Retail Forex Traders In Africa Face Risks Of Uncertain Regulations & Losses

Retail forex trading in developed nations is fiercely regulated and it is still surprising that as we speak several African countries are yet to do same. The number of active Forex traders in Africa continent is estimated at 1.3 million with Nigeria, South Africa and Kenya taking the lead. Although the number is lower if compared to other continents, it keeps increasing daily.

It should be noted that many forex traders in Africa face risk of massive losses and brokerage scams due to absence of retail forex trading regulation in about 90% of African countries. 

Currently, the only three countries in Africa that have regulators supervising retail forex trading are Kenya, South Africa and Mauritius.

Retail forex trading in Malawi is not regulated by the government so Malawian traders should be careful. 

Counterparty risk is the most prominent risk faced and it is the probability that the other party in the trading transaction may default in its trade obligations. In the context of the forex trading, your broker serves as your counterparty, regardless of where it is operating from.

This implies that retail forex traders in Malawi and other African countries without regulation are exposed to counterparty risk as there’s no local regulatory body that can take up the case for you in case broker goes bankrupt and fails in its obligations.

If your broker is in a country under sanctions it also constitutes counterparty risk. For instance, if your broker is from a conflict area, your trading can be affected. This is because your money transfers will be scrutinized by international Anti money laundering (AML) agencies to ensure it’s not used to fund terrorism. 

Ostracizing Africa’s Retail Forex Traders 

Trading in Africa doesn’t provide for adequate compensation should things go wrong just like some developed countries have compensation funds. 

Karan from Safe Forex Brokers South Africa agrees that traders from African countries where forex trading is not regulated are at great risk. He argued that if a broker goes bankrupt, retrieving funds will be difficult without government arbitration. 

He went further to say that many African traders who have been victims of fraudulent or bankrupt brokers have had to silently swallow the loss because they know retrieving their funds will be a herculean task without government support. He also said that these retail forex traders are not compensated in any form, when they suffer losses that warrant compensation. 

This is true as a compensation fund pays financial compensation to investors who suffer pecuniary losses for no fault of theirs such as broker going bankrupt, broker being fraudulent, negligence from the broker, system glitches, etc. 

Due to absence of regulation of retail forex traders among many countries in Africa, there is no provision for compensation funds for Forex traders. Even in South Africa, where retail forex trading is regulated, the compensation schemes does not offer any compensation in case of misappropriation of funds by regulated brokers.  

The Nigerian capital market regulator even published a warning on its website telling those who trade forex that they do so at their own risk. 

While it is commendable that the Nigerian market regulator came out to clarify its position, other capital market regulators in Africa have shied away from being unequivocal. 

However in some other climes, it is not so. For instance, Ireland investors and forex traders are compensated with 20,000 Euros, and in UK, the FSCS has raised its compensation to GBP 85,000 when they suffer losses due to the broker’s negligence.

For example, Pepperstone broker which is regulated in both UK & Kenya, has investor protection for UK based traders of up to £85,000 in case it goes into liquidation, but similar protection is not available to traders based in Kenya.  

Although, there is a privately run global compensation scheme for Forex traders, known as the Financial Commission set up to protect consumers’ interests. But, the benefit is limited because only few forex brokers are members.   

A haven for Scammers 

Forex scammers have also shifted focus to Africa due to the lack of adequate regulation on the continent. Forex scams are a fraudulent trading system geared towards luring you with the promise of unrealistic returns on your investment with little or no risk.

The perpetrators of this act succeed on most occasions with new traders, especially the ones who enter the market with the mentality of quick wealth. 

Forex Ponzi schemes which is the promise of getting you fixed periodic profits with a small deposit also plague Africa. These scammers take advantage of low investor awareness and low standard of living to promise huge returns and a better life only to end up defrauding victims. 

Some fake brokers may lure the uninformed public with promotions and offers that are outrageous with suspicious terms and conditions such as ‘risk-free’ investments in forex. Risk is an integral part of forex trading, so, a broker saying an investment is risk free is a scam.  

Many new traders in Africa go into forex trading with the wrong mindset of getting rich fast and after they lose a significant amount of their funds, it dawns on them that there are no guaranteed profits in forex trading.

This notion thrives in Africa partly because there is inadequate/detailed risk warning to potential traders on what the trade entails.

For example. on foreign broker websites, you see a clear risk warning telling you the percentage of traders that lose money trading CFDs but this is not applicable to these brokers in Africa. 

Excessive Exposure to Risk 

African traders are also exposed to leveraging risk more because there is no leverage restrictions due to lack of regulation. This makes some brokers offer very high leverage. Some, up to 1000:1

Leverage can be defined as a loan given to you by your broker for you to have more capital than what you have in your trading account.

Leverage is expressed in ratio, like 50:1 so if your broker offers you a leverage of 50:1 and you have just $20 with you, it means the leverage is 50 times of your deposit so you can open a trade worth $1,000  

Although, leverage would give you more market exposure. It can also amplify your losses greatly. The greater the amount of leverage on your capital, the greater the risk you are exposed to.

If you are not careful, most especially by not using a stop loss order, high leverage can wipe out your trading account very quickly

In UK for example, the leverage is limited to 30:1 and 2:1 for CFD and CFD like instruments, depending on the volatility of the instrument. So far, only Kenya has capped its leveraging ratio to 400:1 in Africa.

Reaching out for help 

As the knowledge of forex trading continues to increase worldwide, the rate at which number of traders are increasing has made them to be increasingly demanding.

Coupled with the fact that Forex trading has become more competitive, brokers now have customers service channels, where traders can speak with a customer service  representative of that brokerage firm.

However, varying time zones of the world may limit your access to the customer care of your brokerage firm, because the time you are active may be the time the customer care officer is sleeping.

For instance, Malawi is ahead of Denver, Colorado in the United States; by 8 hours. If a forex trader in Malawi is using a brokerage firm in Denver and during a trading session in his country, he wants to speak with the customer care representative at 11 am Malawi time, the customer service official in the US may be sleeping at that time because it would be 3am Denver, Colorado.  

Problems with Deposits & Withdrawals

Forex traders in Africa face the challenge of deposit and withdrawals in foreign currencies. This is because some forex brokers don’t have trading accounts denominated in local currency and some don’t permit withdrawal to local bank accounts.

Although, international platforms like PayPal can be used for withdrawal of your funds, not all African countries are welcome to such platforms.

In Africa for instance, countries like Cameroon, Libya, Ivory Coast, Equatorial Guinea, Sudan, and Central African Republic etc., are currently banned from using PayPal, thereby, making online transactions difficult for Forex traders in those countries.

Even if you are using other payment platforms like Skrill, you still need to convert the US dollar to local currency, and it may attract very high fees. 

Counting the Costs

As you decide to join the league of Forex traders, the most important thing you should have in your mind is that the trade is not a money making machine that can make you rich overnight.

However, with the necessary information given to you, you should manage your investment well so as to reduce your exposure to risk and losses.

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