April 15, 2019

Margin lending re-introduction will lead to another market depression — Adeleke

Adebayo Adeleke
  1. By Nkiruka Nnorom
  2. Adebayo Adeleke is the former General Secretary of Independent Shareholders Association of Nigeria (ISAN). In this interview, he said that re-introduction of margin lending by the Securities and Exchange Commission, SEC, is an error and will not be in the overall interest of the market. Excerpt:
  3. Adebayo Adeleke
  4. WHAT is your take on the plan by the Securities and Exchange Commission, SEC, to review rules on margin lending with a view to reviving activity in that space?It sounds good because what they are trying to do is to stimulate the market, but at the long run, it is a very defective plan because you don’t create a credit for capital formation from borrowing. All over the world and all in the loan books, you have two types of capital. You have tier-1 capital and tier-2 capital.

    Tier-1 capital being the seeds that shareholders are providing for the business, tier-2 being borrowings the business is leveraging to take up opportunities. So, now, you are talking about tier-1, which is the stock exchange – platform for long term capital formation and you now want to take tier-2, which is a loan to fund people to go to that market. What you will be doing in the short run is using short term money to play in a market that is meant for long term capital formation.

    So, there is going to be a disconnect; you are just going to create unnecessary excitement in the market where you have so much money running after a few shares and then prices will start going up. Of course, that is going to be artificial and it is not going to be sustainable.

  5. SEC moves to revive margin lending

  6. At the end of the day, at some point, people will start pulling out because they want to profit and they also want to repay the loans and then there will be another depression in the market and we will go back to zero levels which is what we trying to avoid. For, me, it is going to be a very temporary measure for a long term problem. It is not going to be for a long term interest in the market. It is going to be a very big error coming from the SEC.

    You know we have tried this in the past before the 2008/2009 market crash…?

    Exactly and even when the market crashed, how many of the shareholders who took margin facilities were compensated, rather the stockbrokers who had the platform were the ones who went asking for a forbearance. A stockbroker is an agent; he buys for you, he makes money, he sells for you, he makes money.

    If they had also traded on margin, it would have been a different ball game but those were the people who were asking the government as at that time for forbearance. So, the individual shareholders who also participated in the margin facility were not given forbearance. Now, the question is how can we avoid a repeat of such occurrence because it was not palatable for the market and I am not sure that the market has finally recovered from that incident.

    So, it is going to result in re-inventing the wheels or trying solutions that have been tried and have failed us in the past. It is not going to work out in the long run. If we want to develop this market and have a long term solution to this market, we need to have rules and regulations that are investors’ friendly. We need to talk to our government not to kill the enterprises by over-burdening them with taxes.

    We need to create an environment where businesses will thrive, and then we need to embark on sensitisation, letting people know what the market stands for in terms of long term capital formation and of job creation. We need to find ways of including capital market studies in the school curriculum in the secondary and tertiary level, irrespective of the course you are studying. Everybody must come to the market. It is as important as learning how to take care of your health or even your family. This is much more sustainable than creating margin facility. We are talking about creating long term value.

    Could some of the things you said be the reason for apathy towards margin facility since the introduction of the rules on margin lending in 2010?

    What the SEC did then was to streamline companies where you can take margin facilities to participate, but it is still not a good move by SEC. This market is not meant to be funded by borrowing because borrowing is short term and if you take a short term loan to do long term investment, you are going to blame yourself in the long run. So, we cannot continue to use margin facility to play the market because you are defeating the essence of that market in the first instance. The essence of the market is not for people to buy and sell, the essence is to mobilise money for long term capital formation. So, borrowing money is a short term thing and no bank is going to give you money for three, five, 10 years. Every bank will give you money for a maximum of six months to one year and if they want to renew or roll it over, it is a different thing. So, you cannot take money today to buy shares and expect that the money and interest of about 22 per cent will come back to you in one year. It is not possible. It is pure speculation, gambling.