There is always some risk even in the most surefire business ideas – after all, nothing ventured, nothing gained right?

But businesses that operate by using different currencies for buying and selling, face uniquely pertinent risks from changes in the volatile currency markets – especially when dealing with a marginal currency like the Nigerian Naira.

In this post, we will take a close look at just what these risks are and how Nigerian businesses can best guard against them.

Despite experiencing some hardships since the oil crash of 2014, Nigeria is Africa’s largest economy by some distance and in many ways, it could be viewed as an African success story. The Lagos business districts are growing fast as young, entrepreneurial Nigerians form startups at a truly impressive rate, and ever more international businesses are now taking note.

As Nigeria begins to look outwardly across the continent and the globe, more and more domestic businesses find themselves transacting internationally either in buying or selling goods, or ordering or providing services.

Whilst doing business with the world offers huge opportunities, the challenges that come with transacting across borders in different currencies can be very intimidating for any business that relies on a currency as peripheral, and volatile as the Naira.

The Certainty of Change

Indeed, businesses that deal with clients or suppliers in other countries generally need the currency exchange rates to be very stable – fluctuations affect a transaction’s cost-effectiveness and can make all the difference between profit and loss.

For example, a Nigerian fashion house might buy its fabric from Senegal and then sell its finished goods domestically. If the Naira drops against the CEFA though, then the cost of importing fabrics will go up.

Whilst the firm can try to pass the difference and increase in costs onto the customers by charging more for the end product, many customers are more likely to find the goods to be overpriced. This can be disastrous for companies who are locked into contracts or simply rely heavily on a particular supplier as they can be pushed into running their once profitable business at a loss.

Businesses in the western world also face this dilemma too but currencies like the USD, EUR and GBP are generally pretty stable. As such whilst fluctuations can certainly hurt business, they are more often than not, possible to absorb.

However the Nigerian Naira has endured something of a torrid ride over the last 5 years; in 2017, $1 USD = N315 whereas the rate is currently $1 = N414! Trying to establish a medium to long term strategy for an international basis is very difficult when that business is built on a shaky foundation such as the Nigerian Naira.

The situation gets even more complex. Once again western business enjoys an advantage in the business foreign exchange field – there is a whole range of ways in which western businesses can guard against fluctuations in the currency markets that are unavailable to Nigerian business.

In particular, UK businesses enjoy a wide selection of Foreign Exchange possibilities on account of its gold-standard credit rating, libertarian financial services climate and highly trusted regulatory framework.

On the other hand, a lot of these ways are simply not available in Nigeria as a lot of the requisite service providers are either unwilling or unable to offer business in the country.

This is mostly owing to perceived currency and political stability issues mixed with an unfortunate reputation of Nigeria as an incubator of financial crime. Whilst Nigeria is not currently suffering from any US-imposed financial sanctions, it is feared that a change of regime could lead to this happening.

How to Hedge FX as an SME

There are 3 very common methods of currency hedging – ways in which businesses can indemnify themselves against changes in the currency market.

• Forward Contracts

Forward contracts are when a business agrees to buy a set amount of a given currency, over a specified time, at an agreed, settled rate. For example, a Nigerian business may anticipate that it will need to buy $10,000 over the coming year to pay suppliers. Rather than buy it incrementally as and when it is needed, a forward contract would allow them to “lock-in” the current exchange rate allowing them to budget the N4,111,600.00 they will need.

Forward contracts serve to protect a business from a drop in the value of their currency, but on the other hand, if the Naira was to increase against the dollar then the business would be losing out and paying more for the dollars. Forward contracts can be a bit of a gamble but they do provide certainty.

Problematically though, most of the companies dealing in forward contracts are not offering their services to clients in Nigeria. However, in September 2021, Nigeria did agree to a record $18 billion in OTC forward contracts so the outlook is at least improving.

• Currency Brokers & International Payment Providers

If a business is buying large amounts of a given currency, then a currency broker may be able to help them get a better exchange rate than the one generally available on the market. The issue Nigerian businesses face here though is simply that many currency brokers have a low appetite for buying Naira if they will deal with Nigerian business at all.

When making sizable international business payments (such as for an invoice) then an international transfer service provider can help a business save fees on international bank payments and may also be able to help them ensure a better rate. Unfortunately, though, international business payment service providers don’t accept any Nigerian business.

• Multi-Currency Accounts

Another very useful way for FX hedging is to open a multi-currency account. Multi-currency accounts allow a business to hold account balances in different currencies via sub-accounts or ‘pots’ in addition to their main balance. A Nigerian business could hold its main balance in Naira but then have a USD pot and a CEFA pot. The advantage is that they have foreign currency ready to use and are once again protected by the ebb and flows of the Naira.

Multi-currency accounts are very useful for companies that regularly deal in a small number of particular currencies.

Once again though, a lot of the international or borderless banks that offer multi-currency accounts don’t allow balances to be held in Naira and relatively few Nigerian banks allow multi-currency balances at all.

So, as we can see, all across the world, small businesses have dedicated service providers who are able to assist with FX management and payment. However, in Nigeria few, if any of these options are available.

How To DIY Hedge Against Currency Fluctuations

In the absence of a supportive financial service sector, Nigerian business owners have to utilise their talent for resourcefulness and look for ‘DIY’ hacks for currency hedging.

• Buy Cash Currency

Without access to either brokers or multi-currency accounts, Nigerian businesses are largely unable to hold balances in foreign currencies. They can, however, still hold cash in whatever currency they can get their hands on. Currencies like the USD, Euro and GBP are available worldwide and the CEFA can be obtained in many Nigerian money exchanges or by hopping over the border.

Therefore, when the exchange rate moves to a favourable position (i.e. the Naira becomes strong against the USD), a Nigerian business person can simply take advantage, buy USD cash and lock it securely away until it is needed. They can use it to make international payments via services such as Western Union or Ria or can simply sell it back when the rate changes in the other direction.

• Borderless Bank Accounts

There are an increasing number of fintech startups offering “borderless bank accounts” to residents of an increasing number of countries. These offer Nigerians an opportunity to get an international bank account in a foreign currency via the backdoor. However, few of them permit Nigerian citizens to hold accounts. Even Wise has stopped servicing Nigerian customers at least for now.

• Paypal

Whilst its fees and exchange rates are not the best, Paypal does allow Nigerians to hold accounts and will also permit them to hold USD balances if they receive funds in USD.

• Cryptocurrency

The cryptocurrency market is something of a wild frontier and as such, many platforms will accept customers from all over the world including Nigeria. Therefore a business could buy a given cryptocurrency and then hold it in their crypto-exchange until it was needed.

Whilst critics may point out that most cryptocurrencies are far more volatile than even the Naira, there are stable coins like the USDT which tracks the USD rate 1 for 1. Therefore, in buying USDT, a Nigerian business can almost hold a USD balance which can be converted back to fiat when they need to use it.

In Summary

From Lagos to London, international trade is both exciting and complex. However, Nigeria and the developing world, in general, do face some extra difficulties.

Still, whilst these difficulties can be restrictive they can be overcome or at least countenanced with some determination and ingenuity – and both of these are traits that Nigeria holds in abundance.