Many questions are now asked: were the procedures for lending to stockbrokers right? Is it not true that brokers engaged in insider trading or price manipulation? Wasn’t the stock market systematically abused and manipulated? Didn’t bank CEOs connive with brokers to manipulate shares? Isn’t Nigeria’s market problem due to abuse rather than the much talked about meltdown? What is the future of stockbroking firms in all this?
In 2004, when Charles Soludo, the then governor of the Central Bank of Nigeria (CBN) raised the nation’s banking sector capital base to N25 billion, nobody though it could be that easy for any Nigerian bank to raise such fund within short period. Since then some banks have gone to the stocks market to raise additional fund while others were cut up with sudden financial meltdown that hit the world economy early last year. Today, the economy is grappling to survive.
Unfortunately, Nigerian banks relied heavily on stock market where their shares are traded and when the meltdown hit the market, share prices crashed why investors and stockbrokers whose major incomes are from stock trading not only lost money, banks and other financial institutions were after them, all in desperate bid to recover the margin loans granted them by the banks for the purpose of buying into their organization’s equities.
Today, five bank executives have been removed and 16 other directors are either in prison or in Economic Financial Crime Commission (EFCC) custody. With market capitalization of N12.3 trillion in 2007, stock market crashed to less than N5 trillion at the end December 2008 and even now, bears still hold the market strongly. As at Wednesday, market capitalization closed at N4.8 trillion while All-share Index dropped to 21,335.94 point level.
In fact, one of the stockbrokers, Peter Ololo, managing director, Falcon Securities Limited is said to have collected margin loans worth N90 billion from various banks. Out of the loans, Sunday Trust learnt that Falcon secured N19 billion from Union Bank, duly approved by the bank’s board of directors. Parts of the securities provided was letter of undertaking to purchase Afribank shares through Union Capital market and another letter of undertaking to sell Afribank shares to liquidate the debt. The net value of the 640 million shares held on by CSCS was N13 billion.
Although the Central Bank of Nigeria estimated the exposure of the banks to N456.3 billion, check by Sunday Trust revealed that the exposures of the nation’s banking sector to capital market could be well over N2 trillion. For instance Afribank exposure is estimated to N 36.9 billion facilities granted to individuals and stock brokers while a total of N 48.3 billion was granted to other corporate entities who used share certificate as collateral. This was closely by Guaranty Trust Bank which has a total margin loan portfolio of N70.3 billion made up of N18.9 billion loans to individuals and stock brokers to buy shares and N51.4 billion to other corporate who use share certificate as collateral.
Ecobank is said to have a margin loan exposure of N59.2 billion.
First Bank has a total share loan exposure of N58.8 billion, but its balance sheet shows that it did not join the race for granting margin loans during the share boom years to individuals and stock brokers but corporate bodies that used share certificates as collateral.
Access Bank plc, on its part, has a total exposure of N33.5 billion of which N20.1 billion is as a result of loans granted to individuals and stock brokers for share trading while N13.4 billion was granted to other corporate which backed up the loans with share certificates. Oceanic Bank plc, granted a total of N22 billion as facilities for share trading to individuals and stock brokers.
United Bank of Africa records a loan portfolio of N21.6 billion backed by share. In the case of Diamond Bank it has on its balance sheet a total of N20.2 billion margin loans portfolio made up of N19.6 billion granted to individuals and stock brokers and N0.6 billion granted as facilities to other corporate bodies with share certificate as collateral.
Union Bank, according to the record has a total of N17.8 billion margin loan facilities. Stanbic/IBTC granted a total of N 10.1 billion made up of N 5.2 billion granted for share trading while N4.9 billion was granted to other corporate bodies backed with share certificates.
According to the CBN governor, Sanusi Lamido Sanusi, the huge exposure of the banks to the capital market has contributed greatly to the problem of the sector as some of the loans were granted without collaterals
Some of the stockbrokers spoke almost in unisom over whether loans taken as margin loan for the purpose of shares acquisition need to be collateral
Mike Osime is the Managing director of ICMD Securities Limited. According to him, players take margin loans from their banks to trade. There are rules (relating to this loan), basically, the broker, who approaches the bank to a margin loan, before the broker takes that loan, the bank asks the broker to deposit cash or shares equivalent to about 30 or 40 per cent of the loan he wants to take. For example, if you want to take N100 loan, the bank will ask you to bring N30 in cash or equivalent. But now, what the broker is saying is if anything happens today, he will be willing to lose that 30 to 40 per cent cash he had put down.
“In the credit process of the bank, the bank is saying that because the market is liquid and shares quoted on the stock market are near cash, ‘I am willing to accept that as additional security.’
“When margin loans are taken, the broker has no access to the cash; the bank is paying to buy the shares. What they do is that they buy the shares and the bank pays for it, as against the belief in the market that brokers have taken cash money from the bank.
“The next step is that the Central Securities Clearing System Limited (CSCS) operation ensures that the person, who has access to these shares, which is now 130 per cent at the purchase price, is the bank. If the broker ever sells those shares, they go to the bank’s account. The interesting thing is that most of the banks put a clause that if the value of the share price ever gets to 120 per cent (at which time) the broker would have lost about 50 per cent of the money he put in, they don’t have to revert to him to sell the shares.
“That means when the shares were coming down, (because of the lien on the shares) the bank now writes to the CSCS bringing the shares to the custody of the bank. The bank will now decide whether to sell immediately and return any money. But based on what has happened in the market, the bank cannot sell. What is important here is that the broker has lost his entire 30 per cent equity contribution.
“So when you hear a broker borrowed N1 billion or N2 billion, the broker has lost N600 million or N900 million, as the case may be. In this market meltdown, it is the brokers that have taken the
