Minimising foreign exchange risks for your transfers

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Minimising foreign exchange risks for your transfers

The Central Bank of Nigeria, CBN, has just released the list of “Approved International Money Transfer Operators”.

The list contains the names and addresses of 58 approved international money transfer operators and 2 approvals in principle, making it 60 in all. The length and size of this list underscores the extent of need for money transfers between Nigeria and other countries. It is assumed that the list is in addition to such international money transfer giants like Western Union, World Remit, and Money Gram as those could not be found on the list. Like most transactions, money transfer comes with some risks or costs, so, before transferring that money, there may be need to look for ways to manage or minimise the attendant risks and costs. Here are some of the things you need to pay attention to when making transfers.

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Define the need for the Transfer

Ordinarily, money transfers are not and should not be made for the fun of it. They should be done out of a need to do so. In defining the need for a transfer, you should provide answers to such questions as, does this transfer need to be done immediately or can it be done later at a probably better exchange rate, is a spot transaction the best option for this transfer or can it be consummated with a currency forward transaction or even a currency swap at a later date. Answers to questions such as those would help you shop around for better exchange rates or even look for someone who can take on the opposite side of the transaction.

Pay Attention to the Commission Charges

Money transfer involves commission charges which may differ among operators depending on the amount involved and the urgency, among other factors. Even if your transfer is urgent, research among the money transfer operators and find out where you can save on commission. I personally use Western Union for my transfers, and I have come to notice two things – it costs more to send money through a Western Union Agent than via the internet. It costs at least $3.00 less if you send it through the internet. It also costs less if you are sending the money from and directly to a bank account than if you are sending it to a western union location where the receiver will pick it up in cash. Little drops of water, they say, make a mighty ocean, those commissions add up especially if you transact frequently. It does not cost much to open an account so as to save on transactions costs by sending the money directly from and to a bank account rather than getting picked up at a western union location.

Compare the Exchange Rates and Do the Math

One temptation people fall into easily is to base their decision solely on the exchange rate when making a choice of which money transfer operator to use. Exchange rates should be compared along with the commissions charged. Those operators that give you higher exchange rates may also charge you higher commissions. If you take time to do the math, you may discover that the operator with the lower exchange rate may be a better option. For example, while writing this article, I searched the internet to find out about sending $300.00 to Nigeria using different operators and here is what I found out: Note that the “All Inclusive Rate” is my calculation and it is the decision variable for comparative analysis. All other numbers are from the operators’ website.

You can see from the above table that the highest exchange of N355 is being offered by TranserWise but note also that it charges a slightly higher fee than Western Union and World Remit. If you base your decision just on the exchange rate, you will do your transfer through TransferWise, but by factoring in the commission, you can see from the all-inclusive rate (that is the amount to be received in Naira divided by the sum of amount to be sent in dollars and the commission in dollar), that TransferWise has the worst exchange rate among all 4 operators above even though the receiver will receive slightly more amount in Naira.

Take Advantage of Promotions

Sometimes, but not frequently, some of the operators give out rebates or discounts on money transfer commissions. Most of this happen around festivities like Christmas. It does not hurt to look out for and take advantage of them. In the course of writing this piece, I found out that World Remit is offering zero transfer commission if you have the code “MONITO”, not sure what that means and how to get the code, but if you have it, it saves you $6.47 or more.

Security of Your Money Matters

All that glitters, they say, is not gold. Security of your money should be one of the considerations when deciding on who to make transfers through. Of what use is a mouth-watering exchange rate or a zero commission if your money does not get to its destination on time or at all. Ensure that the operator is not only approved by the Central Bank, but nose around and look for online reviews and comments about their services.

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Hedge Your Risk

I have assumed all along that your transfer is not huge, that it is for private individuals making overseas wire payments or receiving money from abroad, but even if you are a corporation or a small business, hedging your currency risk may be a better option especially if the need is not immediate. Find out if it is possible to fix the rate some 3 to 6 or even 12 months in advance by using such things like currency forwards or currency swaps. There are many Nigerians abroad with foreign currencies of different types looking for Nigerians at home who are in need of such currencies.

Unfortunately, there is no platform to link such “buyers and sellers” as at the moment in Nigeria. However, note that since these types of transactions are over the counter, (OTC), they come with increased risks and therefore you should tread with caution. In addition, there has been an increased amount of money laundering just as the laws seeking to fight it has increased, therefore, care must be taken to ensure that whoever you are engaging in currency swaps with is not into money laundering. Good luck.

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