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Why Forex Matters for African SMEs

Small and medium-sized enterprises (SMEs) in Africa are VITAL to boosting the economies of emerging countries. In the case of South Africa, this impact  is unmistakable, as they employ over 3 million people and contribute roughly 34% to the country’s GDP.  To put this into context, this translates into an annual contribution of $135.66 billion per year. 

Many African SMEs have been increasingly active in international commerce, using foreign exchange (forex) transactions to facilitate their cross-border trade. The growth of e-commerce, improved access to digital platforms, and advancements in logistics have made it easier for African SMEs to connect with international markets. 

The challenges and opportunities

While there has been a notable shift towards cross-border trade, African SMEs are often exposed to significant currency exchange rate fluctuations, as many African fiat currencies are subject to high volatility. When African SMEs import or export goods and services, they must engage in forex transactions to convert their local fiat currency, and rate fluctuations can have a significant effect on the profitability of these SMEs. To illustrate, a significant depreciation of the local fiat currency can lead to escalated import costs.  

However, large fluctuations can also create opportunities for African SMEs. For instance, if the local currency depreciates significantly, it can make the products and services offered by these SMEs more competitive in international markets. This can lead to increased demand for their exports, boosting both revenue and profitability. 

South African SMEs losing out

In the African context, the importance of understanding forex and the costs associated cannot be stressed enough. In a recent survey conducted by Future Forex, South African SMEs are inadvertently incurring excessive costs in their foreign exchange transactions, paying well beyond the expected rates. Surprisingly, more than 75% of the participants weren’t familiar with the transaction charges imposed by their bank or forex service provider and a further 34% of respondents lacked knowledge about the concept of exchange rate margin, also referred to as the spread. The exchange rate margin reflects the difference between the rate at which a forex service provider buys and sells a currency. It’s often expressed as a percentage relative to the exchange rate and can fluctuate over time in response to market sentiment. 

The continent’s diverse economies and the growing interconnectivity among African countries have presented abundant opportunities for SMEs to engage in international commerce. By doing so, they can diversify revenue streams, reduce reliance on local markets and tap into a more resilient and expansive business landscape.