds of the bank.
In many advanced markets, money market securities have arrangements where fixed deposits are traded easily through a structured process.
Describing the pertaining situation on the market, Mr. Oware said: “Currently what prevails is, if a bank wants to borrow money from a pension fund, typically the pension fund would just move money to the bank and negotiate how much interest rate is desirable. If the interest rate is agreed, there is a certain acknowledgment of investment usually by the treasury department of the bank”.
However, if a pension fund wants to sell that investment there is no secondary market in place.
“I am arguing that the same way government of Ghana publishes the issuance calendar, we should transition the fixed deposit market to a negotiable market, where there is a structured arrangement for issuing securities; and the issuer can be credit-rated and the specific characteristics of the securities can also be structured to give pension funds some seniority claims for those who wish for that, and those who do not want seniority claims may get some interest margins as compensation,” Mr. Oware emphasised.
This, to a large extent, gives assurance to an investor about the credit quality of any bank, he noted.
“As investors, I think we hold a certain responsibility to ensure that this happens. It’s not the duty of regulators to force this on the market but we the market participants have the role to also shape the direction of the market by changing the requirements. As an industry, we need to foster a certain coalition to help or advance our market,” he said.
