Recent reports that banks in the country are posting deficits of about N1.2 trillion as a result of margin loans granted to individuals and stockbrokers is awful news that does not bode well for the banking sector and the economy in general. The amount involved is staggering and represents about 33 percent of the Federal budget for this year.

Of this figure, eleven of the 24 banks are in red to the tune of N421.7 billion, while 13 others are reported to have posted N778.3 billion deficit from these margin loans. Margin lending represents facilities which banks grant to individuals or stockbrokers in excess of their deposits.

In most cases, such loans are backed by only share certificates as collateral.
Margin lending was commonplace after the consolidation exercise of the banking sector when some of the banks were literally awash with liquidity.

The result was that in most cases, the banks went after customers to lend them cash with higher interest rates. Most of the loans were reportedly used for share purchase in the capital market, and to buy choice properties. Now, the bubble has burst, the aftershock of the global economic meltdown has exposed the lending which will likely go down as bad debts.

It is the far reaching implications of the loans on the banks that have become problematic. Confidence, which is the backbone of the financial services sector, may be undermined. Perhaps, the bigger problem is the fear of imminent liquidation of some of the banks involved, which can happen if they fail to recover the loans. This can result in Mergers and Acquisitions (M & As). None of these paints a rosy picture of the health of the sector, nor does it support the recovery which our economy is in dire need of.

The looming danger posed by this margin lending perhaps would not have arisen if due process, prudence, ethics and strict enforcement of banking rules and regulations were followed. Lending without adequate collateral negates sound banking practice. At best, it falls within the ambit of old-fashioned bare-knuckle banking where anything goes.

In the heyday of margin lending, some bank chiefs were reported to have helped themselves to their bank facilities without collateral. This does not only amount to insider abuse, it defeats the ethical and moral elements that should govern banking practice.

We, therefore, call for a thorough investigation of those behind the debts by the Central Bank. They should be dealt with according to the laws they infringed. Enforcing the rules that govern banking should be key in the effort to recover the debts. Dealing with the culprits should serve as a deterrent to future offenders. Towards this end, the apex bank should first ascertain the structure of these debts and the people behind them – both from within the banking sector – and outside.

While government intervention has become expedient, it should not necessarily be in the form of financial bailout. Doing so would amount to rewarding unwholesome practice. Rather, we endorse a composite approach that will entail reorganisation of the industry, better enforcement of the rules and appropriate penalty for violators. At present, the moral element that is essential for effective and efficient banking practices is either being ignored or outrightly abused by those who should enforce them.
Altogether, the margin loans controversy should be seen as another opportunity to deepen the ongoing banking reforms. The banking sector is the engine that drives the economy and nothing should be allowed to vitiate that process.

good analysis.