It’s bad enough that fintech startups have to grapple with the&nbsp;<a href="https://www.forbes.com/sites/forbestechcouncil/2023/04/27/finding-vc-funding-is-harder-now-for-startups/?sh=581ae6da7e82">challenge</a>&nbsp;of competing for funds in a global venture capital market that&#8217;s experiencing a funding drought. There is an extra hurdle for those using foreign capital to create new financial products in Nigeria: the value of the country’s currency has fallen 43% over the past year alone thanks to recent currency reform.



Nigeria is Africa’s biggest economy–it’s home to more than 220 million people and the continent’s&nbsp;<a href="https://disrupt-africa.com/2023/02/09/nigeria-is-the-clear-leader-for-african-startup-funding-yet-a-trickle-down-is-happening/" target="_blank" rel="noreferrer noopener">leading destination</a>&nbsp;for startup funding. A substantial portion of its financial transactions still occur in cash, creating a fertile ground for the development of multiple fintech solutions.



“There is a bit of instability happening in the country right now,” says Luci Fonseca, lead partner at San Francisco-based Base10 Partners, which has funded multiple Nigerian businesses, including payments startups Nomba and Okra and e-commerce firm Bumpa. “It creates a number of challenges for a business that charges in naira and reports its revenue in U.S. dollars.”



The massive depreciation of the local currency puts pressure on businesses in multiple ways, according to Gbenga Ajayi, lead partner at VC firm QED<a href="https://www.forbes.com/investment-funds/qed/" target="_blank" rel="noreferrer noopener">QED</a>&nbsp;<a href="https://www.forbes.com/investment-funds/qed/">0.0%</a>&nbsp;Investors, where he focuses on investing in African startups, including payments startup Moniepoint and pharmaceutical management firm Remedial Health. Ajayi said that access to foreign exchange is “one of the biggest challenges” that investors face in the market.



“If you&#8217;re from Nigeria, from Egypt, or even from Kenya, you&#8217;re very much aware that when your currency starts to depreciate, it affects spending power, purchasing power, and there is just a lot of uncertainty,” says Ajayi.



Last year, African startups raised 227 rounds of funding, according to <a href="https://protect-us.mimecast.com/s/PSx0CNk7A3slxG1nI4XZuL?domain=cbinsights.com/" target="_blank" rel="noreferrer noopener">CB Insights</a>, 174 of which went to Nigerian companies. More than 80% of the investors who financed Nigerian businesses this year before the foreign exchange market&#8217;s liberalization were based outside the country, according to PitchBook data, underscoring the significance of foreign capital within the country’s business landscape.



Nomba raised $30 million in May 2023, largely funded by foreign venture capitalists at a valuation of $148 million, according to PitchBook. Lagos-based e-commerce startup Sabi secured $38 million in May at a $300 million valuation, while electronic medical records provider Helium<a href="https://www.forbes.com/digital-assets/assets/helium-hnt/" target="_blank" rel="noreferrer noopener">HNT</a>&nbsp;<a href="https://www.forbes.com/digital-assets/assets/helium-hnt/">0.0%</a>&nbsp;Health got $30 million in a Series B round in June. For outfits like embedded payments firm OnePipe, which secured $4.5 million in debt capital in March, it could make repayment more challenging than envisaged.



Some of the strategies startups are employing to manage currency risks include attracting more customers who transact in dollars; paying local employees, vendors and partners with naira reserves; and adding fees for customers who make payments in naira.



“The startups that are mitigating the reform best are those that already started hedging against the naira even before the reform,” says Mathew Saunders, head of investment at venture capital firm Future Africa. Another method he has seen companies use is “diversifying the customer base to include more international players that can make payment in dollar equivalents,” he says.



Currencies in China, India, Turkey, and Argentina are among the major emerging market currencies that have also come under pressure this year, driven in part by a stronger U.S. dollar. But the situation takes a different turn in African nations such as Nigeria, Egypt and Kenya, which are finding it&nbsp;<a href="https://www.forbes.com/sites/segunolakoyenikan/2023/07/02/africa-becomes-a-casualty-in-the-war-against-inflation-as-dollars-dry-up/?sh=42bd034755f1">increasingly difficult</a>&nbsp;to obtain hard currencies like dollars, pounds or euros.



For countries like Nigeria, which has a long history of supplying dollars to the foreign exchange market to keep the local currency stable, the limited dollar reserves make it challenging for the Central Bank of Nigeria (CBN) to meet the demand of dollars for transactions like imports, where suppliers often require payment in dollars.



Authorities allowed the pegged naira currency to trade more freely in June after foreign reserves fell further to $34 billion from $39 billion a year earlier. With only 35% of the current reserves available for use, according to Abdulazeez Kuranga, macroeconomic strategist at Lagos-based Cordros Securities, “the low liquidity position clarifies why the CBN’s FX supply to the official windows has been underwhelming.”



Since the devaluation on June 14, 2023, the value of the naira has dropped a whopping 40% against the United States dollar in the official window, the currency market where government transactions occur. With inflation at 24% in July, a weaker service demand could potentially put a strain on startups’ revenue and, subsequently, their valuations, especially since some of them generate earnings in naira but report their financials in U.S. dollars.



Nigeria’s central bank authorities say all hands are on deck to stabilize the exchange rate. However, should the currency situation fail to improve, startups backed by foreign capital would have to intensify efforts to significantly boost earnings in order to assuage the impact of the devalued naira or come up with strategies to mitigate these risks.

Nigerian Naira Currency And General Economy As Country Set To Exit Recession

Nigeria’s Sliding Currency Leaves Foreign-Backed Startups In Limbo

How did you become Africa’s 18th richest person?
Our group has invested steadily and has been very consistent, which has had a compound effect on our investments and the kind of assets we have. And also by the sheer nature that FORBES showed interest in Uganda, or has done more research in Africa and has taken more interest.
Tell us your story.
One of the first businesses we started dealing in was salt and the other was in beer—a rare and very fast-moving commodity—followed by other commodities… very soon we became one of the largest beer dealers in the country and this went on until about 1989. That is when the breweries refurbished themselves and started the production of beer. When they started production, they lobbied to the government to stop importation to protect the local industry and jobs. The government obliged… we had built up a huge clientele&#8230; all the hotels in town would buy beer from us;  we would have expatriates buying beer from us. At the time, foreign exchange was not allowed for luxury items like beer. So what would happen is that people would rent their houses in foreign currency. When they received their rent they would come and change it with us. In the meantime, the expatriate community needed to buy local provisions for their daily requirement. They would buy beer and other things from our store, they would also come and exchange foreign currency. We needed this foreign currency to pay for the importation of beer…
<div id="attachment_1613" style="width: 210px" class="wp-caption alignleft"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-1613" class="size-medium wp-image-1613" src="/wp-content/uploads/2017/04/Sudhir-11-grayscale-200x300.jpg" alt="" width="200" height="300" />Sudhir</div>
After the closure of the beer business there were lots of people who wanted to change money with us. We started buying this currency and would actually deal with a trader who would need foreign currency to buy certain types of goods, we would swap this with local currency. Come 1990, Uganda liberalized the formal market, it was the second country in Africa to do so—Ghana was the first. We opened the first foreign exchange bureau called Crane Forex Bureau. Within six months we were doing more business than the banks’ foreign exchange departments. What transpired in the next two or three years was that the banks worked together and formed a cartel that would hit the forex bureaus by levying high charges and restraints. I realized that in order to sustain us we needed to go into the banking business so we eventually opened the first branch of Crane Bank on August 21, 1995. We had accumulated a lot of funds, so we were buying a lot of real estate. We bought our first property in 1991… The government nationalized all real estate, then the NRM [National Resistance Movement] government decided to return the Asian properties to its former owners but a lot of these people had settled in the West. They were doing well and had their families there, not all of them had intentions to come back. At that time there was an excess supply of real estate. The Asians who had property here never dreamed that this property would be returned to them so they came and cashed their money in. In the beginning, a lot of people were very skeptical about buying into the property: they were not sure about what would happen in the future. Now, we have a surplus of real estate in the country and people did not want the risk. I was one of the very few people at that time, who had faith in myself and I started investing at that time. Ever since then, we [Ruparelia Group] never looked back.
What is your view on the current state of the economy?
At the moment we are going through a restructuring. I guess this is always a good thing to do—a time to relook at all your businesses, trim them and flush out any inefficiencies. The problem here at the moment is that the politics are delaying the passing of a law, which will regulate the oil industry. Uganda desperately needs to pass these oil laws so when the oil comes, it is regulated and there is a transparent process it goes through. They don’t realize that every day they delay it, it costs the country a lot in lost revenue. So the government needs to clear that up.
What is the biggest weakness of the Ugandan economy now?
The left doesn’t know what the right is doing, unfortunately. The decision-making process of this country has gone very bad. Although there are a lot of processes, unfortunately these checks and balances have been misused, thereby the people have been scared into making decisions. The only way people feel they will survive in the job is by not making decisions and that’s very bad.
Recently donors have cut back on aid. Will this hurt the economy?
We don’t have only the issue of donors cutting aid; we have the issue of interest rates and of exchange controls – the foreign exchange rates. Now, Uganda cannot afford to have low interest rates at the moment because there will be capital flight out of the country. At the same time, it will have an effect on the foreign exchange rate. The currency depreciated by 8% at the end of last year. When you have further bad news by donor countries holding onto aid, it will have a negative effect on the country. I think Uganda gets about $800 million in aid and that is quite substantial as far as the budget support is concerned.
What should the Ugandan government do to promote entrepreneurs like yourself?
I think it’s always nice to have a government which has departments that make decisions. I think the decision-making process has deteriorated, that’s number one. Number two: the government needs to seriously finish all the regulatory bodies that are needed for the oil to take off. That’s the savior of this country. And if they can’t make decisions on how to solve oil regulation within the ministry then we are not going to go anywhere.
And the entrepreneurs? What can government do to promote businessmen such as yourself?
The only way any country can come out of unemployment is to support private industries, private entrepreneurs, who will then create jobs. They can’t solve all the problems of the nation but it will reduce unemployment and the other issues that go with it. Government went through one phase in 1990 when they first came in to support the industries and private enterprises. They brought in a lot of incentives, which has helped this country to get to where it is now. All it needs now are proper policies and if its oil is sorted out then industries will come here. Government does not need to do much more, just clean up its oil industry. If the oil is controlled and regulated and being produced you will see people queuing up to invest in this country.
What are your plans for 2013?
We have a lot of investments in real estate and we will continue [to invest]. We have projects of more than $150 million in the pipeline and we will fulfill those within the next 18 to 20 months. And hopefully, target a lot of service industries, which will service the oil industry; accommodation, education.
Do you think you will grow in the ranks in 2013?
Definitely. We have a lot of oil in this country and you can imagine that we have not even had one drop of oil come out, and the kind of resources that we have mobilized within the group.
Do you think you’ll be in the top 10 next year?
I am not sure but I am very happy to be at number 18 this year. The next few years will definitely have some kind of an impact. Crane Bank is expanding rapidly, it has 27 branches. By the end of this year, it will have 40 branches and then the year after, another 10, and it will continue to grow by at least 10 branches a year.

Tag: Foreign currency

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Nigeria’s Sliding Currency Leaves Foreign-Backed Startups In Limbo

A Word With Africa’s Next Billionaire