By OKEY ONYENWEAKU
The move to revive margin loans in the financial markets appears to be receiving very strong support from stakeholders.
This is based on the fact that the equities market has been underperforming at -16 per cent negative year to date. Given this trend, expectedly, there is a consensus that measures should be taken to restore liquidity in the market in order to create higher activities in the bourse.
Indeed, the equities market has suffered a protracted set back with little flashes of very weak rally occasionally. Lack of liquidity among other challenges has been fingered for the limp position of the market recently.
Along this line also, several experts have almost always believed that one of the best ways of creating liquidity in the capital market, when every other measure seems to have failed is to encourage margin lending(Margin Loans).Margin loans, industry experts say are loans made by a brokerage house to a client that allows the customer to buy stocks on credit.
The term margin itself refers to the difference between the market value of the shares purchased and the amount borrowed from the brokerage. Interest on the margin loan is usually calculated on the outstanding balance on a daily basis and charged to the margin account.
One obvious benefit of margin lending analysts believe is that it allows you to potentially build wealth much quicker than you would with just your own savings. Some other benefits include: Ability to borrow without the need for property equity: Many people borrow money and use their homes as equity. Added to these advanced market observers explained that margin loans do not only give opportunity to leverage assets, but also the ability to profit from share price declines. Others benefits of margin loans according to them are the ability to diversify a concentrated portfolio, a convenient line of credit, low interest rates, repayment flexibility, tax-deductible interest and the ability to participate in advanced options strategies.
But the downside must also be considered industry watchers say, pointing out that in the past the market suffered because of the same issues that brokers are seeking. It is dangerous’’ a stockbroker who pleaded anonymity said.
Speaking on the issue, Managing Director of High Cap Securities limited, Mr. David Adonri, who is an expert in issues of margin lending told Business Hallmark that the equities market was underperforming because of lack of liquidity. He explained that the remedy to reviving the market would be by re-introducing margin loans to create that needed liquidity to help increase activities in the bourse.
Adonri however cautioned that margin lending should be done differently now than had been the case before:
‘’This time, the guidelines will be different and will be backed by an institutional framework. The principle of the framework will be centered around derivatives. There is also a legal framework to ensure that margin loans are treated as debt instruments’’, he said
But to the former Managing Director of the defunct A.C.B International and a reputable trainer of bankers, Emma Nwosu, the policy makers should thread with caution and ensure that banks are ready in-terms of training and otherwise before the re-introduction of margin lending in the market. According to him, the banks should be given a target within which to prepare and train their staff in readiness for the new loans scheme. He reminded stakeholders about the market crash of 2007 and 2008 which was partly caused by the wrong application of margin lending.
‘’I have said that, I don’t believe the banks are quite ready both for the compulsory minimum lending to the various sectors of the economy and for margin loans. I thought the banks should have been given a target time and told they will be moving into this scheme to get themselves prepared. They have to train their people,’’ he explained.
Another senior broker who would not want his name mentioned in print expressed doubt that any investor or banks were ready to give or accept margin loans.
“I am not sure that anybody has actually accessed any margin facility based on the new rules. I’m also not sure that the banks are ready to give margin facilities now except there are other things attached that guarantee the security of the funds”, he said.
‘’Margin loans will be difficult in our environment now. I am not sure that anybody will that bold to take margin loans now. I want also ask who gives margin loans and who will like to give margin loans now?’’, asked a Lagos based financial analyst, Nonah Awoh
Despite the havoc margin loans wrecked on the economy generally in the past, there is a broad belief that the market still needs the services of margin loans to provide the necessary liquidity for trading activities.
But remotely, there are still subtle fears about margin loans as it evokes memories of pains.
Recalling haunting memories of a sharp plunge in stock prices in 2008 has remained bitingly fresh in the minds of stock brokers who were mauled by a 70 per cent slide in market value in less than 360 days. As the Securities and Exchange Commission (SEC) had promised to roll out new and stricter guidelines for margin trading accounts most brokers look on in distant amusement. The brokers who have shown general disdain for margin trading business and their firm reluctance to return to the quagmire that almost sent the majority of them to early graves, appear interested once again. But most of them still remember then that the equities market recorded a sharp 70 per cent free fall as capitalization dipped from N12.6 trillion in March 3, 2008 to N3.99 trillion by February 2009, its lowest drop in half a decade.
Though there is a consensus that bad corporate governance was a prime reason for the crisis, a cursory review of the scenario revealed that lack of decorum in the application and management of margin loan accounts was majorly to blame unsustainable leverage ratios of stock traders. Even laymen were emboldened to speak out against the way margin loans were earlier administered in the market. SEC, nevertheless, seems to believe that tighter regulation and stronger oversight could reverse the negative opinion operators and their clients have of the concept of margin accounts.
The guidelines according to SEC cover the type of securities that qualify as marginable securities as well as the profile of investors that may participate in margin trading.
“They provide the criteria for determining marginable securities and those securities excluded from the list of marginable securities.
It is important to note that the guidelines exclude Bank stocks from being used as collateral for margin trading transactions” SEC emphasized.
According to the margin list drawn on February 28, 2013, 32 equities qualified for the margin list.
They are Ashaka Cement PLC,Cadbury Nigeria PLC, Conoil Nigeria PLC, Custodian and Allied Insurance PLC, Dangote Cement, Dangote Flour Mills PLC ,Dangote Sugar Refinery PLC, Fidson Healthcare PLC, Flour Mills Nig PLC ,Glaxo Smithkline Consumer PLC, Guinness Nigeria PLC, Honeywell Flour Mill PLC, International Breweries PLC, Julius Berger PLC, Lafarge WAPCO PLC ,Livestock Feeds PLC, Mansard Insurance PLC, Mobil Oil Nigeria PLC,
Others include National Salt Company Nigeria PLC,Nestle Nigeria PLC,Nigerian Aviation Handling PLC, Nigerian Breweries PLC, Oando PLC, Okomu Oil Palm PLC, P Z Cussons Nigeria PLC, PRESCO PLC ,Sevenup Bottling Company PLC, Total Nigeria PLC, Trans National Corporation, UACN Property Development PLC ,UNILEVER Nigeria PLC andUnited African Company Nig.
Efforts to establish whether any investor did access loans under the new rules eight years ago were not easy as the spokesperson of the SEC, Mrs. Efe Ebelo said she needed to reach the relevant desks to give response to our desire before press time.
The Securities and Exchange Commission, SEC, had in May 2019 said that plans were under-way to amend the rules on margin lending and resume activity in that space. The Acting Director General, SEC, Ms. Mary Uduk, had said that engagement was ongoing with the Central Bank of Nigeria (CBN) on margin lending with a view to re-include banking shares in the margin list.
Former CBN Governor, Sanusi Lamido Sanusi, had said that the financial sector entered into a crisis situation partly because the CBN, as the regulator, lacked both the capacity and will to supervise the banks.
The banking sector lost about N1trillion to margin lending in 2008.
“There had been no guideline on margin trading,” adding that, “for instance the Financial Sector Regulatory Committee (FSRC) did not meet for three years and no one talked.” Sanusi had said
He argued that the major issue in the sector centred around corporate governance, because banks were controlled by their chief executive officers rather than the boards.
It would be recalled that about N421 .7 billion margin loans to individuals, stockbrokers and corporate bodies were discovered in the books of 24 banks in 2009. The CBN had sacked Managing Directors and Executive Directors of five banks as a result of these margin and other loans.
Details revealed that 11 top banks had granted a total of N229.9billion to individuals and corporate bodies as loans to buy shares.
Details showed that Intercontinental Bank topped the list of banks with heavy exposure to margin loans of N85.2 billion. G T Bank was burdened with N70.3billion margin loans to individuals, stockbrokers and corporate to buy shares. Ecobank was third in the high profile margin loans challenge with a margin loan exposure of N59.2 billion.
Access Bank Plc had a total exposure of N33.5 billion while Oceanic Bank plc, granted a total of N22 billion as facilities for share trading to individuals and stockbrokers.
United Bank for Africa’s margin loan portfolio stood at N21.6 billion backed by share. Diamond Bank had incurred a total of N20.2 billion debt of margin loans as Union Bank, according to the record had a total of N17.8 billion margin loan facilities.
Stanbic/IBTC granted a total of N 10.1 billion margin loans. The development had helped in crashing the market which is still suffering from its effect.
Not many have forgotten the escapades of Peter Ololo and his firms when the issue of margin loans is mentioned.
The EFCC had explained that a huge portion of the loans taken by Ololo’s firms – Falcon Securities Limited, Petosan Oil and Gas Limited, Petosan Property and Development Company Limited, Petosan Farms, and Resolution Trust and Investment Company Limited – were carried out illegally.
The agency also revealed in the charges against the man who was known as the market maker by his colleagues, that him and some of the bank chiefs, at various times between 2007 and 2009, borrowed about N141 billion naira from three banks (Oceanic Bank Plc, Afribank Plc, and Union Bank Plc) without adequate security.
Indeed, on the heels of renewed whispers over the imminent return of margin loans, it is clear that the scars that had been introduced by the crisis caused by the margin loans debacle of several years ago may not have healed completely. This then leads us to a related point: the therapists of the financial and investments arena may also need to be brought in at this point too.