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The Currency Risk for Nigerian Businesses is Very Real – What Are the Best Ways to Handle It?

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naira and dollar

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.

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan. Mr Olowookere can be reached via dipo.olowookere@businesspost.ng

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Economy

Awe Urges Corporate Firms to Adopt Sound Sustainability Reporting

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Sustainability Reporting

By Aduragbemi Omiyale

Corporate organisations operating in the country have been charged by the chief executive of the Nigerian Exchange (NGX) Regulation Limited, Ms Tinuade Awe, to adopt sound sustainability reporting as it would help investment decisions of investors.

At an event held on Tuesday themed Unlocking ESG for Boards from Strategy to Disclosure, Ms Awe said investors have the right to know the impact of businesses on the environment, especially at a time people are conscious of it.

She encouraged companies to adopt best practices in their disclosure on Environmental, Social, and Governance (ESG) issues by ensuring that their sustainability reports capture relevant sustainability disclosures that are relevant to their stakeholders.

“Our world today is facing major sustainability challenges including inequality, overpopulation, climate change, and several environmental risks. By recognizing that capital allocation makes a real impact on the environment and society at large, investors can reap sustainable long-term investment decisions through investments in ESG-themed investments.

“Furthermore, adopting an ESG-lens in our approach to investment is critical for investors to identify businesses that implement a forward-looking approach to managing long-term risks and leveraging opportunities that ensure long-term ensure economic, environmental, and social responsibility,” the NGX Regulation CEO said at the webinar hosted by Corporate Secretaries International Association (CSIA).

The organisation put hosted the gathering to explore how businesses and organisations can carry a full 360 approach to ESG, from integrating into business strategies to complying with regulations and standards.

In recommending critical disclosures that should be included in a sustainability report, Ms Awe said, “historically, sustainability reports cover the address a company’s approach to managing the Triple Bottom Line (TBL) of people, profit and planet.”

“However, disclosures in sustainability reports have evolved over the years to address the needs of a wide array of stakeholders. In publishing their sustainability reports, companies should consider a number of relevant disclosures including materiality, sustainability risks, and opportunities as well as a detailed explanation of how companies are addressing the risks and levering the opportunities.

“In addition, a sustainability report should include disclosures on how sustainability is governed by the Board, Executive Management, and designated officers responsible for managing the organisation’s impact footprint,” she added.

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Economy

60 Startups to Share $4m Google’s Black Founders Fund

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Google Black Founders Fund

By Dipo Olowookere

The sum of $4 million will be distributed to 60 startups established by Africans in the second edition of the Google for Startup Black Founders Fund for Africa.

In the maiden edition, the tech giant shared $3 million to 50 eligible black-founded startups across Africa as part of efforts to support innovation in underserved areas.

This year, eligible entrepreneurs will receive between $50,000 and $100,000 non-dilutive cash awards and up to $200,000 per startup in Google Cloud credits, support in the form of training, and access to a network of mentors to assist in tackling the challenges unique to each startup.

Application for the initiative has opened via http://goo.gle/BFFAfrica and will close on May 31, 2022, with winners announced on July 29, 2022.

Google will select winners from 13 countries with active tech and startup ecosystems and they are Botswana, Cameroun, Côte d’Ivoire, Ghana, Ethiopia, Kenya, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Uganda and Zimbabwe. However, strong applications from other African countries will also be considered.

It was gathered that businesses eligible for selection for the cohort include early-stage startups with black founders or diverse founding teams, startups benefiting from the black community, operating and headquartered in Africa, startups with a diverse founding team with at least one black founding member; those having a legal presence on the continent and building technology solutions for Africa and the global market; and those who have the growth potential to raise more funding and create jobs.

The Head of Startup Ecosystem for sub-Saharan Africa for Google, Folarin Aiyegbusi, stated that, “The Black Founders Fund Africa demonstrates our commitment to supporting innovation in underserved areas.

“Black-led tech startups face an unfair venture capital funding environment and that is why we are committed to helping them thrive, grow to be better and ensure the success of communities and economies in our region.

“The fund will provide cash awards and hands-on support to 60 Black-led startups in Africa, which we hope will aid in developing affordable solutions to fundamental challenges affecting those at the base of the socio-economic pyramid in Africa.”

“We are hopeful that the support received by the black founders will enable them to grow their business and in turn drive economic growth in Africa as they create solutions and give back to their communities,” Aiyegusi added.

The Google for Startups Black Founders fund was launched in the wake of the 2020 Black Lives Matter movement as part of the platform’s racial equality commitments.

The initiative is a pledge toward driving economic opportunity for Black business owners, providing support to startups in the region in the form of equity-free cash assistance that helps them take care of immediate needs such as paying staff, funding inventory, and maintaining software licenses.

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Economy

Stocks Shed 0.35% as Flour Mills, GSK, Others Fall

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flour mills

By Dipo Olowookere

Profit-taking continued on the floor of the Nigerian Exchange (NGX) Limited on Tuesday, with the bourse shedding 0.35 per cent at the close of transactions.

The decline occurred amid a resurgence of negative investor sentiment as the market breadth was bearish with 21 price gainers and 27 price losers led by Flour Mills, which fell by 9.20 per cent to N37.00.

GlaxoSmithKline went down by 8.39 per cent to N6.55, NPF Microfinance Bank dropped 8.02 per cent to N1.95, Japaul depreciated by 6.25 per cent to 30 kobo, while Champion Breweries slacked by 6.09 per cent to N3.70.

On the flip side, PZ Cussons topped the gainers’ chart after it gained 9.96 per cent to close at N13.25, Berger Paints rose by 9.72 per cent to N7.90, Northern Nigerian Flour Mills improved by 9.63 per cent to N11.95, McNichols appreciated by 9.52 per cent to N1.61, while Abbey Mortgage Bank grew by 9.49 per cent to N1.50.

Only the industrial goods counter closed higher yesterday as it gained 0.05 per cent. The consumer goods, banking, energy and insurance sectors lost 0.54 per cent, 0.39 per cent, 0.31 per cent and 0.21 per cent respectively.

At the close of trades, the All-Share Index (ASI) went down by 187.47 points to 52,756.62 points from 52,944.09 points, while the market capitalisation reduced by N101 billion to N28.442 trillion from N28.543 trillion.

Business Post reports that the volume of trades rose by 253.76 per cent to 1.3 billion from 374.2 million, the value of transactions increased by 55.62 per cent to N7.7 billion from N5.0 billion, while the number of deals went down by 5.91 per cent to 6,449 deals from 6,854 deals.

The significant increase in the trading volume was due to an off-market deal in FCMB yesterday and it topped the chart with the sale of 775.1 million units of stocks valued at N3.0 billion.

Jaiz Bank transacted 172.2 million shares worth N151.8 million, Transcorp sold 140.1 million stocks valued at N202.1 million, GTCO exchanged 50.4 million equities worth N1.2 billion, while International Breweries traded 21.0 million shares valued at N165.1 million.

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