The stock market is essentially a financial tool in which a portion of people's savings is expected to be invested. Ideally, investment through loans is not recommended as it increases the risk of losses.

Especially in highly speculative markets like the Bangladesh stock market, where junk stocks dominate, it is very risky for investors to pour in money by taking loans at 14 to 15 percent interest rates.

Therefore, analysts always advocate restrictions on margin loan requirements and recommend executing forced sales if necessary.

However, the Bangladesh Securities and Exchange Commission (BSEC) has done little to restrict such loans. Some merchant banks have also supported the BSEC as margin loans have become a money-making product for them at the cost of investors' losses.

After former prime minister Sheikh Hasina was ousted in August last year, the BSEC formed a task force to bring about reforms in the capital market.

The committee provided several recommendations to prevent a further rise in negative equity through margin loans, which had become a nightmare for many institutions and caused significant losses for investors following the market crash of 2010 and 2011.

The task force recommended tightening the criteria for obtaining margin loans in order to make those inaccessible to small and inexperienced investors.

However, it did not recommend including this credit item in the Credit Information Bureau (CIB) report for the assessment of investors.

Although this credit product is somewhat different, it should still be included in the CIB report to provide a full and clear picture of the financial standing of those availing credit.

On the other hand, if margin loans are included in CIB reports, investors would be more inclined to properly maintain beneficiary owner's (BO) accounts to avoid any negative equity.

What would happen if margin loans were included in the CIB report?

The most significant impact would be that investors with negative equity in their BO accounts would face restrictions when applying for bank loans for other necessities.

As a result, investors may be more motivated to avoid negative equity in their BO accounts.

Currently, when negative equity arises, investors lose their funds but do not face any further penalties. On the other hand, institutions face liquidity shortages, making them inactive, and the whole market suffers.

Since margin loans are not included in the CIB report, investors do not feel the urgency to sell shares when their equity balance falls.

Furthermore, they resist forced sales and often fail to deposit funds even when they receive margin calls from brokerage houses or merchant banks.

As margin loans are also a form of credit, they should be included in investors' CIB reports. This would help investors realise the importance of forced sales.

Incorporating margin loans into CIB reports would translate to additional tasks for brokerage firms and merchant banks, but these measures are necessary for the betterment of the stock market.

If brokers and merchant banks can access CIB reports for margin loan applicants, they will be able to identify reliable investors. Thus, use of CIB reports for margin loans and defaults could help reduce risks in margin loan lending.

Even if existing negative equity holders are not included in the CIB reports, the process should incorporate future margin loan holders.

By any means, the stock market must avoid further damage from margin loans, similar to the aftermath of the market crash in 2010 and 2011, which was caused by excessive negative equity.

Negative equity refers to an asset whose value has fallen below its outstanding debt.

This occurs when stock investors borrow from brokerage houses or merchant banks to buy stocks, and the stock price drops massively, causing the total investment value to fall below the investor's debit balance.

When the market crash began in 2010, the BSEC deterred stock market intermediaries from executing forced sales, even as share prices continued to fall. As a result, negative equity accumulated to over Tk 15,000 crore at the time.

Later, stockbrokers and merchant bankers had to absorb the negative equity as investors completely avoided meeting with brokerage houses.

Even now, negative equity amounts to over Tk 6,000 crore, burdening several stockbrokers and merchant banks.

If brokers had been able to execute forced sales, investors might have incurred losses, but would not have been left empty-handed. Moreover, institutions could have protected themselves from financial distress.