Retail FX in Nigeria: Light at the end of a long tunnel

For many years, a sizable number of small to medium sized retail FX brokerages have shown considerable interest in attracting business from networks of introducing brokers in Nigeria, often with very mixed results.

Whilst Nigeria is home to the largest economy in the entire continent, the business environment cannot hold a candle to the organized nature of the second largest economic force – South Africa – on the basis that disorder, uncertainty and flagrant corruption from the top down pervades, whereas South Africa’s business environment is intrinsically well organized and resembles that of many Anglophone Western nations.

One of the largest attractions toward doing business with networks of Nigerian affiliates and introducing brokers is that many have a loyal following of local traders who often attend regular offline seminars held by introducing brokers, thus a willing and enthusiastic business network exists across the country.

There is more to the landscape than that, however. Nigeria’s investors in many cases do not place their faith in the local financial structure, largely due to the local currency – the Naira – being subject to massive instability caused by the government and those close to government officials being able to purchase or trade Naira at preferential rates, the banks being able to offer a different rate to the wider population, which is volatile to say the least, and a massive street-level black market operated by FX bureaux that are the subject of government level disdain.

Thus, Nigeria has a large base of traders and investors who would rather trade electronic markets with overseas firms, which, although a great opportunity for brokers, presents its own set of very specific challenges which range from how to get money in and out of a nation which is subject to sanctions by merchant services providers on the grounds of the level of potential illicit activity that has tainted the nation’s reputation for over 30 years.

This week, however, a positive direction has materialized, as for many Nigerians with memories of the Naira exchanging above N520 to dollar at the parallel market nearly two years ago, the stability in the market now is a welcome development.

This has largely been brought about by the impact of the Central Bank of Nigeria (CBN)’s policies on the local currency, including the introduction of Chinese Yuan into the intervention, has impacted positively on the Naira stability.

Today, with key policy initiatives, especially the introduction of the Investors’ & Exporters’ Forex Window, the apex bank (the local name for the Central Bank of Nigeria) has brought convergence in the market, keeping the Naira stable at N361 to the dollar in the parallel market. The apex bank has also continually intervened in the forex market at the retail end, supplying both dollar and yuan to meet FX demands.

The adoption of the Yuan as a reserve currency was a very clever move by Nigeria, as the only way to stem the unpredictable nature of the value of the Naira was to enter into an agreement at central bank level with a stable overseas economic power, however due to commercial sanctions by many international banks and merchant services providers such as Visa, Mastercard and many central banking regulators, achieving such an agreement with many national financial institutions abroad would have been nigh on impossible.

According to the Central Bank of Nigeria’s report today, the total FX interventions by the Central Bank of Nigeria (CBN) stood at $963 million as at August 2018. According to a report by Financial Derivatives, a financial market research firm, the FX interventions have helped to stabilise the naira against global currencies, especially the US Dollar. At the parallel market, the naira started the period at N360/$, and inched up marginally, closing at N361/$ on August 28.

This can be attributed partly to the CBN’s intervention of approximately $963 million during that period. The Naira also appreciated against the British Pound and euro to close at N464/£ and N412/Euro on August 28, from N474/£ and N415/Euro on August 13.

Whilst such market-related information is not necessarily our remit, it is important in this case due to the clear stabilization of the Naira as a result of the $2.5 billion currency swap with China to boost its reserves and aid trade between both countries, Nigeria has since begun selling Chinese yuan to local traders and businesses.

With such a currency swap deal in place, Chinese payment processing services such as UnionPay International can now be safely used and observed by the Chinese government, hence the years-long concerns about transferring funds to and from retail clients in Nigeria by brokerages in other regions can now be mitigated substantially.

As is perhaps to be expected, however, the initial period was not without its difficulties.

In the first two weeks of introducing I&E Foreign Exchange Window, forex speculators lost over N500 million, as the CBN sustained its dollar interventions in the interbank market. The losses grew to over 1 billion Naira in the first two months after more foreigners began to use the window, and its impact on the forex market deepened.

The economy has also enjoyed major inflow of forex in recent months with over $51 billion recorded in the I&E FX Window. The I&E Forex window, also called willing-buyer willing-seller window, allows foreign investors to find buyers for their dollars at a mutually-agreed price. The CBN controls about 15 per cent of all the transactions carried out in the window.

The CBN has injected $340 million into the interbank retail Secondary Market Intervention Sales (SMIS). This is in addition to the sale of 69 million Chinese Yuan (CNY) in the spot and short tenored forwards.

The figures obtained from the CBN showed that the United States (US) dollar denominated interventions were only for concerns in the agricultural and raw materials sectors.

According to its Acting Director, Corporate Communications, Isaac Okorafor, the sales in Chinese Yuan were through a combination of spot and 15-day tenors. He said the exercise, in line with its guidelines, was for the payment of Renminbi denominated Letters of Credit for agriculture as well as raw materials and machinery.

Lagos, the nation’s capital, for many years 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.

The combination of Chinese corporate and government uprightness and purchasing power, along with the willing Nigerian IB networks and their respective customers, many of whom are middle class and looking for an outlet to a more organized economic environment for their investments, may well be a great combination for the retail FX business.