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What is Forex Trading in Kenya and Risks Involved

Forex Trading in Kenya Explained

What is Forex Trading in Kenya?

Tens of thousands of Kenyan investors chasing big returns are increasingly sinking billions of shillings in unregulated online trade in foreign currencies, industry insiders say, exposing themselves to rising settlement risks. What is Forex Trading in Kenya?

With capital flight by foreign investors reducing returns on the stock market and investment in government securities and real estate seemingly out of reach for many, retail investors are increasingly tapping into the profit-minting offshore forex markets where more than $5 trillion (Sh505 trillion) change hands online daily.

Why online forex trade is a high risk venture

The risk for trading in currencies online is, however, higher than fixed securities such as government and corporate bonds as well as shares on the Nairobi bourse. Therefore, the increasing appetite for online investments could backfire as there are numerous uncertainties involved.

To access the global forex markets, investors open online accounts with brokers abroad where they deposit cash from their debit or credit cards for buying liquid foreign currencies such as the US dollar, the sterling pound, the euro and renminbi for trading at a margin.

Some investors even do a swift (Society for Worldwide Interbank Financial Telecommunication) transfer which enables them to deposit cash to the broker’s account direct from their bank accounts, to tap the convenience of reduced transaction costs.

The trade, however, poses a settlement risk because of the difficulty in monitoring the financial health of a digital broker who is not regulated and thus not obligated to disclose his books of accounts.

The growing risk associated with the online forex trade has caught the eye of the regulator, the Capital Markets Authority (CMA), which on Monday warned the return-chasing investors against entrusting unlicensed entities with cash to trade in currencies on their behalf.

“CMA … requires all online foreign exchange brokers or money managers not licensed by the authority to cease and desist from trading, conducting sensitization in Kenya and on boarding Kenyan investors or managing online foreign exchange portfolios,” the regulator said in a statement.

Section 23(1) of the Capital Markets Act and the Capital Markets (Online Foreign Exchange Trading) Regulations, 2017 requires brokers engaging in forex trade to obtain the go-aheads from the CMA.

EGM Securities is Kenya’s sole licensed non–dealing online foreign exchange broker after getting CMA’s nod last June, offering investors recourse in the event of failure to deliver on a deal.

“The retail market in Kenya is still product-hungry. Financial markets are very traditional and the younger demographics are looking for alternative investment opportunities,” Kevin Ng’ang’a, EGM Securities chief executive, told Digital magazine.

“What online forex brokerage allows you is to have an easier global micro play at significantly lower cost.”

EGM Securities is part of a global network of regulated brokerage houses such as Divisa Capital of the UK, Bloom Capital LP of New Zealand, EGM Futures DMCC (UAE) and Equiti Jordan. The aggressively expanding firms are backed by deep-pocketed investors from oil-rich Gulf region.

They provide cash flow capability for institutions and professional traders to invest in forex and contracts for difference (CFD) where investors return is the difference between prices of shares and commodities at the beginning and the end of the contract.

“What we saw as an opportunity in Nairobi is if we offer everything that an online forex broke can offer but in a locally regulated environment, we solve two problems: we overcome the trust issue and retail investors have a recourse because they have a regulator who can oversee the brokerage business,” Mr Ng’ang’a said.

“The second opportunity is that Kenya is a leading emerging market from a settlement, technological and regulatory perspective.”

Traders need in the upwards of $100 (Sh10,100) to start trading in global currencies via the EGM platform, with payments via digital financial services such as M-Pesa, AirtelMoney, Visa, Mastercard, e-Lipa and easyPay.

Besides forex, the firm is also licensed facilitate investment in indices, precious metals such as gold and silver as well as oil commodities such as Brent, West Texas Intermediate (WTI) and natural gas.

“What we are offering is a diversified investment class so that you have a retail investor putting a little in low-risk securities and a little in higher-risk ones,” EGM Securities boss said.

Using Nairobi as launch pad for sub-Saharan Africa, EGM Securities is pondering Uganda and Rwanda entry next year.

“We have an Africa play and Kenya is the entry point,” Mr Ng’ang’a said.

Before starting out on trading Forex, we believe this “What is Forex Trading in Kenya” will guide you into conducting due diligence and understanding the risks involved in this financial space. Good luck. You may need it!

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