Africa Economy Financial Inclusion Forex Report

Insight: The rise and rise of retail Forex trading in Africa

Forex trading has seen huge growth across Africa in recent years – the retail market growing from US$ 14 billion in 2013 to US$ 21 billion in 2016 in South Africa alone.  Nigeria and South Africa are the two largest African markets, but Kenya, Tanzania, Rwanda, Botswana, Namibia and Angola have all seen a massive surge in interest from the public.

Internet penetration, youth unemployment and fierce marketing by a new wave of Forex brokers are all key drivers of this growth. The low cost of entry has also helped – most brokers now offer their trading platforms on mobile devices and require very low minimum deposits – sometimes as low a US$ 1.

Internet penetration in Nigeria now stands at 47% of the population, with 50 million mobile internet users, and this is set to reach 85% of the population by 2023. Youth unemployment stood at 38% in 2018, though this has come down slightly as the economic recovery continues, albeit unevenly. Marketing by brokers is always difficult to quantify exactly; but anecdotal evidence suggests that young people – young men in particular – are being aggressively targeted over social media by introducing brokers and other representatives of the industry.

Brokers are also increasingly offering Nigerian traders accounts with the Naira as a base currency, removing the fees paid for currency conversion when opening a USD denominated account and allowing Nigerians to instantly fund their trading accounts.

This is a pattern we are seeing replicated across Africa and the amount of money being spent by the youth is increasing every year.

Fleeing Europe

But where are all these new brokers coming from? Some are homegrown, but most of the new brokers are recent arrivals from Europe.

In the spring of 2018, ESMA (The European Securities Markets Authority) introduced new regulations for the retail Forex market in the EU. These included limits on leverage (30:1 is now the maximum), the banning of binary options, bonuses and promotions, and guaranteed negative balance protection for all customers.

These new rules have had a major impact on the profitability of the industry in Europe, which was traditionally the most valuable regional market in the world. Most of the established Forex brokers are weathering the storm, but many of the smaller brokers have started looking overseas to less regulated markets for easier profits.

Which brings us back to Nigeria; why are Forex brokers so interested in the Nigerian market in particular? The single most significant reason is the complete lack of local regulation.

In late 2018 the Nigerian financial regulator, the Securities and Exchange Commission (SEC), freely admitted in a public noticethat:

“online retail forex trading is currently unregulated and consequently may be subject to abuse. Until a framework for regulation of online retail forex trading is developed by the SEC, any person participating or engaged in such investment activity does so at his or her own risk.”

Since issuing this public notice, and despite the continued growth of the market, the SEC has taken no further action to regulate Forex brokers operating in the country. This lack of regulation is now a serious problem; there has been an increase in the number of fraudulent Forex brokers operating in the country, and for new traders, it is very difficult to tell the difference between a good broker and a criminal broker.

South Africa and the FSCA

Unlike Nigeria, the South African financial regulator, the Financial Sector Conduct Authority (FSCA), has been very active in regulating the local Forex market. Also faced with a huge increase in interest for Forex trading, the FSCA has responded by cracking down hard on criminal Forex brokers and instituting a new licensing regime for all Forex brokers.

The new licensing regime, known as the Over the Counter Derivative Provider (ODP) licence, forces all Forex brokers (and other OTC derivative companies) who have a physical presence in the country to provide continuous access to all transaction data to the FSCA. This means that the regulator will have access to all transaction details, including the instrument type, underlying asset, price, leverage used and the investors name and country of residence. Though this may seem like an onerous responsibility to place on brokers, it is designed to ensure that brokers treat all clients fairly and do not engage in unprincipled or illegal activity.

The Forex market in South Africa is the most developed and regulated in Africa, but there are still fraudulent actors, so it is always important for those thinking about Forex trading to check on whether a broker is regulated by the FSCA, or one of the other major international regulators.

The ODP licensing regime is still in the application phase, but once it is active, we can expect the FSCA to take an even more active role in ensuring the safety and education of traders and potential traders.

The Future

Following in the footsteps of the EU, strict regulatory tightening is also expected in Australia over the next year, so Africa can expect another wave of international brokers looking for more profitable markets.

In a welcome move, the Kenya Capital Markets Authority (CMA) has recently starting regulating Forex trading in the country – granting licences to two local Forex brokers and making very public warnings about working with unlicensed operators in the country.

Until such time that other African regulators begin to follow in the FSCA’s footsteps and start actively managing this high-risk market, people across the continent are advised to treat all marketing from Forex brokers with caution and to conduct their own research before spending any of their money.

Jeffrey Cammack

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