The steady devaluation of the Naira raises critical issues of currency fluctuations and the risk it poses on businesses engaged in transactions involving foreign currencies. Businesses that regularly transact in and convert multiple currencies to meet contractual obligations are particularly vulnerable to this risk and can suffer significant financial losses as a result.
To mitigate foreign exchange rate risks, businesses can consider purchasing suitable financial derivatives. A derivative is a contract that derives its value from the performance or price movements of an underlying asset. Such underlying assets include foreign exchange rates and interest rates. Derivative contracts are used to hedge or insure against the risk of adverse changes to the value of an asset, increase leverage or speculate on an asset. There are four (4) principal classes of derivatives which also includes swaps.
The use of foreign exchange (FX) derivatives in Nigeria is not yet as prevalent as in other developed countries, but is steadily gaining traction. Studies indicate that many Nigerian companies that could benefit from FX derivatives do not take advantage because of insufficient knowledge about these instruments. Such studies have discovered that other factors inhibiting the development of derivatives markets in Nigeria include limited supply in the local market and difficulty in evaluating derivatives instruments.
To stimulate FX derivatives in the Nigerian financial market, in March 2011, the CBN issued Guidelines listing approved FX derivative products that Authorised Dealers (Nigerian banks) can offer to their customers inclusive of FX (Currency) Swaps. As a direct consequence of the latest CBN forex policy, Analysts expect FX Derivatives transaction volume to increase.
Currently running operations between the UK and Nigeria, Owotutu is a currency marketplace. Unlike other popular marketplaces, Owotutu does not leave users to deal directly with themselves. Owotutu offers the following:
This allows users to swap currencies with each other, without sharing personal or account details with each other. Users are required to transfer funds to Owotutu for their respective legs of a currency swap. Thereafter, they instruct Owotutu to transfer the counterpart currency, from the swap, to a specific account on their behalf.
Each user is rated by comparing the number of transactions they successful complete against the number of transactions that they accept to be part of. Hence, the rating system is not left to the perceptions of other users, but to empirical data that shows their ability to meet their obligations.
Greg has GBP200 but needs NGN. Jones offers Greg NGN50,000 for his GBP. If Greg accepts this bid, he will be requested to move his GBP200 to a GBP escrow, as Jones is also requested to move the NGN50,000 to escrow. Thereafter, Greg will instruct Owotutu to move the NGN50,000 to another NGN account; while Jones instructs the transfer of the GBP200 to an account of his choice. If either party fails in their obligations, Owotutu will refund the party that met its obligations; while the failure will count against the defaulter’s ratings on the system.
They do not offer cross-border currency transfers on the Owotutu platform. They are looking to expand to USA, Ghana, China and other emerging markets soon.