CBN Stops Funding of Margin Trading by Banks
Financial sector regulatory authorities, the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC), have directed banks to stop the extension of loans to stockbroking firms following increasing suspicion of insider dealings at the Nigerian Stock Exchange (NSE). The directive which was issued by the regulators recently is a reflection of the central bank’s continuous monitoring exercise which aims to sustain the stability of both the banking sector and the capital market.
Margin trading involves borrowing money to purchase stocks. It allows the stockbrokers to buy more stocks than they would do normally while the shares are used as collaterals.
A source within the stockbroking community told Business Day that the CBN has directed banks to stop forthwith the extension of loans to stockbrokers specifically for margin trading.
Bismarck Rewane, managing director, Financial Derivatives Limited, who commented on the development, said CBN is not stopping all loans to stockbroking firms but that used specifically for margin trading. Rewane said what the CBN is against is banks lending disproportionate amount of their total loanable funds for speculative purposes thus starving the real sector of funds that would have gone into production and generation of employment.
“For instance, if banks loan 90 percent of their total credit for speculative purposes and 10 percent to the real sector, is that good for the economy?”
According to him, it is not the fact that banks lend to stockbroking firms that is the issue but the problem is when it becomes excessive in relation to their total loan portfolio.
A market analyst who spoke to Business Day noted that the development was bound to slow down the market. He said share prices would definitely go down just as it would be difficult to determine the intrinsic value of the stocks. He was of the view that the apex bank’s decision could also slow down the entire economy adding that companies should be allowed to leverage on their assets in order to increase the Balance Sheet.
“The decision by the CBN gives an impression that the economy is growing so fast and they are trying to slow it down but Nigeria is stillm an emerging market and more importantly, the pivot for economic development is availability and access to credit; the ability to refinance whatever assets you have at a point in time”, he said.
While maintaining that margin trading could not have encouraged price manipulation in the market, he stressed that the decision could also reduced the ability of the stock market to react to information.
He said, “The market thrives on information and at any point in time it is driven by forces of demand and supply. We should always leave the buyer and seller to determine the price and nature of assets to buy because there is always a factor of demand and supply in the price mechanism”.
The analyst maintained that the five percent maximum limit at which the prices of shares could either go up or come down on a daily basis was enough to check arbitrary pricing in the market.
Statistics from the regulators have shown that over N3 trillion or 25 percent of the NSE market capitalisation is funded by margin accounts and this is also partly responsible for the market being overpriced in recent times.
It was gathered that the CBN order actually emanated from a joint decision by a committee, which was set up to look at the impact of margin trading on the alleged manipulation of share prices at the NSE. The committee’s membership is drawn from CBN, SEC, NSE, the Association of Issuing Houses of Nigeria (AIHN) and other market operators.
There is a general belief that those who have access to margin loans jerk up share prices in their desperation to meet up with the interests on the loans and still make profit from the sale of the shares.
In line with the CBN order, the Central Securities Clearing System (CSCS) has stopped the opening of joint account specifically for margin trading. Before now, the joint accounts are usually opened with a representative of the banks as co-signatories.
The source disclosed that the banks decided on the joint account in order to effectively monitor their funds.
“Henceforth, the shares would no longer be used as collaterals, we have been told to provide other instruments as collateral for share purchase loans, because it is suspected that the procedure contributed to price manipulations in the market. You know it would not be easy to get huge funds like before if the loan is not collaterised with the share certificates”, he said.
The market in general has already started feeling the impact of this directive as the prices of some stocks have been on the downward trend for some weeks now since the directive was given. Moreso, the CSCS has been turning down requests with respect of opening of margin accounts.
Lanre Oloyi, head of media, SEC, admitted that there is a committee on margin trading but could not confirm recent decisions by the committee.
Other market operators who spoke on the issue admitted that the development would ensure proper pricing of shares in the market.
It would be recalled that Afroil plc and Capital Oil plc were suspended recently after SEC investigations confirmed that the share prices were manipulated.
The director general of the commission, Musa al’Faki noted that other companies are still being investigated while erring firms would be punished.
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