Did the Bank of Ghana do a disservice to the Ghana Stock Exchange?

The Ghana Stock Exchange has struggled to make a meaningful impact for the past few years, making it quite unattractive. In the last few years between 2014 and 2019, the only impressive return was in 2017 when the Exchange returned 52.73%.

The reasons for the slow performance are attributed to the high cedi depreciation, power crises, high interest rates (2014-2016), low dividend payouts, low earnings of the companies amongst others.

The banking crises had the biggest toll from 2018. Currently the crises have not yet been fully resolved as the Receiver of the collapsed institutions is yet to complete its work.

The Bank of Ghana in a press release of 20^th April, 2020 has directed that “… all banks and SDIs desist from declaring or paying any dividends or distributing reserves to shareholders, and from making any irrevocable commitments regarding the declaration or payment of dividends to shareholders, until further notice.”

The Bank of Ghana in the same document referred to its earlier release where the banking regulator “…directed banks and SDIs to desist from declaring or paying dividends and from making other distributions to shareholders for the financial years 2019 and 2020, unless the Bank of Ghana was satisfied, that such institutions met the regular prudential requirements and were not relying on the additional liquidity released by the regulatory reliefs provided by the Bank of Ghana.” The Bank of Ghana indicated that it would continue to monitor the evolving impact of the pandemic on banks and SDIs and on their customers, and would issue further directives as required.

By halting the declaration of dividends, does it mean that the BoG was not satisfied with the banks’ compliance to the regular prudential requirements and was not convinced that some of the banks may not touch the additional liquidity released?

In these times that the economy is struggling in the wake of the COVID-19, dividend payments would have eased a lot of hardships just as the measures put in place to protect customers of banks and this would have enhanced trading on the bourse.

What this means is that for the second election year in a row, the stock market is expected to close on the low side, which was not the case in previous election years.

No nation with the stock market at heart would support this directive.

Let’s look at some of the reasons stock exchange activities are very critical to our economy.

• A stock exchange is a reliable barometer to measure the economic condition of a country. It’s not the case for Ghana as the exchange is not fully represented by the industries in the economy. The rise or fall in the share prices indicates the boom or recession cycle of the economy.
• The stock exchange is the only place listed securities are traded and the authorities include the companies’ names in the trade list only after verifying the soundness of the company. The listed companies also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange. How many of the listed banks were caught up in the financial sector meltdown?
• The process of buying and selling through a stock exchange helps to invest in most productive investment proposal and this leads to capital formation and economic growth.
• The stock exchange typically offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive ventures especially Ponzi Schemes.

If the dividends were allowed to be paid in these crucial Covid-19 times, plummeting stock prices would have been supported during this market downturn.

A reason why dividend stocks outperform during poor markets is because if the share price is falling investors feel the dividend is safe and investors are not going to be drawn to buy into the stock because of the yield alone.

As mentioned above, one of the advantages of dividends is that they can protect you during a bear market. They can also help accelerate your returns during a market downturn and help you recover your capital more quickly.

Dividends can help you psychologically as an investor especially as many investors haven’t really benefited much on the capital market in Ghana in the past few years.

Dividend payment is as good as cash. There is a good saying, “revenue is vanity, profit is sanity, cash is reality.” The cash paid would have been an effort to reduce hardship and reduce the impact COVID-19 is having on people. That is a reality.

A company’s stakeholders include and not limited to customers, employees and shareholders. It is clear that the Bank of Ghana’s main objective is to protect the bank customers, forgetting that shareholders are also key. There are indeed some shareholders who do not hold cash in the banks but mainly rely on dividend payments for survival.

References: younginvestorsghana.org, retireondividends.com, Investopedia.com, gse.com.gh, bog.gov.gh

Source: Young Investors Network Research

Read Full Story