There is always risk, even in the most secure business ideas – after all, nothing has been tried, nothing has been won, right?
But companies that operate using different currencies to buy and sell face particularly relevant risks associated with changes in volatile foreign exchange markets, especially when dealing with a marginal currency like the Nigerian naira.
In this article, we will take a close look at what these risks are and how Nigerian businesses can better guard against them.
Despite some difficulties since the 2014 oil crash, Nigeria is by far the largest economy in Africa and in many ways it could be considered an African achievement. Lagos’ business districts are growing rapidly as young Nigerian entrepreneurs are setting up startups at a truly impressive rate, and more and more international companies are taking note.
As Nigeria begins to look outward across the continent and the world, more and more domestic companies find themselves doing international transactions, either buying or selling goods, or ordering or supplying. services.
While doing business with the world offers tremendous opportunities, the challenges of trading cross-border in different currencies can be very daunting for any business that relies on a currency as peripheral and volatile as the naira.
The certainty of change
This is because companies that do business with customers or suppliers in other countries generally need exchange rates to be very stable – fluctuations affect the profitability of a transaction and can make all the difference between profit and profit. loss.
For example, a Nigerian fashion house could buy its fabric in Senegal and then sell its finished products in the country. If the Naira drops relative to the CEFA, the cost of importing fabrics will increase.
While the company may try to pass the difference and the increased costs on to customers by charging more for the end product, many customers are more likely to find the goods too expensive. This can be disastrous for businesses that are locked into contracts or simply rely heavily on a particular supplier, as they may be pressured to run their once profitable business at a loss.
Businesses in the Western world face this dilemma as well, but currencies like USD, EUR, and GBP are generally quite stable. So while fluctuations can certainly hurt business, they are most often possible to be absorbed.
However, the Nigerian Naira has undergone a scorching rush over the past 5 years; in 2017, 1 USD = N315 while the rate is currently 1 $ = N414! Trying to establish a medium and long term strategy for an international base is very difficult when this business is built on fragile bases like the Nigerian naira.
The situation becomes even more complex. Once again, Western companies have an advantage in the area of trade forex – there is a whole range of ways that Western companies can guard against fluctuations in currency markets that are not available to companies. Nigerians.
In particular, UK businesses benefit from a wide array of forex opportunities due to its blue chip credit rating, libertarian financial services climate and highly reliable regulatory framework.
On the other hand, many of these means are simply not available in Nigeria as many required service providers are unwilling or unable to offer business in the country.
This is mainly due to perceived currency and political stability issues mixed with Nigeria’s unfortunate reputation as a financial crime incubator. While Nigeria does not currently suffer from any financial sanctions imposed by the United States, there are concerns that regime change will lead to it.
How to hedge FX as an SME
There are 3 very common methods of currency hedging – ways in which companies can indemnify themselves against changes in the currency market.
Futures contracts occur when a company agrees to buy a specified amount of a given currency, over a period of time, at an agreed and settled rate. For example, a Nigerian company can anticipate that it will need to purchase $ 10,000 in the coming year to pay its suppliers. Rather than buying it gradually as needed, a forward contract would allow them to “lock in” the current exchange rate, allowing them to budget for the N 4,111,600.00 they will need.
Futures contracts are used to protect a company from fall in the value of their currency, but on the other hand, if the naira rose against the dollar, the business would lose and pay more for the dollars. Futures can be a bit of a gamble, but they offer certainty.
Problematically though, most of the companies dealing in futures do not offer their services to Nigerian clients. However, in September 2021 Nigeria agreed to a record $ 18 billion in forward contracts, so the outlook is at least improving.
- Currency brokers and international payment providers
If a business buys large amounts of a particular currency, a currency broker may be able to help them get a better exchange rate than what is generally available in the market. The problem that Nigerian businesses face here is simply that many currency brokers have a low appetite for buying naira if they are dealing in Nigerian business.
When making large international business payments (such as for an invoice), an international transfer service provider may help a business save fees on international bank payments and may also be able to help them secure a better rate. Unfortunately, however, international business payment service providers do not accept any Nigerian business.
Another very useful way for currency hedging is to open a multi-currency account. Multi-currency accounts allow a business to hold account balances in different currencies through sub-accounts or “pots” in addition to their main balance. A Nigerian company could hold its main balance in Naira but then have a pot in USD and a pot in CEFA. The advantage is that they have foreign currency ready to go and are again protected by the ebb and flow of the Naira.
Multi-currency accounts are very useful for businesses that regularly process a small number of particular currencies.
Again, many international or borderless banks that offer multi-currency accounts do not allow naira balances and relatively few Nigerian banks allow multi-currency balances.
So, as we can see, all over the world, small businesses have dedicated service providers who can help them with the management and payment of currencies. However, in Nigeria few, if any, of these options are available.
How to hedge yourself against currency fluctuations
In the absence of a supportive financial services industry, Nigerian business owners must use their talent to be resourceful and research “do-it-yourself” tips for currency hedging.
Without access to brokers or multi-currency accounts, Nigerian businesses are largely unable to hold foreign currency balances. However, they can still hold cash in whatever currency they can get their hands on. Currencies like USD, Euro and GBP are available worldwide and CEFA can be obtained at many Nigerian exchange offices or by crossing the border.
Therefore, when the exchange rate moves to a favorable position (i.e. the Naira becomes strong against the USD), a Nigerian businessman can just take advantage of it, buy some money. in USD and lock it securely until needed. They can use it to make international payments through services like Western Union or Ria or can just resell it when the rate changes the other way.
There are a growing number of fintech startups offering “borderless bank accounts” to residents of an increasing number of countries. These offer Nigerians the option of obtaining an international bank account in a foreign currency through the backdoor. However, few of them allow Nigerian citizens to hold accounts. Even Wise has stopped serving Nigerian customers at least for now.
While its fees and exchange rates aren’t the best, Paypal allows Nigerians to hold accounts and will also allow them to hold USD balances if they receive USD funds.
The cryptocurrency market is kind of a wild frontier, and as such, there are many platforms that will accept customers from all over the world, including Nigeria. Therefore, a company could buy a particular cryptocurrency and then hold it in their crypto exchange until needed.
While critics may point out that most cryptocurrencies are much more volatile than even the Naira, there are stablecoins like the USDT which tracks the USD 1 to 1 rate. Hence, by buying USDT, a Nigerian company can almost hold a USD balance which can be converted back to fiat when needed.
From Lagos to London, international trade is both exciting and complex. However, Nigeria and the developing world in general face additional challenges.
Yet while these difficulties may be restrictive, they can be overcome or at least accepted with some determination and resourcefulness – and these are two traits that Nigeria possesses in abundance.