Flutterwave's Swap

Introduction

One of the problems that has plagued the Nigerian forex market is the difficulty in accessing foreign currency. Nigerians find it increasingly difficult to access forex through official channels, leaving them with no choice but to turn to the parallel market. On 5th September 2023, it was reported that the CBN planned to clear the foreign exchange (FX) backlogs in the next one or two weeks. Forex backlogs are the unmet demand for forex by investors and exporters, estimated at $10 billion through different structures. The backlogs pertain to different structures within the foreign exchange market, as requests for forex cut across travel allowances, school, medical, forex sales at major airports, businesses and personal needs. This plan, however, fell through. The growing demand pressure on the parallel market has led to a significant widening of the gap between the official and parallel rates. According to PUNCH, on 13th September 2023, the Naira fell to 950/$1 at the parallel market as the forex scarcity in the country worsened. 

Flutterwave has come up with an app which it says will be the solution to the problem of the inability to access forex. This app is called Swap. 

What is Swap?

Swap is a digital platform for streamlined currency exchanges, and is only available to registered Nigerian users. Users can only access dollars, euros, and pounds on Swap. The platform, launched in partnership with Wema Bank and Kadavra BDC, is backed and approved by the Central Bank of Nigeria (CBN) and is available to Nigerian individuals and businesses. Flutterwave, with this new app, Swap, wants to digitalize the manual process of accessing foreign exchange in Nigeria. On Swap, you can exchange a minimum of $10 and a maximum of $10,000, but the purpose of swapping determines the limit of dollars you can exchange for Naira in accordance with the regulations of the Central Bank of Nigeria.

What Does This Mean for Customers and FX Suppliers?

FX suppliers get to acquire the legitimacy status of Swap and ensure that they are CBN regulatory compliant. The CBN had, in August 2023, rolled out regulations for Bureau De Change (BDCs) to comply with in their buying and selling of forex in Nigeria. The inability to distinguish between the activities of market speculators and registered BDCs has always been a major source of conflict between the CBN and the BDCs, and signing up with Swap would help curb that conflict.

According to Flutterwave, Swap would ensure that every exchange is seamless and secure and that the average person can access forex to meet their needs. It also disclosed that it will introduce a convenient card issuance system to swap users to enhance rapid access to global currencies like dollars, euros, and British pounds, to distribute more than 10 million cards to Nigerians from October 2023. 

Also, the move will benefit Nigerians who require swift access to Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) to facilitate their educational pursuits, business endeavours, and diverse travel requirements. Flutterwave will leverage its International Money Transfer Operator licence, granted by the CBN, to facilitate the influx of foreign currency. While Kadavra, utilizing its BDC licence, will handle the sale of foreign currency, and Wema Bank will provide comprehensive support throughout the process. Swap offers two things as an alternative to other means of acquiring forex. The first is access to foreign currency and competitive rates. 

Access to Foreign Currency

Currently, application for PTA /BTA takes place online through the trade monitoring system websites, where persons can apply for PT/BTA. However, such people would still need to go to a physical branch to get foreign exchange in cash. Swap aims to tackle the forex scarcity problem by reducing the need for cash for forex in Nigeria. This would help to ease the pressure on the Naira caused by forex scarcity. 

Swap also solves the problem of BDCs having to get forex from the CBN and their suppliers, whom they had had to rely on when the then governor of CBN, Godwin Emefiele, had stopped the sale of forex to BDCs in 2021. Commercial banks also get their forex supply from the CBN. Nigeria’s forex reserve shows a declining curve. According to a report by FBNQuest, despite the CBN’s decision to float the Naira in June 2023, it has had limited success in increasing foreign exchange inflows, as offshore investors have mostly remained cautious. In August, reports showed that Nigeria’s forex reserve has reduced by 2%, falling to $33.287 billion from $33.973 billion in July. In August 2023, the CBN released its consolidated financial statement of seven years, which showed that the CBN owes JP Morgan and Goldman Sachs a combined sum of $7.5bn as of the financial year ended December 2022 and included as part of its liabilities is another $6.3bn owned in foreign currency forwards. 

Competitive Rates

Swap will enter the market alongside foreign exchange platforms like Chippercash, Lemonade, and World Remit, to which customers will compare its rates. According to Swap, it aims to have people who use the platform experience the advantage of competitive exchange rates to maximize the value of their transactions. Flutterwave could negotiate with its forex suppliers on Swap to provide in exchange for connecting the suppliers with a large volume of customers. According to Flutterwave, it is trusted by over 1 million businesses and over 2 million individuals. 

Swap vs. Parallel (Black) Market

Swap would also be competing with the parallel market, which also drives the rate of the Naira to the dollar. As long as there is a scarcity of forex in the official windows of Nigeria, the parallel market will continue to exist, notwithstanding the disparity between the two rates. Individuals and businesses in Nigeria, from manufacturers to importers, who have been in a long queue for dollars, have resorted to buying dollars at almost 20 per cent higher in the black market. The businesses drive demand to the market and complicate CBN’s effort to attain a single exchange rate. The disparity in the I&E window (which trades at 771.271 as of 19th September 2023) and parallel market (which traded between 940-965 as of 18th September 2023) shows that demand for forex is on the parallel market, which is deemed lower in size to the investor and exporter window. This also shows the black market’s ability to meet the forex demand. A swap would need to establish itself as being able to meet the forex of its customers as well as provide incentives for the forex suppliers on its platform. 

Conclusion

Despite the CBN’s decision to float the Naira in June 2023, it has had limited success in increasing foreign exchange inflows, as offshore investors have mostly remained cautious. According to a former head of tax and corporate advisory services at PwC Nigeria, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies, attracting more FX inflows and lowering the cost of borrowing. The Naira came under intense pressure over the last few months after the CBN unified multiple exchange rates into the Investors’ & Exporters’ (I&E) window.  The possibility of doing forex transactions with the click of some buttons is worth praising and makes for something to look forward to. However, there is still the lingering problem of the need for the Nigerian forex market to attract forex inflows to relieve the pressure on the naira. Swap would have to have to make operational changes to the foreign exchange market if it is expected to encourage people to channel their forex to the official market.