Africa, despite its basket case FX situation, is becoming an even greater land of opportunity for OTC brokerages
As doing business in Western markets becomes increasingly difficult and restricted, Africa looks like a land of opportunity as central banks in countries where the local population have zero faith in their domestic markets create FX frameworks. We take a close look
This month represents a period in the history of the OTC trading industry that will likely be remembered forever by every participant from traders to senior institutional company executives as the month in which the entire direction has changed.
In the Western world, no longer is the defense against the creeping claws of the exchange lobby which wants the retail business going through its venues, and the regulatory proposals which set forth intentions to change the way in which core OTC products are offered to retail customers able to continue ground, because the likelihood now is that any reference to OTC firms being long established and publicly listed will likely be met with a “what about FXCM?” response.
The true fallout of the aftermath of the revelations by the Commodity Futures Trading Commission (CFTC) that FXCM, one of the world’s largest FX brokerages, had been trading against its customers by having an undisclosed interest in an external market maker that was taking the opposite position of FXCM clients and banking up to 70% in rebates from said market maker, EFFEX Capital, is not yet fully known, however, aside from the complete decimation of one of the world’s OTC giants through its own cleverly orchestrated malintent towards its own customers, the playing into the hands of the dissenters is one of the most toxic byproducts.
Outside of the top quality organizations of London, Sydney, Geneva and those that remain in New York, the derivatives venues of London, Frankfurt and Chicago are on the prowl and hungry for retail business, and the environment for doing business will likely become more complex, and competitive.
It therefore may be something of a surprising and unorthodox viewpoint to look toward Africa for a dose of sobriety and as a land of retail OTC FX opportunity.
Advertising bans, entry barriers and dissent toward perfectly good quality firms simply do not blight the African landscape.
Africa, a continent in which pretty much nothing works properly, there is disorder on an industrial scale, and currencies and central banks are absolute basket cases.
Africa, a continent in which inflation and corruption runs rife and is a thorn in the side of everyday life.
Africa, a continent in which very little infrastructure exists, internet outages are common, there is very little market connectivity and rampant unofficial markets take precedence over officialdom which is trusted by citizens in the same way that a colander could be viewed as a reliable method of containing water.
Why is it a land of opportunity?
As the FX industry becomes more and more the subject of scrutiny in Western countries, Africa’s investors do not want to work with local firms, do not have any interest in listed derivatives or illiquid assets, and are very enthusiastic about OTC FX provided by good quality, regulated Western firms.
Faith in domestic economies in Africa is at an all time low, and major centers such as London are held in high esteem, with traders wanting to be engaged in seminars by introducing brokers across Africa in order that their funds can be placed with a British or Cypriot brokerage, and educational tools can be used, whilst traders convene in conference-style surroundings to trade en masse.
Today, a further indicator that there may be opportunity arose, with the Reserve Bank of Zimbabwe having set up an FX facility for cross-border traders, directed at reducing domestic settlement of local card transactions on international card switches as part of a cocktail of measures to promote monetary and fiscal stability.
The words Zimbabwe and fiscal stability go together in the same way that fig conserve does with dijonnaise dressing, but rather than being a reason to avoid the area completely, its own domestic instability and the Reserve Bank’s desperate measures may be a good opportunity for FX brokerages to take on board traders from the region.
Currently, Zimbabwe is absolutely choked by a tight liquidity situation characterised by US-dollar cash shortages, low industrial production, uncompetitiveness of exports, low aggregate demand and high cost of funding, among others, and an astonishing 98% unemployment, demonstrating exactly how ineffective the official system is, with many Zimbabweans operating outside of the available provisions made within the country.
In his 2017 Monetary Policy Statement, Reserve Bank of Zimbabwe Governor Dr John Mangudya said the central bank would set up a facility for bona fide cross-border traders registered with any recognised association to be accessed from March 1, 2017.
The facility would be made available through normal banking channels and Easylink.
“In line with best practice and in order to mitigate against money laundering and to inculcate market discipline, the central bank is availing a facility for bona fide cross-border traders,” Dr Mangudya said, adding that modalities of the facility were being finalised by banks and relevant cross-border associations.
This should come as a boost to cross-border associations that are facing difficulties in accessing foreign currency and are prone to using the parallel market to sustain their businesses.
Unlike the highly sophisticated financial centers of the world, in which access to top quality liquidity via highly advanced trading infrastructure is readily available as a result of the unfaltering efforts to innovate and drive the business forward by our astute leaders, Africa is by and large an outsider.
Customers there do not have large portfolios, free movement of capital and large publicly listed companies connected to the best quality liquidity on their doorstep, hence the environment changes at a much slower rate than it does in the West, providing some level of sustainability for FX firms.
For example, the development cycle in the Western world is around 3 months, between new design and implementation, meaning that the business is rapidly evolving, as a result of having to keep abreast of competition but also because of continual new rulings and circumnavigation of constraints.
In Africa, the dreadful situation has prevailed for decades, and will not be likely to change soon, hence a good loyal client base from Zimbabwe or Nigeria is probably not as banal a proposition as it may first appear.
The hyperinflation is decades old and is almost unresolvable.
In 2014, the Reserve Bank of Zimbabwe unveiled “convertible” coins in denominations of US$0.01 through US$0.50.
The Bank said that 80% of Zimbabweans use the U.S. dollar, and said the local lack of coins induces retailers to round prices up to the next higher dollar. The coins extend the use of the dollar as a de facto currency, and indeed the National Bank has repeatedly assured that it does not intend to bring back a national currency.
As of May 2016 the liquidity of the USD had rapidly decreased and John Mangudya, the governor of the Reserve Bank of Zimbabwe, said Zimbabwe would print new bond note which he was said would be at par with the American dollar. This was to be done within the following two months. Some citizens disputed this, saying the 2008 error was now returning and they would not accept the bond notes.
In June 2015, the Reserve Bank of Zimbabwe said it would begin a process to “demonetise” (i.e., to officially value a flat currency at zero). The plan was to have completed the switch to the US dollar by the end of September 2015.
In December 2015 Patrick Chinamasa the Zimbabwe Minister of Finance said they would make the Chinese yuan their main reserve currency and legal tender after China cancelled $40 million debts.
However this was denied by the Reserve Bank of Zimbabwe in January 2016. In June 2016, nine currencies were legal tender in Zimbabwe but it was estimated 90% of transactions were in US dollars and 5% in Rand.
For FX firms wanting to tap into this market, as long as a successful method of taking the funds out of the country exists – which in Zimbabwe should be quite easy as there are no capital control laws as they are in other regions, plus sanctions by merchant services providers Visa and Mastercard do not exist in the same way that they do in Nigeria.
For many FX brokerages, doing business with Nigerian customers has been either impossible or extremely difficult for several years. Transferring customer funds to client holding accounts outside Nigeria is a massive red flag for the world’s large merchant services providers, Visa and Mastercard, which often will not entertain any electronic payments to financial services companies from Nigerian customers due to the experiences of fraud and money laundering that cast a massive shadow over the nation’s economy in the 1980s and 1990s.
Lagos, the nation’s capital, at the time was dubbed with the unflattering accolade of being the “money laundering capital of the world.”
With the demise of Liberty Reserve which was seized by the US government for, ahem, money laundering activities, the channel of doing business with Nigerian IBs has dwindled significantly, however the country’s interbank FX sector is in such incredible disarray that new opportunities may now be presented.
This morning, the Nigerian Central Bank has suspended eight Nigerian banks for defaulting on FX settlement, meaning that they cannot conduct any interbank FX activity at all for two months.
Officially, the central bank has taken the line that if a transaction is on queue, it shall be given highest priority and when it fails to settle, the system shall generate an automatic Intra-day Liquidity Facility (ILF) backed by collateral to settle the transaction and where there are no securities, the allotment shall be cancelled and the defaulter suspended from all auctions for eight weeks effective from the date of default.
Aside from the central bank rate for the Naira, Nigeria has a network of unofficial FX bureaux which set their own rates and have been the subject of a government clampdown which has forced many of them out of business, are completely at odds with the Central Bank of Nigeria.
The gravest problem of all is that a massive black market in local currency arose, adding to the international concerns about risk and potential fiscal instability, hence the difficulties doing business with Nigerian partners as cash is hard to extract via conventional means.
The Central Bank of Nigeria has been attempting to eliminate the spread between the official and black market exchange rate against the dollar, and in many cases the naira is trading on the parallel market some 40% lower than the official rate as low global crude prices have dried up vital oil revenues and pushed Africa’s largest economy into recession.
The central bank scrapped a 16-month-old peg of N197 to the dollar in June last year, but it continues to trade in the official market, so that the naira remains far stronger against the dollar there than on the parallel market. The government has blamed that black market for damaging the already shaky economy and the central bank has been working on removing the price difference, largely to no avail.
A central bank that presides over defaulting interbank institutions has enough on its plate.
The upshot of this is that Nigerian investors do not trust the system and wish to seek business elsewhere, however local presence is necessary and in order to establish local presence, nerves of steel are required.
Jean-Raphael Nahas, Head of Business Development at Blackwell Global is an expert in establishing FX business in Nigeria, having achieved what has not been mastered by many others, that being the establishment of a local office in Nigeria, and a local IB network.
Mr Nahas explained to FinanceFeeds recently with regard to this “How do you engage IBs and create a large network? The majority of brokers expect their sales staff to close as many IBs as possible and there is nothing wrong with that, however it is important to really understand which IBs are vital to the business.”
“In Nigeria, where there is currently a fantastic opportunity and great potential, due to the devaluation of the naira. Nigeria is an attractive destination for international brokers to set up, many brokers ahve been there for some years now. it is important to take this opportunity to set up an office for very little money” said Mr. Nahas.
FinanceFeeds concurs with this, however the barriers of entry must be navigated as getting money in and out of Nigeria is increasingly difficult. Another interesting point is that some brokers operating in Nigeria offer a completely different rate for the USD against the naira compared to that offered by rival brokerages, in an attempt to attract clients. This is not possible in pretty much every market in the world outside Nigeria.
It is very much favored by Nigerian traders to use a brokerage that is globally owned, and has an office in Nigeria to face local clients. Mr. Nahas confirmed today that Blackwell Global has just renewed the lease on its Nigerian operation and is forging ahead with the opportunities there.
Mr. Nahas explained “In December, the Minister of Finance , Mrs. Kemi Adeosun said that The Central Bank of Nigeria (CBN) plans to put an end to the spread difference between Interbank and Parallel FX rate, which will go a long way in assisting business owners in Nigeria who are presently suffering due to the high exchange rate.”
“If this will be done, many businesses will be able to benefit and source for FX at a lower rate which will increase growth in all sector of the economy” he continued.
Mr. Nahas explained to FinanceFeeds “In the last week of December, the exchange rate between the Dollar and Naira at the parallel ($492 to 1 naira) comparing that to the interbank rate ($305 to 1 naira) which is lower. This will equally help FX firms as their clients will be able to source for dollars easily and at a lower rate.”
When asked how the perceived entry barriers can be mitigated, and if there is a lot of opportunity to gain good access to good quality clients and how this can be maximized now that there is an advantage with regard to cost of operation.
Mr. Nahas said “IBs in Western Africa do not have much money to spend so they rely on brokers to support them. If they feel that the support is there, then they are happy to work. Often, they expect a broker to establish some kind of office in Nigeria, whehter it is a small office where clients can come in and discuss their FX accounts on a one to one basis, or the type of office in which seminars could be held.”
Mr. Nahas explained that this can be achieved for around $15,000 including annual rent, desks, office equipment and screens to accommodate the traders and students coming in for education.
Many traders wish to deposit locally in the naira currency, therefore Mr. Nahas concurs that opening a bank account with a Nigerian bank would be an appropriate measure for a FX firm with an office there, due to the ability for Nigerian clients to be able to deposit funds locally and not have to navigate the difficulties of transferring abroad.
The Central Bank of Nigeria’s proposals to end the black market for the local Naira may well have been an initial signal toward the beginning of some stability for Western firms to enter Nigeria’s extremely localized retail FX market, however with the absolute decimation of the interbank dealers in Nigeria, this has now been amplified several-fold.
In Zimbabwe there would be no way that any firm would want to hold any funds in a local bank, however there is no reason why Zimbabwean traders and IBs cannot deposit to a British bank, as there are no sanctions on the country.
The unofficial market will never subside, and the inflation and lack of certainty will always prevail. Now that the central bank has created an FX framework, FX brokerages should perhaps begin to make hay in what could be a sustainable market.