Impact of Soaring Forex on Nigerian Fintechs: A Deep Dive

This Week In Tech

As fintechs continue to lead the charge towards a more inclusive, technologically advanced financial sector, they find themselves navigating treacherous waters. Nosa Alekhuogie delves into the intricate relationship between the escalating inflation of forex and the fintech industry in Nigeria, exploring the challenges and innovative solutions that are shaping the future of financial technology in the country.

Nigeria’s fintech industry has been at the forefront of innovation and financial inclusion on the African continent. Nigeria was poised for a fintech revolution with a rapidly growing population and increasing internet penetration. However, in recent times, the country has been grappling with a severe inflation problem, which is exerting immense pressure on the economy.

Economic analysts have attributed this to the various government policies, including the removal of fuel subsidy earlier in May this year.

Understanding forex inflation in Nigeria

According to the National Bureau of Statistics, Nigeria’s inflation rate has risen to its highest level in almost two decades. The country has faced various economic challenges over the years, but one of the most pressing issues has been inflation, particularly in foreign exchange. The Nigerian Naira has been steadily losing value against major global currencies, such as the US Dollar and the Euro.

The dollar is being sold for N1170/$1 at the parallel market while the official Investors and Exporters (I&E) window is exchanged at N808.27/$1, as the FMDQ reports. The depreciation of the naira is primarily linked to persistent dollar scarcity in the financial system, driven by increasing demand, particularly due to the recent inclusion of forty-three previously banned items by the Central Bank, leading to higher import bills.

This inflation has also been attributed to several factors, including reduced oil revenues (a significant source of foreign exchange for Nigeria) and macroeconomic instability.

Naira depreciation

The depreciation of the Nigerian naira has been rapid and substantial. Fintech companies in Nigeria, like any other businesses, rely on foreign exchange markets to access vital resources, make international payments, and secure partnerships. The continuous depreciation of the naira leads to increased costs for these fintechs, which must be managed effectively to maintain profitability.

The soaring inflation in Nigeria affects exchange rates and leads to a higher cost of living for the population. For fintech employees and consumers, this means reduced purchasing power and layoffs, which have been happening in some companies, indirectly impacting the sector’s growth. As costs rise for individuals and businesses, the adoption of fintech services may slow down, leading to lower revenues for these companies.

Impact on fintech operations

The foreign exchange inflation directly affects the cost of conducting business for fintech companies in Nigeria. Many fintechs depend on international technology and software providers, and any increase in software licensing, subscription fees, or cloud services can be a significant burden. Additionally, fintechs often have international partnerships and need to pay in foreign currencies, which results in higher costs when converted to naira.

Fintech companies often rely on hardware and equipment from overseas. As the cost of importing such equipment increases due to exchange rate fluctuations, fintechs face supply chain disruptions. This can lead to delays in product development, scaling, and even increased downtime, impacting customer service and businesses.

For Nigerian fintech startups and businesses seeking investments, the inflation in foreign exchange rates poses a challenge. Investors may hesitate to inject capital into a market where the currency loses value quickly. This can reduce funding opportunities for fintech companies and limit their growth prospects.

Navigating regulatory, compliance challenges

The Central Bank of Nigeria (CBN) has introduced various measures to control the exchange rate and manage inflation. These measures include restrictions on access to foreign exchange and capital controls. While the intentions are to stabilise the economy, these policies have created regulatory and compliance challenges for fintech companies.

Fintech companies often need foreign exchange to settle international transactions, pay for licenses, and import equipment. With the CBN imposing restrictions on access to foreign exchange, fintechs are forced to navigate complex bureaucratic processes to obtain the necessary foreign currency and buy at exorbitant prices from the black market. This can be time-consuming and result in delays and inefficiencies in their operations.

As the CBN introduces new regulations to manage foreign exchange, fintechs must invest resources in understanding and complying with these rules. Failure to comply with the rules will result in heavy sanctions, and this diversion of resources from core business activities can slow down innovation and growth. Additionally, regulatory uncertainty can deter foreign investors and partners from engaging with Nigerian fintechs.

The need for innovation, adaptation

In the face of these challenges, Nigerian fintechs are demonstrating resilience and adaptability.

Fintech companies are diversifying their revenue streams to mitigate the impact of inflation. Many are offering additional services, such as cross-border payments and foreign exchange services, to cater to the changing needs of their customers and generate new revenue sources.

To manage the risks associated with exchange rate fluctuations, fintechs are investing in risk management strategies. This includes hedging against currency risk and monitoring the forex market to make informed decisions about when and how to exchange currencies.

Fintech companies are partnering with local financial institutions to navigate the regulatory challenges more effectively. Collaborating with banks can provide fintechs access to foreign exchange and help them comply with CBN regulations.

Government initiatives, stakeholders collaboration

The Nigerian government and various stakeholders are taking steps to address the challenges faced by the fintech industry.

Industry associations and fintech leaders are engaging with government officials to advocate for policies that support the sector’s growth. These efforts include discussions on regulatory reforms, incentives, and access to foreign exchange.

The government recognises the importance of fintech in driving financial inclusion and economic growth. Initiatives like the National Fintech Strategy and the Digital Economy Initiative aim to provide a conducive environment for fintech companies to thrive.

Conclusion

The inflation of foreign exchange in Nigeria is undoubtedly impacting fintechs in various ways, from increased operating costs to regulatory challenges. However, the industry is not without resilience and adaptability. Fintechs are diversifying their revenue streams, developing risk management strategies, and collaborating with local partners to overcome these challenges.

As the government and regulatory bodies continue to recognise the importance of fintech in Nigeria’s economic development, there is hope for improved policies and support in the future. Fintech companies in Nigeria will need to remain agile and innovative to navigate the changing economic landscape and continue their mission of driving financial inclusion and innovation in the country.

The rising inflation of the US dollar will pose challenges for fintech companies seeking financing and conducting cross-border operations. These challenges may lead to increased costs, reduced foreign investment, and a greater focus on currency risk management. However, fintechs have shown resilience and adaptability in the face of such challenges, and they are likely to continue seeking innovative solutions to navigate this evolving financial landscape.

The Nigerian government can take several measures to support fintech companies, especially in times of economic challenges such as rising inflation.

There are some steps the government can consider.

Stable exchange rate policies: The Nigerian government can work with the Central Bank to implement stable exchange rate policies. This includes using monetary and fiscal policies to minimise excessive fluctuations in the naira’s exchange rate. Stable exchange rates provide certainty for fintechs that engage in cross-border transactions and rely on foreign exchange. A predictable environment encourages foreign investments and partnerships, fostering growth in the fintech sector.

Access to forex: It is well-known that foreign exchange is not readily available in the country, making business owners groan and struggle to stay afloat.

To ensure that fintechs have access to foreign exchange, the government can establish a streamlined and transparent process for obtaining foreign currency. This process should prioritise businesses with legitimate foreign exchange needs. Additionally, the government can consider setting up dedicated channels for fintech companies to access foreign exchange, such as those used for importing software licenses, technologies, and equipment.

Regulatory clarity: Regulatory clarity is crucial for fintech companies to operate with confidence. The government can work with relevant regulatory bodies to develop clear and consistent guidelines for fintech operations. This includes defining the licensing requirements, risk management, and consumer protection rules. A well-defined regulatory framework reduces ambiguity and encourages responsible innovation.

Support innovation: Governments can encourage innovation within the fintech sector by creating regulatory sandboxes. These sandboxes allow fintech companies to test new products and services with some regulatory flexibility. The government can balance fostering innovation and ensuring consumer protection by doing so. Regulatory sandboxes enable companies to experiment and develop solutions that can be later scaled safely.

Tax incentives: The government can provide tax incentives to encourage the growth of fintech companies. This might include tax breaks for research and development activities, reduced corporate income taxes for fintech startups, or exemptions from certain regulatory fees during the early stages of operation. Tax incentives can reduce the financial burden on startups and encourage investment in the sector.

Data protection and cybersecurity frameworks: Strong data protection and cybersecurity frameworks are vital for the fintech sector. The government can collaborate with fintechs to develop and enforce comprehensive data protection laws and regulations. This safeguards consumers’ financial data and enhances trust in fintech services. The government can work with fintechs to establish best practices for data security, including encryption standards and breach reporting requirements.