By Peter Egwuatu
In order to prevent unnecessary margin facilities to the stockbroking firms and future crash of the Nigerian stock market, the relevant government agencies have been advised to pass legislation that will prevent banks from owing brokerage firms.
Dr. Chukwumah Biosah, a financial analyst has said, â€œ I believe that the federal government, Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) should work in concert to pass legislation that will prevent banks from owning brokerage firms and using shareholders funds for risky capital market investments.
According to him, â€œ Brokerage firms should raise their own capital and provide margin facilities to their own customers. This will allow these firms to monitor the portfolio of the customers they have provided margin facilities to. For example, in developed exchange, brokerage firms provide margin facilities to customers and as stock prices drop and the margin ratios are violated, customers are alerted to bring in funds to fulfill the margin requirements. If the funds are not provided within a 3 day window, the
stocks are liquidated to prevent further loss to the portfolio and chances that the customer might default on the margin facilities provided by the brokerage firms. If margin requirements were strictly enforced by Nigerian brokerage firms and banks, most of these banks and brokerage firms will not have the large non-performing margin loans on their books today.
Biosah, according to the report from Proshare Nigeria Limited, stated â€œ Over the years the SEC which is supposedly the regulatory arm of the stock exchange has fell asleep on the wheel. Stocks of companies that failed to report quarterly or fiscal year financial statements to the SEC were allowed to be continuously traded on the exchange. For example, in 2007 I wrote an article published by www.proshareng.com in which I was basically alarmed that the shares of Wema Bank were allowed to trade on the NSE even after they failed to report fiscal year financial statements for over two years. It was only after Wema Bank decided to issue a secondary offering to extort money from unsuspectinginvestors that they hurriedly put out a financial statement.â€Â However, to the credit of the CBN, he stated that the charade was quickly stopped before unsuspecting investor fell victim to the scam.
â€œ In most developed or well managed exchanges, it is mandatory for publicly traded
companies to report quarterly and fiscal year end financials to the SEC If any publicly traded companies fail to report financial statements without any valid reasons the stocks of the companies are suspended from trading in the exchange. However, in Nigeria most publicly traded companies report abbreviated financials which most investors do not even have access to. Therefore, investors are unable to compare quarter over quarter financials to determine if there are any unusual spikes in
certain components of the financial which usually alerts investors to financial misrepresentationâ€ he added.
Biosah, noted that this is the time for the banking system to be truly reformed, adding , â€œ measures should be taken to correct some of these problems. These include but are not
limited to the following:Â Active participation of Nigerian Banks in the capital markets have to be regulated.
The SEC must enforce the reporting of quarterly and annual financial statements of allpublicly traded companies because this will improve transparency.Â The CBN must perform regular random bank audits and their findings must be enforced.Â Banks must have internal audit and quality control departments which must operate independently without being strong armed by the management of the bank.