The low liquidity in the Ghana Stock Exchange (GSE) is a problem. With only 41 listed equities, the GSE continues to struggle with the lack of activity on the bourse. In a statement marking the 25th anniversary of the GSE, Dr Sam Mensah noted that:

The GSE’s liquidity as measured by the market turnover ratio is well below key African markets such as Botswana, Nigeria, Kenya and South Africa. Low liquidity increases volatility thus creating additional risk for investors.

This is unfortunate. Ghana has the second largest economy in West Africa. It has political stability and tax concessions for investors in the stock exchange yet activity on the market is far too low.

Equities shed 12.69% off their value last year and have lost a further 12% this year even as treasury bills are returning 22%. How much of this has to do with fundamentals and how much has to do with the low liquidity in a high interest environment? I do not know.

What I do think is that the stock market is suffering from a catch-22 situation

– people are afraid to invest because of the low liquidity that is causing high volatility

– the unwillingness of people to invest is leading to low liquidity.

Perhaps there could be a way to draw investors who are looking for stable returns into the stock market. This method could potentially also reduce borrowing costs for businesses. I’m talking about convertible corporate bonds.

Corporate bonds are debt instruments issued by companies. They usually have fixed maturities and fixed interest rates . A convertible corporate bond offers the holder the added benefit of converting the bonds into shares usually at a predetermined price.

For example let’s say CediTalk is listed on the GSE and is trading at GH¢1 per share. It decides to issue GH¢1000 convertible bonds with a maturity of 5 years, a coupon rate (annual interest payments) of 20% and the option to receive cash (face value of the bond) at maturity or receive 1000 shares of CediTalk. At maturity, the convertible bondholder would make the decision about whether to take GH¢1,000 or receive 1,000 CediTalk shares. So if CediTalk is trading at GH¢2 per share at maturity the investor may consider converting into shares. If CediTalk is trading at GH¢0.5 s/he may prefer the GH¢1,000 cash.

Convertible bonds could attract investors into the stock exchange because they offer the stability of a bond (through the interest payments) and the growth potential of an equity (through the ability to convert into shares). Also companies could issue convertible bonds with yields lower than other fixed income instruments or lower than the interest they would pay from borrowing from a bank because of the added benefit of the convertibility.

Corporate bonds have recently been issued in Ghana but I am yet unaware of any convertible corporate bonds. As businesses deal with high interest rates and low activity in their equities, convertible bonds may be a way of killing two birds with a stone.