The Bank of Ghana has backed COCOBOD’s decision to raise money locally to finance cocoa purchases instead of depending on its traditional annual syndicated loan.

Governor of the Bank of Ghana, Dr Johnson Pandit Asiama, described the new funding approach as a positive step that could make cocoa financing more sustainable and reduce pressure on the country’s banking system.

Speaking after the latest Monetary Policy Committee meeting, Dr Asiama explained that COCOBOD will now raise funds from investors in Ghana’s domestic capital market to purchase cocoa from farmers for export.

“They've now moved from the syndicated loans to local market financing. I think it's rather a good one. What it means is they are mobilising money locally to fund the purchases of cocoa for export, which we believe is a good thing,” he said.

Why COCOBOD is changing its funding model

For many years, COCOBOD relied on loans arranged by a group of local and international banks to finance the purchase of cocoa beans during the crop season.

Under the new model, COCOBOD is expected to raise money through the domestic capital market, including the issuance of commercial paper.

Commercial paper is a short term investment instrument used by companies and public institutions to borrow money directly from investors.

Dr Asiama said this approach should have been introduced earlier because commercial banks cannot continue increasing their lending to COCOBOD without limits.

Banks are required to maintain enough capital to protect depositors and absorb possible losses. As a result, the amount they can lend to one institution, including COCOBOD, is restricted.

“It's one thing we should have done long ago. The reliance on banks to fund COCOBOD, there's a limit to how much the banks can fund because of their capital base,” he stated.

He added that raising money from the capital market would allow a wider group of investors to support cocoa purchases instead of placing most of the responsibility on commercial banks.

Reduced pressure on the Bank of Ghana

The Governor also said the new model could help reduce large liquidity injections into the financial system.

Under the previous syndicated loan arrangement, significant amounts of money entered the economy during the final quarter of the year when cocoa purchases increased.

This sometimes created additional pressure for the Bank of Ghana because the central bank had to manage the extra money circulating in the financial system.

Dr Asiama said that pressure should reduce because the funds will now be raised from money already available within the domestic market.

“We used to have the pre-financing regime where, in the fourth quarter, we had that huge liquidity injection on the balance sheet of the central bank. That will no longer be the case, given that this is going to be money that's mobilised within the system,” he explained.

What the change could mean

COCOBOD’s move could create new investment opportunities for pension funds, banks, fund managers, insurance companies and other investors in Ghana’s capital market.

It could also reduce the cocoa sector’s dependence on foreign loans and limit the risks associated with exchange rate movements and international borrowing conditions.

However, the success of the new model will depend on COCOBOD’s ability to attract enough investors at affordable interest rates.

Dr Asiama said the Bank of Ghana believes the decision is consistent with efforts to strengthen the financial system and create a more efficient way of funding cocoa purchases.

The central bank expects the new arrangement to provide COCOBOD with the money it needs while reducing pressure on commercial banks and the Bank of Ghana’s balance sheet.