Dipo Olowookere
By Dipo Olowookere
A total of 162.6 million shares of four companies listed on the Nigerian Exchange (NGX) Limited have been offered by investors for securities lending.
The stocks of these publicly quoted organisations are Zenith Bank, GTBank, MTN Nigeria and Dangote Sugar, according to a notice from the exchange.
In the disclosure sighted by Business Post on Tuesday, it was disclosed that investors have volunteered to offer for lending their idle 77,333,000 units of Zenith Bank equities.
In the notice, which said the figures were as of Monday, April 12, 2021, Dangote Sugar had 43,000,000 units to be borrowed by interested traders, while GTBank has 31,095,000 units, with MTN Nigeria having 11,196,000 million units.
Meaning of securities lending
According to the NGX Group, securities lending involves the practice of loaning or transferring financial assets like stocks, bonds and others to another party from the holder for a fee.
For study.com, securities lending allows investors to borrow shares, sell them and buy them back at a lower price in the future. If all goes as planned, the short seller is able to return the borrowed shares and keep any profits. Without the ability to borrow securities, investors would have to buy a stock before they sold it.
This market practice, according to the former acting Director-General of the Securities and Exchange Commission (SEC), Ms Mary Uduk, is good for the Nigerian capital market because it would deepen liquidity, as well as offer more returns to investors and all parties involved, adding that the commission has rules in place to encourage market confidence.
She had pointed out that securities lending is a useful trading tool for short selling, hedging, and arbitrage. Explaining that hedge funds can also partake more in the Nigerian capital market as the SEC develops securities lending activities.
“We have a framework which has been approved. However, we noticed that it is not being fully explored. What we want to do now is to see what restrictions we can remove and what enlightenment we can do to ensure that other necessary parties key into the rules.
“We are encouraging them to go into securities lending. They are being encouraged to lend out these securities, they make money out of it,” Ms Uduk had said at an event held in Abuja in December 2019.
How securities lending works
According to an expert in the capital market, investors with idle equities deposit their shares to a securities lending agent (SLA) and interested trader approach the SLA to borrow them with collateral and then pay a fee with a promise to return the stocks at an agreed period.
“The SLA is usually a big bank with significant capitalisation and they collect collateral from borrowers. So, even if the borrower defaults, the collateral will cover the securities.
“In the unlikely event that the collateral doesn’t cover, the SLA is mandated by regulation to make the lender whole by guaranteeing the safety of their securities,” the investor, who asked to remain anonymous, explained.
Editor’s Note:
This article has been updated with the correct message it was intended to convey. We sincerely apologise for the initial error.
