Capital market operators have stated that the review and amendment of rules guiding margin lending will go a long way in providing needed liquidity and boost activity in the capital market.
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.
Prior to 2008-2009, many investors/brokers that engaged in margin lending had their fingers burnt, following the crash and loss of value in the shares (collateral), due to the global meltdown.
Following the losses suffered by operators and investors, the Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN) 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.
The Managing Director of 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 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, as they were overwhelmed and failed to monitor investors’ 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 and foreign investors, had already 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, a stockbroker with Calyxt Securities Limited, Tunde Oyediran, agreed that merging lending would provide liquidity to the market.
He noted that stockbrokers are in a situation where they cannot get funds from banks, saying: “Let the regulators involved work on it very well and the mistake of the past would not be repeated. This is what happened in every other developed jurisdiction.”
Speaking at the first quarter post-Capital Market Committee (CMC) media briefing recently, in Lagos, the acting Director-General of SEC, Ms. Mary Uduk, affirmed 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.
By Helen Oji
The Guardian Newspaper May 6th, 2019