Naira-USD spreads have narrowed dramatically following FX policy reforms and the removal of Nigeria’s unorthodox central bank governor, Godwin Emefiele. | Chart: Ayomide Agbaje — TechCabal Insights.

That is more than 50% of pure profit if you could somehow get $ at official rates and resell in the parallel market. Nigeria has a fairly large number of people who need $ for everyday things like purchasing items on Amazon, paying for subscriptions or running a business with dependencies on international vendors/products. But banks no longer allowed international payments from Naira cards to go through, so importers of food and users of digital services had to source for $ from anywhere they could.

As I said, a lot of problems being solved in Africa are structural problems with roots deeply resident in government policy. In the last three years, cross-border payment products have really been dollar-local currency arbitrage products. They solved an important problem and benefited from netting a smaller percentage of the arbitrage opportunity from meeting that need. And Nigeria made up the bulk or at least a significant propoertion of that market.

Before moving forward, let us establish one truth, or something as near the truth as possible.

All currency problems are policy and government problems. Therefore all cross-border payment problems are government problems.

The degree to which they are business-solvable problems is tied to the attention and approach of the government. If you are in many African countries and run a business that is too exposed to swings in government policy, you are either close to the managers of government problems, or very brave.

In my opinion, we had a lot of very brave businesses. In any case, governments change and there is not too much you can do to hedge against changing government policies if your business depends on bad policies to thrive. In this case, when things get better, your business suffers from it.

A few weeks after Nigeria switched from its tenuous fixed exchange rate policy to a managed rate, Bloomberg and other media reported the upward surge in the country’s stock exchange. Last week, Bloomberg reporter, Emele Onu, clarified that a lot of that upward momentum came from bank stocks. An index of bank shares gained 23% last month, the most since 2018. Clearly, the banks were “balling”.

To rub it in, last week, banks in Nigeria have launched a slew of products targeting remittances.

Access Bank, Nigeria’s largest bank by assets (2022), launched a product with remittance fintech, Remitly to capture remittance inflow. ALAT, the digital banking arm of Wema Bank will now allow naira cardholders to spend up to $500 without needing a dollar bank account. It was $0 previously. Guaranty Trust Bank has done the same, and United Bank for Africa (UBA) will allow customers will FX accounts to borrow in naira against the FX in their dollar or British pound accounts.

It has been an onslaught of products capitalising on the FX policy reform and threatening the market of cross-border/dollar virtual card fintechs. It exposed the vulnerability of building a currency-policy-dependent payment product in Africa that is only designed to capture arbitrage opportunities. But not use the short term painkiller as a foothold to explore deeper user engagement models beyond the occasional need for a USD virtual payment option.

@wquist – Slow Ventures

In underwriting/spread based businesses, be very aware if you are building products to spot an arbitrage or to create one. Both can be great ways to make money but there is very little long term equity value in the former.

— fintechjunkie (@fintechjunkie) July 13, 2023

And it showed that the banks are learning how to quickly turn on a dime (at least in launching new products that also capitalize on policy swings). Banks are better positioned to do these types of product launches, because they have deposits, serious cashflow, legacy positioning and their stock (thus available capital) is up!

They still carry a corporate and non-digital-first baggage with them.

UBA will only give the FX-backed loan I mentioned earlier, if you walk into the bank and fill a form. And GT Bank’s new app launch was disastrous as it locked customers away from making any transactions for hours, until the problem was resolved.

Interestingly these remittance products have been launched just as remittance inflow is tightening. Nigerians at home received $952 million in the first half of 2023 and will need $1.2 billion in remittances in the next half to only match what came in last year. Declining inflow from remittances is not exactly good news for the new remittance products everyone seems to be launching.

In addition, for banks, the new FX reforms have failed to drive a surge in investment from foreign inflow. Remember that 23% gain in bank stocks I mentioned earlier? Here’s where the surge came from according to Bloomberg:

So far, the stock-market gains have been largely been driven by local investors looking to protect their savings against searing inflation. Bank of America Corp. economists said the country will have to increase interest rates by at least 700 basis points before the end of the year to curb inflation that’s poised to accelerate to 30%.

In the longer run, there’s speculation that the reforms may eventually draw more international investors.

“People are positioning in banks ahead of the expected return of foreign portfolio investors, who will want to key in for the benefits,” said Segun Adams, an equity analyst at Lagos-based Afrivest West Africa Ltd.