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SEC, NSE To Reverse Capital Market Losses With Margin Lending

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Following the decision of Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN) to amend the rules guiding margin lending, capital market analysts said, it will go a long way in providing liquidity and boost activity in the capital market.

As at April 5, 2019, the All-Share Index (ASI) has recorded a year-to-date loss of 5.77 per cent. The stocks market has experienced volatility as investors and fund managers rebalance their portfolios, with eyes fixed on political space and ongoing full year company earnings position and post-election market dynamics.

A margin or investment loan is a form of gearing that lets operators and investors borrow money to invest in approved shares or managed funds, using their existing cash, shares or managed funds as security. The amount that they can borrow is determined by the securities in their portfolio, their Loan to Value Ratio and a credit limit based on an assessment of their financial position.

Recall that many investors/brokers that engaged in margin lending prior to 2008 and 2009 capital market meltdown, had their fingers burnt following the crash and loss of value in the shares (collateral). Following the losses suffered by operators and investors as result of margin lending, SEC and the CBN had issued rules on margin lending in 2010.

Since then, there have been zero activity regarding margin lending, hence SEC and CBN are making moves to review the rules and make them flexible and attractive.

Speaking at the first quarter post-Capital Market Committee, (CMC) media briefing recently, in Lagos, acting director-general of SEC, Ms. Mary Uduk, said that engagement is ongoing with the CBN on margin lending with a view to re-include banking shares in the margin list.

Uduk said that the need to amend the rules on margin loans became necessary following zero activity in the space even after rules around margin lending was formulated in 2010.

According to her, after the meltdown, in 2010, the SEC and CBN came together to come up with rules on margin loan but after the issuance of that rules, we found out that there was zero activity in respect of margin loan and that is why the market suggested that it appears the rules on margin loan is very stringent.

“In coming up with that rule, probably due to the experience of the past, we excluded banking shares from margin list. We found out from other jurisdictions that you can be given loans to buy banking shares, so, because of that, we started engaging CBN,”

The acting DG explained that there will be no collateral damage as in 2008 because we are going to introduce margin call to guard against that, saying that  “By the time we amend the margin loan rules, we will also monitor compliance with the margin rules so that there will not be any abuse in the market.”

Managing director, Trust Yields Securities Limited, Alhaji Rasheed Yussuf, said that the current liquidity challenge in the NSE can only be solved with the reintroduction of margin loans, calling on CBN and SEC to collaborate with market operators on the modalities for reintroduction of margin loans in the market.

Yussuf attributed failure of margin loans in the past to lack of monitoring by banks. The commercial banks were overwhelmed and failed to monitor investors to access their margin loans portfolio.

He said that the fundamental problem of the NSE, apart from structural issues, was liquidity and the market would not witness any meaningful growth until the issue of liquidity is resolved.

According to him, until we solve the liquidity problem, no matter what we create in terms of product, the market will not wake up. The foreign investors, the major players in the market, had developed a ‘wait and see’ attitude due to current economic policies.

“Lack of liquidity was affecting the volume and value of shares being traded on the exchange. Margin loan is used in every market to create the needed liquidity, even in New York.’’

Also, independent equities analysts at Tradelines, Tunde Jeariogbe said the re-introduction of margin loan in the Nigerian equities market will be a welcome development, though not without its lapses as experienced back in 2008/2009, when most involved in the scheme got their fingers burnt.

He stated that the first challenge the move will solve is the liquidity challenge that has characterized the market, where international institutional investors fully determined the market direction, saying that “When they move, market crashed, at their entry activities on the exchange is excited. This simply confirms the low trading potentials of the local participants in the market.”

He noted further that the move will also reactivate activities in several brokerage firms who currently lack the financial capacity to play the market, and reduce infringement by market operators on clients’ portfolio.

According to Jeariogbe, confidence around the market will automatically be boosted. Individual investors trading potentials will also be enhanced. In my opinion the market will not witness any meaningful growth until the issue of liquidity is resolved.

He stressed that dictating the tradable equities with the loan will kind of refocused the market on approved listed equities, this is more like the market experience with the institutional investors, saying that “Although this cannot be completely avoided, we are of the opinion that margin loan policy should be refocused to accommodate sizeable number of listed equities.”

Also, a stockbroker with Calyxt Securities Limited, Tunde Oyediran said this development is to provide liquidity to the market. Oyediran noted that stockbroker are in a situation where they cannot get funds from banks, saying that with the reintroduction of margin loan, this will have a great impact on the market.

He added that “It is a welcome development, let the regulators involved work on it very well and the mistake of the past will not be repeated. This is what happened in every other developed jurisdiction.”

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