‘18% of depositors’ funds used in margin trading’

Shamsuddeen Usman, minister of finance, has raised the alarm that consolidated banks face new challenges as N2.5 trillion or 18 percent of depositors’ funds are currently being used for margin trading.

This makes the fund a significant factor that is driving prices in the Nigerian Stock Market. “Some analysts reports have estimated that 18 percent or about N2.5 trillion of depositors’ funds are used for margin trading,” Usman said.

The minister recalled that, earlier on, banking consolidation was aimed at strengthening the banking sector to play its developmental roles in the nation’s economy as well as make the Nigerian banking sector an active player in the African and global financial systems.

But with these initial objectives have come new challenges. Some of these challenges include more intense competition, sliding profitability/efficiency ratios due to share capital dilution ramifications, integration costs and the larger asset base, banks raising of more funds, thus further exacerbating these profitability and efficiency ratios, according to Usman.

The pressure, therefore, is on banks to return to investors and depositors from large capital raised.

This temptation, he says, has led to increase volume of risk assets resulting in decline in the quality of risk assets, and the use of depositors’ funds to push share prices to appease their investors.

These challenges have led to their determination to generate increasing returns to shareholders, thus encouraging bigger risk taking, and deposit insurance funds face larger potential losses in the event of failure of a single, large consolidated institution.

The result is that depositors’ funds are being held in banks’ own shares at inflated prices, and asset/liability mis-match as depositors’ funds are locked into equity investment.

The minister says the risks associated with margin trading thus include stability of the capital market being impacted by economic trends, and that any downward trend in the economy will impact the capital markets negatively, causing the price of the stocks to decline, and that panic sellers and customers might spell trouble for banks.

He says as stock prices decline, the value of the stocks pledged as collateral to banks for the margin facilities will also decline, leaving no effective cover.

Also, securities used, usually shares, as well as depositors’ funds will be lost if market crashes.

He says margin trading is believed to be largely responsible for the crash of US stock market in 2000.

The minister also notes that sub-prime lending, another reason to be cautious, started as a credit problem in the US mortgage market with delinquency rate of 5 percent in sub-prime.

The problem, he explains, is that with the financial crisis in the global banking system, total reported write-downs for major financial firms is now totalling $161 billion and estimated to reach $200 billion this quarter.—BusinessDay