Internationale Zeitschrift für Wirtschafts- und Managementwissenschaften

Challenges of Frontier Stock Markets with Low Liquidity: A Case Study of Ghana Stock Exchange

Abstract

Igor Gvozdanovic and Justice Seth Baning-Osafo

Very few studies examined the antecedents of illiquidity in the finance literatures. This research investigates factors contributing to the problem of illiquidity, a common feature of frontier markets, on the Ghana Stock Exchange (GSE). The general objective of the research was to analyze the illiquidity phenomena- its origins, impacts, and potential remedies. More specifically, the research focused on the effect of illiquidity on stakeholders and identified measures in place to improve the condition. The research adopted a qualitative methodology research with unstructured phenomenological interviews, which enabled participants to share experiences, opinions and perspectives on the problem. Twenty-two participants representing the major stakeholders on the market were selected for the study, including: (i) registered brokers; (ii) listed companies; (iii) unlisted companies; (iv) government institutions, (v) regulatory agencies, and (vi) investors. The results indicated that there is lack of equity culture in Ghana, with bank loans and personal savings being primary sources of business funding. Macro-economic instability also affects businesses and investors. Government borrowing at high treasuries interest rates makes stock market less attractive. The study also revealed that market inefficiencies, lack of clear government policy direction and effective regulation also contribute to illiquidity. To deal with the problem, the exchange has recently introduced the Ghana Alternative Market (GAX) for SMEs, and the Ghana Fixed Income Market (GFIM). Based on the findings, it is recommended that the government tackles anti-equity culture through financial literacy programs or education, and establish financial incentives for listed companies. Government must control borrowing through prudent fiscal policies, maintain macro-economic stability, and implement effective policies and regulations that promote listing of State Owned Enterprises (SOEs), local private companies and foreign businesses on the GSE.