The online Forex CFD trading market has seen enormous growth across Africa in recent years, and in Nigeria in particular. The Nigerian market in retail Forex trading is now estimated to be worth roughly 10-15 million USD daily, making it only second to South Africa in terms of daily spend in African countries. This high level of growth is occurring for several reasons: Internet penetration, youth unemployment and intense marketing by brokers.
Internet penetration in the country 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.
The low cost of entry is also a factor – most brokers offer their trading platforms on mobile devices and some require very low minimum deposits – sometimes as low as 1 USD. Brokers are also increasingly offering Nigerian traders accounts with the NGN as a base currency, removing the fees paid for currency conversion when opening a USD trading account and allowing Nigerians to instantly fund their trading accounts.
But where are all these brokers coming from? Many are homegrown, but most 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.
Non-existent Regulation in Nigeria: The Perfect Storm
Which brings us back to Nigeria; why are Forex brokers so interested in the Nigerian market? 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 notice that:
“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; we have seen an increase in the number of fraudulent Forex brokers operating in the country, and for beginner traders, it is very difficult to tell the difference between a good broker and a criminal broker.
Lack of regulation also allows brokers to operate in an unscrupulous manner, even if they don’t operate illegally. Brokers in Nigeria do not have to place limits on leverage or offer negative balance protection – an especially deadly combination for beginner traders: We often hear stories of beginner traders opening accounts with 500:1 leverage and quickly becoming indebted to their broker after being caught out by swift changes in the market.
Some brokers also use opaque bonus schemes to tempt new traders, with most not reading the small print which requires customers to trade a set amount before receiving the bonus in question. This forces new traders to spend more of their money in the hope of achieving their bonus, before they are adequately educated to face the complexities of the Forex market.
Björn Michels is CEO of FXScouts, an online broker comparison portal with a strong focus on education. FXScouts is determined to support new traders by providing Forex education and honest reviews of the best brokers operating in Nigeria.
Michels believes that with no national regulator to protect consumers from unscrupulous brokers, this soft regulatory environment has led to “frightening” levels of risk: “The financial risk we are seeing in Nigeria, especially amongst the youth, is frightening. Potentially thousands of young people are losing money they cannot afford, and brokers are making huge profits. While some in the private sector are doing their best to educate, government needs to be more actively involved in creating a more transparent and secure environment for consumers.”
Michels is quick to point out that, with education and discipline, Forex trading can be a profitable endeavour but that the danger lies in when it is treated like gambling: “We cannot have a situation in Nigeria where the vulnerable are exploited by irresponsible brokers – government and the industry need to come together to protect and educate.”
Currently, the safest way to trade Forex CFDs in Nigeria is to make sure that your broker is regulated by one of the three major regulators: The Financial Conduct Authority (FCA) in the United Kingdom, the Cyprus Securities and Exchange Commission (CySEC) in Europe or the Australian Securities and Investments Commission (ASIC) in Australia. All three of these regulators
A New Wave of Brokers
Following in the footsteps of the EU, strict regulatory tightening is also expected in Australia over the next year, so Nigeria can expect another wave of international brokers looking for more profitable markets.
Until such time that the SEC steps in and starts regulating this huge market, you are advised to trade only with a good internationally regulated broker and avoid local operators. Be especially wary of brokers that offer bonuses that seem too good to be true, as they usually are.