Commercial banks in East Africa are losing billions of shillings annually through rogue dealers who are engaging in private foreign currency trading online, taking advantage of improved Internet connections and the 24-hour nature of the business.

The EastAfrican has established that over 80 per cent of forex dealers in the region are taking part in private dealing with leading international dealers, competing directly with their employers. Apparently, the majority of them use their employer’s resources to trade.

So thriving is the business that some dealers have opened personal dealing bureaux where they hire university graduates to oversee the trading.

Every morning, before the official trading time kicks off, the principal dealers will “take positions” that are subject to change when a material event occurs in the market.

In case of any substantial change in the currency market, the hired employees are advised by their “bosses,” normally over the telephone, to review trading positions.

For starters, a trading strategy known as “booking” is employed, whereby currencies are sold and bought automatically when a certain exchange rate is reached.

This trend also explains the high dealer-turnover being witnessed in banks.

“Dealing is very demanding. I normally make an average of Ksh500,000 ($6,670) 0daily for the bank but I am considering quitting to start my own operation, for this is a very lucrative venture free of tax,” a dealer at Co-operative Bank of Kenya said.

Also lured by the flourishing business are bank employees not directly attached to treasury.

This new breed of traders are said to hone their dealing skills through mentorship from their treasury colleagues and private tutorial courses.

Dealers interviewed by this paper confirmed that the forex business is taking East Africa by storm, especially with the coming of faster Internet connections, thanks to the recently launched undersea fibre-optic cable.

Central Bank of Kenya Governor Prof Njuguna Ndung’u terms the private dealing a criminal activity.

“In Kenya, the only entities permitted to engage in foreign currency dealing are the authorised dealers licensed under the Banking Act and Central Bank of Kenya Act. In this regard, any individual or entity engaging in forex dealing who is not a licensed or authorised dealer is committing an offence punishable in law,” Prof Ndung’u said.

Official ignorance

What is baffling, however, is that neither the Central Bank nor the Kenya Revenue Authority seem to be aware of the flourishing private forex dealing despite conspicuous notices and promotions in the Internet and media about the trade.

“The Central Bank of Kenya is not aware of any fraudulent forex dealings by employees of commercial banks or other individuals. We would appreciate receiving the details of the cases in question to enable us to undertake relevant investigations and proactive action to uphold market integrity,” the governor said, adding, “Any cases of individuals dealing in forex without Central Bank authorisation should be reported to Banking Fraud Investigations Department for appropriate action.”

The leading trading sites include www.oanda.com and www.AvaFx.com.

In Nairobi, the majority of forex training colleges are based on Upperhill and Moi Avenue. According to Gilbert Kimari, a trainer and trader at Genius Forex Ltd, one cannot be successful in forex trading without training in how to reduce the risk of making losses.

To open an account with these online brokers, applicants must demonstrate that they are “intermediately experienced” investors, albeit not necessarily in forex.

This may entail disclosure of one’s investment history supported by trading statements.

In addition, the applicant must demonstrate an understanding of the risks involved in the business.

Trading accounts are opened with no minimum balance requirement.

“Despite the fact that currency trading is inherently an activity for central and private sector banks, non-banking international corporations and hedge funds, technological innovations have made it feasible for individual investors to monitor currency markets and to trade via intermediaries,” Gerald Ndung’u, a chief dealer at Invest Dealers Ltd said.

Bank dealers attribute the pull of currency dealing for private investors to the 24-hour trading, five days a week with continuous access to global dealers, an enormous liquid market making it easy to exchange most currencies, volatile markets offering profit opportunities and recognised instruments for controlling risk exposure.

Other factors that have catalysed the process include the leveraged trading with low margin requirements and zero dealing commission-principle.

Today, more than $1.5 trillion exchange hands daily across the world.

“When I first heard about it, I thought it was a fraud, but currency trading can achieve such high gains. It is important though to understand that leverage magnifies both gains and losses and it is easy to lose a substantial amount of money within a very short period. Nevertheless there are strategies to protect ones profits and minimise losses,” a dealer based in Westlands told The EastAfrican.

“In order to limit risk, a trader should routinely monitor positions against the market and should run risk-control safeguards against each open position,” says Shani Shamah, the author of Foreign Exchange Primer, adding: “The success of an institution trading in the foreign exchange market depends critically on how well it assesses, prices, and manages risk, and on its ability to limit losses from particular transactions and to keep its overall exposure controlled.”