Forex Market is a global financial market where currencies are traded and exchanged. Retail investors can participate in this market for the purpose of speculation or hedging.
Trading in the forex market is especially popular in Africa, and the market is regulated by CMA in Kenya. Lower barriers to entry for investors, and entry of more regulated players in the industry has led to growth in CFD trading & forex trading in Kenya.
The Covid-19 pandemic has led to a huge surge in the trading volume in Africa. But most retail investors are unaware of the risks associated with CFD & forex trading, and this puts them at risk of losing their capital or even more.
We look at the state of local online forex trading industry since it has been regulated and the risks that online forex trading pose to retail investors.
Growth and Concerns
Kenya based broker comparison website Trade Forex Kenya reported that over the last couple of years post the establishment of the regulatory framework in Kenya, the user base has been estimated to grown to around 100,000 active traders. These traders generated an estimated daily forex volume of around US$192M in 2019. There are now 5 local brokers that have been licensed in Kenya to accept forex traders.
But the question lies if Kenyan retail investors are experienced enough to handle the risks associated with trading such high capital in the forex & CFDs market?
The increase in market players in the recent years is an effect of rising unemployment levels so some investors might be drawn into this field owing to exhausting other possibilities. With this being the case, are new investors or first-time investors aware of perils associated with a market which swallows huge market players every day?
As much as one would like to believe, not everyone is protected from risks as the probability of market crashing due to volatility is relatively high, and the risk of losing more than your capital is higher if you are using leverage.
If this is the case then how do investors ensure that they are prepared to weather the storm when the storm arrives?
The answers to this question are manifold, but every investor has to form a hybrid mechanism of past and present successful strategies to tackle any issue.
One of the first and foremost steps to understand the market is to study the regulations surrounding it. It’s pertinent to state that the primary motive for any broker is to make their commission, so regardless of the fact whether the client makes his profit or not, the broker charges their commission.
So, investors must look after their own interest. So, a good place to start would be to understand the laws that protect and govern them.
CMA Regulation and Online Forex Trading Licensing Scheme
Prior to 2017, there were barely a handful of traders who used to actively trade in the forex market from Kenya. But since Kenya had no regulations back then, there were no regulated brokers to facilitate such trades.
With the advent of technology this sector started to show prominent growth. Having realized its true potential & the risks for investors, the Kenyan capital market regulator decided to develop a framework to allow for forex trading to be done within its borders.
CMA is the concerned authority that licenses, supervises, monitors activities of capital market entities including those dealing in stock market and online forex trading in Kenya.
According to the current regulation which in in place the CMA only issues licenses to Forex brokers under 3 categories, the first being Dealing Forex Broker, the second being Non-Dealing Foreign Exchange Broker and the final one being Online Forex Money Manager. And Forex trading is offered as a CFD instrument.
There are 5 CMA Licensed Forex Brokers in Kenya as of January, 2021. The Non-Dealing Foreign Exchange brokers are EGM Securities (FXPesa) bearing license no 107, SCFM Limited (Scope Markets) bearing license no 123, PepperStone Kenya bearing license no. 128, and Exinity East Africa Limited bearing license no 135. The only Online Forex Money Manager is Standard Investment Bank Limited (Mansa X) bearing license no 116.
These are the only brokers who are currently licensed under the regulations of the CMA after fulfilling all the requirements enlisted in Section 29 of the Capital Markets Act.
The primary goal of all these brokers is to facilitate trade for their clients by acting as a link between the market and the client. The conditions to facilitate such trades differs depending on the category of licenses given to them.
Kenyan traders who wish to trade are expected to only use any of these registered and licensed brokers. The CMA has explicitly forbidden all Kenyan traders from engaging with foreign brokers. The CMA has issued a notification to foreign brokers not to entice Kenyan traders to trade on their platform as many brokers were found to be onboarding Kenyan traders without obtaining CMA license. Regulator has notified many such brokerages are subject to abuse and pose risk to investors.
If anyone is found to be in violation of these provisions then the CMA vows to punish them severely. These drastic measures came into place in light of the numerous scams and Ponzi schemes that have taken place in the past.
Risks and Caution for Retail Forex Investors
Despite such regulations being in place, the choice at the end of the day lies with the investor.
There are ample choices in the market for investors, but in a long run its better to understand if you will be able to handle the risk if the market crashes.
For examples all forex trading at most brokers is done as a CFD instrument. A CFD is nothing but a contract that is entered into by, and between a broker and client.
The contract mentions the price at the day of entering the contract and the price at the day the contract was closed. If the price of the asset which was the underlying object in the contract changes then the difference in the price has to be paid by the broker if the price increases and the difference in the price has to be paid by the client if the price decreases.
Whether or not a price increases or decreases depends on the market, but the main aspect to be considered before entering into a CFD is if you can handle the risk.
If you are using leverage of 1:20, then only 5% needs to be paid to the broker upfront for the asset you want to invest in, if the market is against your prediction then you not only lose the 5% but you also lose more than you investment since you will need to cover the extent of your loss till the day the contract ends.
As the only objective of most brokers is to pocket their own commission, investors really need to understand the risks involved more than the rate of return. Only if you can afford to take the risk, then only should you involve yourself in the market.
Often times juicy rate of return might blind you from seeing the true picture, you can completely lose sight of the risks. So, the first question that you’ll need to ask yourself before delving into the market is whether you can afford to lose the money you invest, if your answer is no then the forex market is not for you.
There are a lot of ways you can protect your money by having a risk management in place, reducing the leverage, having a stop loss target etc.
But remember, at the end of the day you have to learn to live with the consequences. All these regulations and derivatives exist to protect you as much as possible, but there are some factors beyond these derivatives. There are only indicative but not definitive.
A starting point for any new investor is to understand what exactly he seeks to achieve with the forex market. What is the target he wants to achieve and what’s the realistic goal he has on his mind.
Past this you’ll need to do your own research, collaborate with one of the few licensed brokers and explore all the possible options you have. Finally have a look at the regulations and once you are certain that you are ready, make the informed call and hope that the market reacts positively to you.