Stock Market Treatise II

Following unconfirmed speculations of CBN/SEC directive for the suspension of Margin Facility (Lending by banks to stockbrokers for the purchase of stocks) last quarter, the Nigeria Stock Exchange had instructed CSCS to suspend the opening of new Joint Accounts (the Joint Accounts warehoused both the stocks purchased and the collateral buffer) thus crippling the dynamics of the Margin Facility. This was supposedly predicated on the notion that most Banks were concentrating their lending portfolio to the Capital Market to the detriment of the real sector of the economy thus stifling economic growth and pushing the unsustainable bullish run of the market.

Subsequently, Banks reduced lending to the stockbrokers and some actually called in their facilities. This immediately led to price diminution experienced over the last quarter with the bears taking over the market. There were several meetings between the market operators and regulators with even the Senate Committee on the Capital Market headed by Senator Ganiyu Solomon looking into the allegations and consequently, it was discovered that there was no justification for the continued embargo as borrowing has always been a traditional source of funding for the Capital Market worldwide.

Consequently, the CBN Governor, last week cleared the air that they did not at any time oppose Bank's funding of Capital Market activities and that the aggregate lending by Banks to the sector had not reached the point of concern to the CBN. This statement had been preceded by SEC's, also denying any directive on this. Thus, based on the above, the CSCS advised the lifting of the suspension on the operation of the Joint Account though changing the terminology to Custody Account instead of Margin Accounts and promising to further strengthen the procedure
We expect a further statement by the Nigeria Stock Exchange this week as there were still ambiguities as to the operations of the accounts as the attached letter was particular as to "Stockbroking firms". We need to clarify if the lifting of the suspension also affects tripartite accounts - Bank/Stockbroker/Client.

A sit stands, Banks can now open new Joint Custody Accounts with Stockbrokers and we should see some resurgence in share prices as banks resume lending to the brokers. However, we still need to exercise some caution as there is a possibility that there would still be constriction in the market as we approach the new December 2008 Financial Year End for all Banks.
Further caution should also be exercised as the brokers also have a deadline of December 2008 to racapitalise to a minimum of N1 billion.