Retail forex traders in Africa face regulatory risks and uncertain losses


Retail forex trading in developed countries is tightly regulated and it is still surprising that as we speak, several African countries have yet to do the same. The number of active Forex traders on the African continent is estimated at 1.3 million with Nigeria, South Africa and Kenya leading the way. Although the number is lower compared to other continents, it keeps increasing every day.

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

Currently, the only three countries in Africa that have regulators overseeing 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 significant risk one faces and it is the likelihood that the other party to the business transaction will default on their business obligations. In forex trading, your broker serves as the counterparty, regardless of where they operate from.

This implies that retail forex traders in Malawi and other unregulated African countries are exposed to counterparty risk as there is no local regulator that can take the case for you in case the broker would go bankrupt and default on its obligations.

If your broker is in a sanctioned country, this also constitutes counterparty risk. For example, if your broker is from a conflict zone, your trading may be affected. This is because your money transfers will be scrutinized by international Anti-Money Laundering (AML) agencies to ensure that they are not being used to finance terrorism.

Ostracizing retail forex traders in Africa

Trade in Africa does not provide adequate compensation if something goes wrong, just as some developed countries have compensation funds.

Karan of Safe Forex Brokers South Africa agrees that traders from African countries where forex trading is unregulated are at great risk. He argued that if a broker goes bankrupt, it will be difficult to recover funds without government arbitration.

He went further saying that many African traders who have fallen victim to fraudulent or bankrupt brokers have had to silently swallow the loss as they know recovering 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 because a compensation fund pays financial compensation to investors who suffer pecuniary losses through no fault of their own, such as broker bankruptcy, broker fraud, broker negligence, system problems, etc.

Due to the lack of regulation of retail Forex traders in many countries in Africa, there is no provision for Forex Trader Compensation Funds. Even in South Africa, where retail forex trading is regulated, compensation schemes offer no compensation for misappropriation of funds by regulated brokers.

The Nigerian capital market regulator even issued 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 has clarified its position, other capital market regulators in Africa have been reluctant to be unequivocal.

However, in other climates this is not the case. For example, Irish investors and forex traders are compensated with 20,000 euros, and in the UK the FSCS has increased his salary to GBP 85,000 when they suffer losses due to broker negligence.

For instance, UK and Kenya Regulated Pepperstone Brokeroffers investor protection for UK-based traders up to £85,000 in the event of liquidation, but similar protection is not available for Kenya-based traders.

Although there is a private global compensation scheme for Forex traders known as the Financial Commission put in place to protect the interests of consumers. But, the benefit is limited as only a few forex brokers are members.

A paradise for scammers

Forex scammers have also focused on Africa due to the lack of proper regulation on the continent. Forex scams are a fraudulent trading scheme aimed at luring you in with the promise of unrealistic investment returns with little or no risk.

The perpetrators of this act mostly succeed with new traders, especially those entering the market with the get-rich-quick mentality.

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

Some fake brokers can lure the uninformed public with outrageous promotions and offers with suspicious terms and conditions such as “risk free” forex investments. 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 get into forex trading with the wrong get-rich-quick mentality and after losing a significant amount of their funds, they realize that there are no guaranteed profits in trading. forex.

This notion thrives in Africa in part because there are inadequate/detailed risk warnings to potential traders about what the trade entails.

For instance. on foreign broker websites you see a clear risk warning telling you the percentage of traders who lose money trading CFDs, but this does not apply to these brokers in Africa.

Excessive exposure to risk

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

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

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

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

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

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

Ask for help

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

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

However, different time zones around the world may limit your access to your brokerage’s customer service, as the time you are active may be the time the customer service manager is sleeping.

For example, Malawi is ahead of Denver, Colorado in the United States; by 8 o’clock. If a forex trader in Malawi is using a brokerage firm in Denver and while trading in their country, they would like to speak with the customer service representative at 11 a.m. Malawi time, the customer service representative in the United States may be sleeping at this time. because it would be 3 a.m. in Denver, Colorado.

Problems with deposits and withdrawals

Forex traders in Africa face the challenge of foreign currency deposits and withdrawals. This is because some forex brokers do not have local currency denominated trading accounts and some do not allow withdrawals to local bank accounts.

Although international platforms like PayPal can be used to withdraw your funds, not all African countries are welcome on these platforms.

In Africa, for example, countries like Cameroon, Libya, Ivory Coast, Equatorial Guinea, Sudan and Central African Republic, etc., are currently banned from using PayPal, which makes online transactions difficult for Forex traders in these countries.

Even if you use other payment platforms like Skrill, you still have to convert US dollars to local currency, and this can lead to very high fees.

Count the costs

When deciding to join the league of Forex traders, the most important thing you need to keep in mind is that trading is not a money-making machine that can make you rich overnight.

However, with the necessary information provided to you, you should manage your investment well to reduce your exposure to risk and loss.

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