ABSTRACT
Margin loans have become phenomenal in
stock markets around the world over the years. The impact of this facility on
the level of activity in stock markets have now become evident. Empirical
evidences attest to the fact that margin facilities influence the level of
activity in the stock market during periods of economic boom and recession.
Hence, this research work looked at the impact of margin loans on the Nigerian
Capital Market from 2000 to 2010 with a model specification and regression
analysis. The study aims at ascertaining: the effect of margin loans on the
level of activity in the Nigerian Stock Market during periods of boom and recession, the impact of margin
loans on investors during economic boom and recession and the level of
investors understanding of the terms and conditions attached to margin loan
contracts. Data was collected via secondary sources of macroeconomic variables
in particular. The study confirmed that
margin loans have a positive effect on the stock market and investors during
periods of boom and the opposite during periods of economic downturn and
further revealed that investors have little or no idea of the terms and
conditions attached to margin loan contracts.
The study therefore recommends that
investors should be properly oriented on the terms and conditions of a margin
loan contract before the extension of such facilities to them and that the CBN
should restructure margin debts/interests and that toxic assets in the market
should be bought by the FGN in order to restore sanity and stability in the
Nigerian Capital Market.
TABLE OF CONTENTS
Page
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Table of Contents v
Abstract vii
CHAPTER ONE:
INTRODUCTION
1.0
Introduction 1
1.1
Background to the Study 1
1.2
Statement of the Problem 5
1.3
Objective of the Study 5
1.4
Research Questions 6
1.5
Statement of Research Hypothesis 7
1.6
Significance of the Study 7
1.7
Scope and Limitation of the Study 9
1.8
Plan of the Study 10
1.9
Definition of terms 10
CHAPTER TWO:
LITERATURE REVIEW
2.0
Introduction 12
2.1
Margin Lending its Implication on the Stock Market 12
2.2
Impact of Margin Loans on the Nigeria Stock Market 14
2.3
Impact of Margin Loans on the Nigeria Investors 16
2.4
Benefits and demerits of Margin Loans 17
2.5
Implications of the Global Economic meltdown on the Nigeria
2.6
Capital Market 19
2.7
Implication of Bank Losses on the Nigerian Capital Market 22
2.8
Roles of the Central Bank of Nigeria 25
2.7.1 Rationale
for CBN’s position 28
2.9
Sources of Finance
31
2.8.1 Fund
Raising in the Nigerian Capital Market 34
2.10
Other Institutions 38
2.11
Available Opportunities in the Nigerian Money Market 40
2.12
Performance of Quoted Companies in the Nigeria Capital
Market 42
2.13
Capital Market Reforms and Prospects of Enhancing Industrial
Capabilities through the Market 50
CHAPTER
THREE: RESEARCH METHODOLOGY
3.0
Required Data for the Study 55
3.1 Model
Specification 55
3.2 Explanation
of Variables 56
3.3 Estimation
Technique 58
3.4 Evaluation
of parametric Estimates 59
3.5 Sources
of Data 61
3.6 Reliability
and Validity of Research Instrument 62
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.0
Introduction to Empirical Analysis 63
4.1 Time
Series Property of the Variables 63
4.2 Data
Presentation and Analysis 66
4.3 Statistical
and Econometrics Tests of the Estimated Parameters 71
CHAPTER FIVE:
SUMMARY, CONCLUSION
AND
RECOMMENDATION
5.0
Summary of major findings of the study 74
5.1 Conclusion 77
5.2 Policy
Implementation and Recommendations 78
5.3 Limitation
of the Study 79
5.4 Area
for Further Research 80
Biography
Appendix
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
The capital market is a market for mobilizing
long-term funds fro investments in capital projects. The main institution in
the Nigerian market are the Nigeria stock exchange (NSE), Issuing Houses and
Stock Brokering firms. Reminiscent of its role in the establishment of the
money market in Nigeria, the CBN played a central role in the establishment of
capital market institutions in Nigeria including the Securities and Exchange
Commission. The Bank was also responsible for the issuance of the Federal
Government Development Stock, which in the 1960s and 1970’s constituted a major
capital market instrument.
On the other hand, a common phenomenon
in capital markets around the world is the term most popularly known as “margin
loan”. The online investment dictionary defines the term as “a loan from a
broker to a client that essentially functions as a margin account. The funds
may be used for any purpose, and the loan is secured with securities owned by
the client.... Conversely, according to Bankole (2009), a margin loan (or a
margin account) is a loan made by a brokerage house to a client that allows the
customer to buy stocks on credit. The term margin itself refers to the
difference between the market value of the shares purchased and the amount
borrowed from the brokerage. Interest on the margin loan is usually calculated
on the outstanding balance on a daily basis and charged to the margin account.
As time goes by, the outstanding debt goes up and interest charges accumulate.
Also, the brokerage holds the securities as collateral for the loan. A simple
example of a purchase on margin might be an investor buying stocks with a market
value of N100,000. But, only using N50, 000. of his own money. The other
N50,000. being provided by the brokerage as a margin loan. Though this sounds
straight forward but margin loans are not that simple. If one wants to trade on
margin, the first step is to open a margin account. By law this requires an
initial investment of (at least) N200, 000, but the amount could move (upwards
or downwards) depending on the brokerage’s own rules with respect to opening
the margin account.
This set up amount is known as the
“minimum margin”. Once the account is open the investor can then borrow up to
50% of the price of any stock he wants to purchase. It is however noteworthy
that the investor does not have to borrow the full 50% as the amount he borrows
can be less than 50% (but not more). The 50% “down payment” is called the
“initial margin”. And as long as stock prices stay stable or go up, the
investor will keep making interest payments and other things will roll along
smoothly (but then, this is not always the case).
Another fundamental issue that needs to
be discussed is the term “maintenance margin”, in case the stock prices drop.
According to the generally accepted best practice rules, anyone who buys stocks
on margin must maintain a minimum of 25% of the total market value of the
securities that are in the margin account (some brokerages demand even higher
percentages). Falling stock prices could take an investor’s margin account
below threshold and in which case, the brokerage house will require the investor
to put in more cash or securities to bring his stake up to the minimum. Usually
a call is made to the investor from the brokerage (when his margin account
falls below threshold) for incremental funds, the call is known as “margin
call”.
Undoubtedly, margin accounts allow an
investor to gain control of a large block of stock at a minimal investment.
Sophisticated investors will use a margin facility to increase their personal
wealth by using the “leverage” provided by using borrowed money. However, if
share prices go the wrong way (like they did recently), the investor with the
margin loan is not only liable for money borrowed, but also maintaining his
margin account. In this case, leverage is working the other way and falling
share prices coming with the outstanding margin loan can cause an investor significant financial hardship.
The extension of margin facilities to
investors in the Nigerian capital market yielded great dividends and improved
the general level of activities on the floors of the Nigerian stock exchange
during periods of boom, however, the global economic recession quickly turned
this success story into failures, by revealing the extent of exposures of
investors so much that one begins to wonder whether they actually read the
terms and conditions attached to these facilities before accepting them.
Sequel to this, commercial banks were
immediately under enormous pressure as the actual margin lending was done by
them through their stock broking outlets and subsidiaries, which implied that
they were directly or indirectly affected by the recession and losses suffered
by investors. Consequently, this led to a lot of “drama” in the Nigerian
banking sector in 2009. The amount of losses recorded by commercial banks
during this period brings up the question, “How effective are the collateral
securities for margin lending?”
Furthermore, with the high level of
exposure and losses revealed by the global credit crunch, the fate of investors
and commercial banks is one question that has been lingering in the minds of a
lot of people. Most financial analysts have also questioned the reliability and
effectiveness the monetary policies of the Central Bank of Nigeria with respect
to margin lending, as they opine that machineries should have been put in place
to check the level of exposures of commercial banks and investors alike, and
also the reliability of collateral securities for margin lending in the capital
market.
1.2 STATEMENT OF THE PROBLEM
There has been a strong debate between
regulatory authorities, bankers, shareholders and the public after banks
consolidation and the global financial crisis in Nigeria about quantum of margin
loans and its negative impacts on the Nigeria capital market. The regulators in
this post consolidation era are interested in the stability of shares prices
safety of investment in the capital market but without consideration of the risks,
inadequate speculations on share prices initiated by modern smart bankers like
the commercial banks in granting margin loans.
Therefore, the problem here is to use
multiple regression equation to determine whether there is a relationship
between money supply and capital market indicators, if there is, whether the
degree of linearity is such that capital market and margin loans issue could be
largely a matter of economic failures through global financial crisis or
business exigencies as opposed to the flex of legal muscle by the regulatory
authorities and the public.
1.3 OBJECTIVES OF THE STUDY
Nigeria capital market situation provides
an interesting study of the issue at hand. Since the capital is place o
investments in any economy, it is against this backdrop, that the objectives of the study are to empirically
investigate the
a) how margin loans have affected the activities in the Nigerian stock
market during periods of boom.
b) how margin loans have affected the activities in the Nigerian stock
market during recession periods.
c) To ascertain the impact of margin loans of investors during periods
of boom.
d) impact of margin loans on investors during periods of recession, and
e) how much investors know about the terms and conditions attached to a
margin loan contract.
1.4 RESEARCH QUESTIONS
The problems observed above gave rise
to the following research questions:-
i) How has margin
loans affected the activities in the Nigerian capital market during periods of
boom?
ii) How has margin
loans affected the activities in the Nigerian capital market during recession
periods?
iii) How has the
global economic downturn affected holders of margin loan accounts (investors)?
iv) What steps can
be taken to minimize losses of margin facilities in the capital market during
periods of economic downturn?
1.5 STATEMENT
OF RESEARCH HYPOTHESIS
For the accuracy of the study, the
research hypotheses are stated thus:
Hypothesis I
H0: Margin loans does not have any positive impact on the Nigeria economy.
H1: Margin
loans have positive impact on the Nigeria economy.
Hypothesis II
H0: Bad loans and bad investment in the capital market does not erode the
money supply in the economy.
H1: Bad loans and bad investment in the capital market erode the money
supply in the economy.
1.6 SIGNIFICANCE OF THE STUDY
Every stakeholder in the modern – day market
based economy must recognize the importance of the capital market and its role
towards the achievement of economic development in his country, as well as in
building his personal economic profile. This can only be achieved when players
are able to out-guess the market and are able to swim and cross over against
all tides. But all these are possible when the stakeholders have thorough
understanding of the dynamics and workings of the market, which this piece of
work hopes to provide.
In lieu of these, this study is
significant in the following areas:-
First, the study will help equip
investors with knowledge of when and how to take margin facilities, thereby
reducing their risk exposures and making significant returns on their
investments. In other words it will assist investors in making good investment
decisions as far as the acceptance and maintenance of margin facilities are
concerned.
Similarly, institutional investors will
equally benefit from the findings in this study by availing themselves of the
knowledge to appropriately accept and maintain margin facilities, so as to make
proper and informed judgments and /or decisions.
In the same vein, stockbrokers,
investment analysts, financial advisers and portfolio managers will also gain
from the wealth of knowledge of this study which will assist them in their area
of specialization. That is, the investment advices and other services provided
by these experts and specialists to their clients.
Furthermore, all stakeholders in the
economy will have a better understanding of the market dynamics and how the
economy is affected by it, as the capital markets is known to have been playing
significant roles on the economic development of every nation. Hence, the use
of it as a measure of the performance of the economy.
Lastly, through this study, students,
researchers, stockholders/shareholders, investment analyst, portfolio managers,
institutional and individual investors as well as those who have a stake in the
economy will be stimulated and encouraged to conduct further research on this
subject matter i.e. “margin loans and its effect on the Nigerian capital
market”, since the concept is relatively new.
1.7 SCOPE AND LIMITATION OF THE STUDY
This study seeks to look at the impacts
of margin loans in the Nigeria capital markets. Pre independence of the Nigeria
economy are avoided due to lack of data. The study mainly concentrates on
Margin loans and the investor in a period of boom, Margin loans and the
investor in an economic downturn, The roles played by stock brokers and
commercial banks in the issuance and management of margin facilities; and The
roles of the apex bank (i.e. CBN).
In salvaging, the exposures brought
about by the current global economic meltdown. The empirical analysis shall
therefore be confined to a period of 10 years (2000-2009). The study makes use
of secondary data. These data are sourced from various and current publications
of the Central Bank of Nigeria (CBN), Nigerian stock exchange (Abuja) with
respect to figures of the total amount of margin loans extended to investors by
stock broking firms and commercial banks, the Federal Office of Statistic
(FOS), the International Monetary Fund (IMF), International Financial
Statistics (IFS), the Institutional Investors Magazine clippings from daily and
weekly Newspapers and Economics textbooks.
1.8 PLAN OF THE STUDY
The study is divided into five chapters;
Chapter One: Deals with introduction, the problem statement, objective of the
study, source of data, justification of the study, scope of the study and
source of data. Chapter Two: Deals with a review of the literature and surreys
of some margin loans and capital market and investment theories. Chapter Three.
Focus on methodology by which the research will be carried out by revealing the
source and the of data to be used and the analytical techniques to be used in
the study. Chapter Four: Presents models and interpretation. Chapter Five: Is
directed to making reasonable suggestions, recommendations, Conclusion and Area
for further study.
1.9 DEFINITION OF TERMS
The following terms were used in this
study to mean the following:-
i) MARGIN LOANS: A loan made by a brokerage house to a client that
allows the client to buy stocks on credit.
ii) MINIMUM MARGIN: The minimum amount required to open a margin
account. Usually N 200, 000, but varies from broker to broker.
iii) MARGIN CALL: A call from a brokerage demanding incremental funds
from the investor (or account holder), where the amount in his account falls
below minimum threshold (usually due to a sharp fall in share prices).
iv) MARKET PLAYERS: This are the various parties that help to make
activities happen in the capital market e.g. Stockholders, portfolio managers,
analyst etc.
v) STOCK BROKER: A person permitted to transact business on the floor of
a stock exchange or over-the-counter.
vi) CAPITAL MARKET: A market for securities (debt or equity) where
business enterprises and government can raise long-term funds.
vii) RETURN: Benefits accrued to margin facilities.
viii) TRADING ACTIVITIES: The various acts of buying and selling of
shares and securities on the floors of the Nigerian stock exchange.
ix) LIQUIDITY: The rate at which transactions are turend into cash, i.e.
how fast an activity can be paid in cash.
x) PORTFOLIO: Institutions registered by the statutory regulatory
agencies to manage the portfolios of their clients.
xi) CAPITAL GAIN: The amount realised at the disposal of a security in
excess of its original cost.
xii) MARKET DYNAMICS: The ability of the market to behave and react to
certain situations in the economy.
xiii) INTEREST: Percentage paid by a margin account holder to the
broker, which is charged based on the amount of margin loan he has taken, i.e.
synonymous to bank interest charges on loans.
xiv) MARGIN FINANCE: The percentage of the purchase price securities
(that can be purchased on margin) that the investor must pay or with his or her
own cash or marginable securities.
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