South Africa FX: Room for Growth or Already Saturated?

In 2021, Nigeria, South Africa, and Egypt’s Gross Domestic Product in nominal terms accounted for about half of Africa’s economy with Nigeria sitting atop, according to data from the International Monetary Fund (IMF).

However, when it comes to the online retail forex industry, South Africa remains Africa’s largest player.

According to estimates, South Africa boasts around 190,000 daily FX traders with over 1,000 financial organizations participating in the country’s market.

The country’s forex trading volumes including contract for difference (CFD) and spot trading generated about $2.21 billion per day in 2019.

Also, in 2019, all forex instruments are said to have generated a total daily foreign exchange volume of $20.37 billion.

According to DayTrading.Com, the increasing popularity of retail trading has seen CFDs vying to unseat single stock futures in terms of activity on the Johannesburg Stock Exchange.

Unlike Nigeria with no defined regulatory oversight of the online retail forex industry, the presence of the Financial Sector Conduct Authority (FSCA), South Africa’s financial markets watchdog, plays a key role in helping South Africa maintain its dominance.

The country’s leading position in the continent has been attributed to the strong regulatory framework provided by the Financial Sector Conduct Authority (FSCA). The FSCA, formed in 2018, is the successor to the country’s Financial Service Board of 2004 which regulated the country’s forex industry until FSCA’s emergence. In fact, the FCSA is the oldest and most respected regulator on the continent.

It has been said that the interest in South Africa among foreign brokers is because the country has no restriction on the use of leverage in CFD and forex trading.

As a result, South Africa boasts of some of the world’s top global retail forex brokers who have established their presence in the country.

State of South Africa’s FX Market

Industry stakeholders who spoke to Finance Magnates, noted that South Africa’s online forex market experienced significant growth last year, driven by global inflation and a high level of unemployment.

“We have seen record activity in the South African market over the past year, both in terms of the rising number of traders and the volume they trade; these figures have risen significantly since the previous year,” Paul Margarites, Exness' Regional Director in Sub Saharan Africa, told Finance Magnates.

Margarites added: “This is partly due to an ever-increasing customer base, made up of people wanting to supplement their income by focusing on trading full time, coupled with increased market volatility which translates into increased trading activity for existing customers.”

Dany Mawas, the former Managing Director of Africa & UK Sales at FXCM and the current Global Head of Retention at Infinox Global, noted that the country’s market “matured considerably,” with regulators putting more stringent measures in place to protect traders.

“This is resulting in a safer market place and brokers with established track records and regulatory licenses [are] proving to be the preferred choice,” he added.

Is South Africa's Forex Market Saturated?

According to the Bank for International Settlements (BIS), trading in FX markets hit $6.6 trillion per day in April 2019, which is up from $5.1 trillion three years ago.

BIS explained that the increase was buoyed by a pickup in trading with financial clients, such as smaller banks, hedge funds, and principal trading firms.

The BIS Triennial Central Bank Survey also noted that the currencies of emerging market economies (EMEs) again gained market share, reaching 25% of overall global turnover in the forex market.

With South Africa’s leading position in Africa, is the country’s forex trading market saturated or does it have more room for growth?

Industry actors believe there will always be room for growth in the country’s forex industry.

“There is still massive room and potential in South Africa especially because of the effects of COVID and high levels of unemployment," Mabyanine Phiri, the Regional Business Manager at Broker Solutions, noted.

"South Africa, which has a high number of its population falling under the youth category, has seen a lot of young people creating businesses within the FX space and Africa, in general, seems to be following this trend,” Phiri further explained.

However, Margarites believes that “changing and tighter controls of the regulatory environment will also play a major part in determining who will grow and who will not.”

“Although the market in South Africa has seen significant growth over the last year, so too has the competitive environment which has of course challenged market share for many brokers in the country,” he added.

Mawas on his part noted that the market is currently enjoying stability which “is a great springboard for continued growth.”

“The SA forex industry is no longer in its infancy. It’s been through the period where lots of brokers entered and exited the market very quickly," the INFINOX Global executive said.

"The lack of knowledge and regulatory oversight contributed to negative assertions of the market. However, since the tighter regulations and application of Treating Customers Fairly (TCF)/Anti-Money Laundering (AML) practices, we’ve seen the market stabilize,” Mawas added.

Challenges

Although stakeholders in the industry pointed out that there is room for growth, they also acknowledged challenges to be overcome. They pointed to adapting to the country's changing regulatory landscape for forex and CFD brokers.

"The most evident pressing challenge South Africa faces now is a shift in regulatory policies," said Phiri who is also a Non-Executive Director (NED) at FX Dream Team, a forex turnkey solution marketing agency.

Phiri explained: "FX brokers and other role players have to adopt new policies such as requiring FX brokers to apply and acquire an Over The Counter Derivatives Provider (ODP) license in addition to the traditional Financial Services Provider (FSP) license enforcement by the FSCA. [This] has become common and very apparent."

"In the past two years, the FSCA have shut down two major local brokers operating without an ODP licence," he added.

Margarites also noted that the increased focus on regulation and conduct by all market participants has shaken up the local market to some degree over the recent months.

To redress this, the Exness executive explained: "clarity around local regulation is required in the country, specifically a harmonization of the different kinds of licenses currently shaping the regulatory landscape."

"This would achieve more fluidity and transparency to attract international players. Once any lingering uncertainties are resolved, the South African online trading industry will move forward," he added.

Industry actors who spoke to Finance Magnates also emphasized the importance of educating traders and introducing brokers (IBs) to achieve needed consolidation.

"These specific role players need to upskill themselves from a business skills and administration perspective in order to grow the industry and curb the negative perception the industry has gained through scams and services offerings that don't add value to the final consumer," Phiri explained.

Meanwhile, Mawas told Finance Magnates in an interview that INFINOX Global and some of its key partners have recently introduced the Fintech and Crypto Asset Providers Association (AFCAP).

The association, which comprises financial services providers in South Africa, is targeted at promoting and developing awareness and education in the sector, he noted.

Projections

All projections from industry stakeholders engaged by Finance Magnates point to expected growth in the online retail forex market in South Africa.

"We see the market continuing to grow, with the focus on quality and trust increasing in importance for the client base in the country who are demanding more competitive trading conditions and higher levels of transparency from their brokers," Exness' Margarites said.

INFINOX Global also noted that it was expecting further growth in the industry with more traders entering the market as they feel more secure about the industry.

"With new generations [of young traders] also entering the market, they’re bringing with them the technology they use. Mobile trading platforms and social media have made trading more accessible and more popular," Mawas said.

Furthermore, FX Dream Team projects that the majority of industry role players in the coming years will be businesses led by young people.

Furthermore, the forex marketing agency noted that tough competition between brokers will lead to an increase in the level of services being rendered to retail traders.

"In the next five years, the South African FX market will only be made up of major international brokers with liquidity and who are completely compliant. The general public is becoming more aware of the cowboys and scammers and the tactics they use," FX Dream Team's Phiri said.