Retail FX market in Nigeria an opportunity for brokers as central bank looks to end the spread between interbank and parallel FX rates

Nigeria was once a very interesting market for medium sized retail FX firms, as attracting customers from that particular region of Africa meant utilizing strong introducing broker (IB) networks to onboard often loyal, local customer bases across the country.

Several hindrances have curtailed the interest in forging strong IB networks in Nigeria recently, one particular event being the end that was put to the nation’s preferred payment channel.

Liberty Reserve, which was shut down by United States federal prosecutors under the Patriot Act after an investigation by authorities across 17 countries. The United States charged founder Arthur Budovsky and six others with money laundering and operating an unlicensed financial transaction company. Liberty Reserve is alleged to have been used to launder more than $6 billion in criminal proceeds during its history.

Due to the risk profile of Nigeria which is recognized by payment solutions providers and merchant services companies such as Visa and Mastercard, Liberty Reserve was a very popular method of transferring client funds from Nigerian customers to western brokerages and vice versa.

Nigerian FX traders are indeed willing and wish to seek alternative means of investing and generating a profit, largely by operating via IBs, many of which hold FX seminars in Lagos in which many potential and existing investors attend and become clients of a particular brokerage en masse.

Nigeria is a very different country than it was at the turn of this decade, however. The economy is faltering, despite Nigeria’s natural resources being a source of tremendous wealth, and the local currency – the naira – is in freefall.

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 (CBN) will now try to eliminate the spread between the official and black market exchange rate against the dollar, the Minister of Finance, Mrs. Kemi Adeosun said on Tuesday.

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, 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.

“The CBN is working on the elimination of arbitrage,” Adeosun told Reuters by text message, without saying how this would be done.

She earlier told a conference that the central bank was working on removing the price difference. Adeosun said this had been in response to a question about manufacturers not getting incentives to produce given an arbitrage opportunity.

The Central Bank of Nigeria spokesman, Isaac Okorafor said the central bank was working towards “ensuring that the forex market operates as effectively as we would envisage.”

He said the aim was to “ensure there is no black market” but did not give details of how this would be achieved.

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 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.

Mr. Nahas explained “On Tuesday 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 “Presently 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 signal the beginning of some stability for Western firms to enter Nigeria’s extremely localized retail FX market.