Nigeria an opportunity for FX brokers as domestic banks banned for 8 weeks: Do you have nerves of steel?

Nigeria’s interbank FX sector has fallen flat on its face, and the widespread disarray in local markets makes overseas FX brokerages absolutely attractive to Nigerian IBs. For those with unrelenting will, it may well be a good market to revisit

nigeria

Here is an equation: National disarray, corruption, lack of direction and chaos + a series of willing and eager domestic market traders = massive opportunity.

Factor in some strength of character and nerves of steel, and a positive outcome may well materialize.

In Nigeria, this equation may well be one that can apply to retail FX firms from London to Sydney, via Limassol along the way, as Nigeria has been home to a large number of regional introducing brokers (IBs) and small value retail traders that reside in the various provincial regions around the country since the dawn of the MetaTrader 4 platform.

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.

jean-raphael-nahas
Jean-Raphael Nahas explains Nigerian FX IB networks to Andrew Saks-McLeod

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.

 

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