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Banks to Extend Margin Loan Deadlines

7th Oct. '08

Nigeria's banks have won approval to restructure margin loans extended to stock market traders, a reprieve which gives them additional time to avoid declaring the facilities as non-performing loans. The central bank said in a circular to banks dated October 2 that several institutions had indicated they wanted to reschedule some of their capital market related exposures in the wake of sharp falls in the stock market.

The extension is up to the end of 2009, the circular says. Analysts have voiced concern at the high level of margin lending -- providing credit to individuals and institutions to speculate on stock prices -- in Nigeria, sub-Saharan Africa's second biggest economy and equities market after South Africa.

The 10 trillion naira Nigerian exchange has been one of the world's best performing frontier markets in recent years, but has fallen by more than a third since March, making margin facilities harder for speculators to repay. If such credit remains outstanding for an extended period, banks are supposed to declare the facilities as non-performing loans and make provisions for them in their balance sheets. "

Given that the facilities should have been structured for a much longer period from the beginning, the Central Bank is ... allowing such facilities to be restructured for a longer period between now and December 31, 2009," the central bank said. "It should be noted that the forbearance is specifically for only loans made for the purchase of shares in the Nigerian Stock Exchange," it said in the circular, published on its Web site.

Banks in Nigeria, the world's eighth-biggest oil exporter, have seen explosive growth on the back of record oil prices and a growing middle class, aggressively raising capital and increasing their capacity to lend. Credit to the private sector grew 96 percent in 2007. At just over 6.8 trillion naira, banking system credit to the domestic economy rose 14 percent in the second quarter alone, according to central bank figures.

The central bank warned in June that strong economic growth would increase credit demand and test the risk management mechanisms of both banks and regulators, a sentiment echoed by some analysts who fear bank loan books have grown too fast. Brokers have blamed the Nigerian stock market's decline this year on a combination of factors including banks recalling margin facilities, investors selling shares to buy into private placements and prices which had looked overvalued.

Foreign hedge funds and portfolio investors had already started to pull money out of Nigerian equities even before the global credit crunch made them more risk-averse. Nigeria's banks are nonetheless generally considered in a good position to weather the worst of the global banking crisis, as their healthy balance sheets and strong capital bases mean they are not heavily reliant on foreign credit lines.

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