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Liquidity as a basis for assessing financial assets

By: Ebenezer M. Ashley (PhD)

As part of its functions, money is described as a liquid store of value. This implies a financial asset can be converted into an easily spendable means of payment whenever the holder wants.

Liquidity, therefore, places emphasis on a person’s ability to transform wealth holding into cash without delay or loss of value. Money’s description as a liquid store of value means  money stores value of wealth for individuals and businesses;  people can possess money with high level of certainty that its value would be stable or maintained in the near and distant future, controlling for inflation.

It also means money serves as a liquid asset. Cash is the most liquid form of all financial assets; and  it can be spent without strict conditions. A non-cash asset may also be liquid if it may be converted into cash within a short period and without a significant loss or penalty, which may mean loss of capital, loss of face value, and loss or forfeiture of a substantial amount of interest.

Different forms of financial assets
In Ghana and many other countries across the globe, individuals and businesses use different forms of financial assets. Examples include currency, current account, foreign currencies, cedi travellers’ cheques, building society term deposits, service card, Barclaycard, government Treasury bills, bank acceptances, trade bills, certificates of deposit (CDs), call and time deposits, commercial paper (CP), loan stocks, and gilt-edged securities, among others. Each of these financial assets is discussed, briefly, to determine whether or not it is money, and the extent to which it can be readily converted into cash.

Currency performs all the functions of money and meets the five relative advantages outlined by W.T. Newlyn, including the need for individuals and corporate bodies not to incur cost in holding money; money should not be marketed to facilitate its conversion into means of payment; it must not (normally) earn income; certainty surrounding the absolute value of money must be significant; and controlling for inflation, certainty surrounding the real value of money must be high.

For obvious security reasons, however, persons are reluctant to hold money in large quantities; they would prefer to deposit it at the bank or channel it into other investment vehicles.

Current account is also called sight deposit account, demand account, or chequeable account. In other jurisdictions, it is called a checking account. Use of a cheque facilitates the transfer of funds from an individual’s account to another. This eases payments. 

Foreign currencies are not considered as legal tender; they must be sold before being spent. Readily convertible currencies like the United States dollar are now included in the broad classification of money.

Some government and private institutions make and accept payments, and save in dollars. This affirms its liquidity in Ghana and in other jurisdictions.

Cedi travellers’cheques are issued in different denominations by the GCB Bank  for travellers within the country.

They are not a legal tender, but widely accepted by individuals and businesses throughout the country. These cheques are used in designated shops; their spending is preceded by marketing.

Building society term deposits are not chequeable in Ghana. For a withdrawal to take place, the cheque must be issued by the building society and encashed in a designated bank before spending.  

Service card is available at all Standard Chartered Bank branches in the country. It guarantees cheques up to a certain amount on each transaction. There is a money line service which guarantees payment up to a higher amount. Both can be used in any branch of the banks, specified restaurants and fuel stations, and commercial houses. Unlike other jurisdictions, use of credit in Ghana is restricted and conditionally accepted for payment.

Barclaycard is issued by the Barclays Bank of Ghana. Functions of the Barclaycard are similar to those of the service card; it guarantees payment at member shops and filling stations, and businesses. It is restricted and conditionally accepted for payment.

Government Treasury bills are financial instruments with high liquidity features. There is an active secondary market for purchase and sale of existing bills. They are traded on the discount market. A holder can rediscount it pre-term without significant loss of capital or income. A Treasury bill must be sold before being spent. For this reason, it is described as a money surrogate or quasi-money.

Bank acceptances are bills issued by firms; they are rediscounted on an existing secondary market. The bills are categorised into three: eligible bills, ineligible bills and trade bills. Eligible bills are acceptable or guaranteed by the central bank; ineligible bills are neither accepted nor approved by the central bank; and trade bills do not carry the acceptance of a bank. They are least secure and, thus, give the highest yield. Secondary market for trade bills is not active, except in the case of fine trade bills.That is, bills issued by blue chip or very reputable companies.

Call and time deposits of wholesale funds are accepted by clearing banks, acceptance houses, and building societies from individuals and businesses. The term of call deposits varies from overnight to seven (7) days, but time deposits range between three (3) and twelve (12) months or more. These carry interest, but there is no secondary market for moneys at call and short notices.

Certificates of deposit (CDs) are issued to depositors against large deposits and are intended for specific periods. They attract fixed interest rates; they are negotiable, and have an existing active secondary market though they operate in the same way as call and time deposits. CDs are more liquid than time or call deposit.

The writer is the Lead Consultant/CEO Eben Consultancy Fellow Chartered Economist & Council Member, Institute of Chartered Economists of Ghana (ICEG)
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