CBN OKAYS RESTRUCTURING OF MARGIN FACILITIES

By Ayo Olesin and Yemi Kolapo
Published: Monday, 6 Oct 2008
The Central Bank of Nigeria has okayed the restructuring of loans given for the purchase of shares on the Nigerian Stock Exchange, handing borrowers and banks a 15-month lifeline

The CBN’s move was part of wide ranging measures announced last month by the Minister of Finance, Dr Shamusudden Usman, to arrest the capital market slide that has seen the erosion of stock value by over N3.5tn since March.

The liquidation of margin facilities or loans given for share purchases by banks and panic sale of shares by borrowers to repay loans were attributed as part of the reasons for the persistent bear market.

In a circular to banks, posted on its website on Friday, the CBN said that given that the facilities should have been structured for a much longer period from the outset, it was allowing them to be restructured for a longer period “between now and December 31, 2009.”

The circular, referenced, “BSD/DIR/CIR/GEN/VOL.2/010,” and signed by the Director, Banking Supervision, CBN, Mr. Ignatius Imala, said several banks had recently indicated their desire to reschedule some of their capital market related exposures.

It noted that this desire was informed by the strict consideration of Section 2.3 of the Prudential Guidelines, which provided grounds for re-classifying non-performing facilities.

The apex bank, however, stated that the forbearance was specifically for loans made for the purchase of shares in the NSE.

Loan rescheduling involves a re-negotiation of loan agreements between borrowers and authorised institutions either as a result of deterioration in the borrower’s financial position or the borrower’s inability to meet the initial repayment agreement.

Analysts estimated in January that leverage in the capital market was between 18 per cent and 25 per cent, and had warned of a bubble being built by easy access to funds; share price manipulation and over confidence by investors, who relied on the previous year’s performance when the index gained 74.8 per cent and staked huge funds in companies that were, in cases, moribund.

The withdrawal of foreign capital by hedge funds to cover losses in the Unites States and Europe; speculations over the suspension of margin lending; the CBN’s announcement that all banks would have a common year end and inability of inexperienced short term investors to take loses resulted in a steady slide of the All Share Index and the market capitalisation, which dipped by 13 per cent or N1.65tn between March 6 and June 9, 2008.