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Solving Africa’s currency illiquidity problem

David Bee's picture

Some 41 currencies serve the African continent. Many of these are characterised by their illiquid and rarely traded status on the global financial market, as well as their volatility. So for those wishing to do business with Africa, these currencies — as difficult and expensive to source — can pose a real problem.

From the Namibian dollar to the Seychellois rupee, it is vital that organisations are able to source emerging market currencies reliably, on time, and at competitive prices. Yet such necessities often elude those trading with Africa, who view currency concerns as one of the biggest barriers to the development of Africa as an emerging — and therefore high growth — opportunity for international investors.

Funding development

But currency concerns go deeper than simply lost investment opportunities. When one considers the prospect of an international charity responding to a humanitarian or environmental crisis, the importance of currency sourcing becomes especially clear.

Many charities operating in Africa are funded by one or more of the G10 currencies, such as the American dollar or British pound. Yet providing Ebola relief on the ground in Sierra Leone, for example, would mean sourcing the Leone. Without a means to reliably exchange funds into local currencies, NGOs and government aid agencies are unable to pay local staff, execute operations or even fund projects in those areas most in need of help. And unfortunately the situation is more acute than it first appears.

Tightening regulations have caused many correspondent banks to cut ties with African countries deemed high risk, with respect to financial crime or terrorist funding. This process, known as “de-risking”, has left many African countries all but cut off from international banking — including currency conversion, which is a particular concern of the anti-money laundering (AML) regulations but of vital concern to aid agencies operating in the region.

One currency, one Africa?

So what are the potential solutions? One enduring proposition is a single African currency. First mooted in 1963, and most recently in 2018 by South African President Ramaphosa, a continent with its own currency would boost trade and attract foreign investment. Or so say those advocating it.

However, Africa’s 54 sovereign states are diverse. A monetary union would require converging differing economic aims with regards to inflation and interest rates. Not only would Africa struggle to achieve this in the current economic climate, but it would also likely create a myriad of new, unpredictable problems. Countries would lack the ability to respond individually to asymmetric shocks, for example. And the alternative — a unilateral monetary policy — would be unable to serve the economic needs of all equally.  

Given the structural concerns a single currency is likely to create, its implementation — at least for now — looks to be out of reach.

Combining technology and experience

Clearly, a medium-term solution is vital — if investors, NGOs, development agencies, trading companies, and remittance firms are to continue their operations on the continent. But adhering to international AML regulations means ensuring compliance is key. This can be best achieved by working alongside local African banks to ensure that their compliance procedures meet international standards.

Such a process could remove risk without having to remove partnerships — and result in improved AML procedures, IT system implementation, staff training and upgrading client Due Diligence information management.

FX trading, in particular, has innovative responses to compliance-related challenges. So new FX online trading platforms are helping fill the gap for local African currencies: at Crown Agent’s Bank we have our own, EMpowerFX, for example. With offerings granting nimble access to over 500 currency pairs — and live integrated news feeds to track market fluctuation — such modern currency trading technologies allow for greater liquidity at more competitive prices.

In turn, innovative compliance solutions, new FX trading technology, and sector expertise can begin to offset the disadvantages of an illiquid currency market and — ultimately — help to ensure quick and efficient access to local funds across the African continent.