When it comes to doing business in Nigeria, it can be highly profitable, depending on the effort put into it. However, it also comes with a set of risks that can arise from politics, economy, security, finance, and infrastructure. However, smart founders or managers do not treat these risks as if they are scary or mysterious; instead, they map them, rank them, and build simple, repeatable controls to reduce the tension or shock they cause and keep the business in good shape.
Business risk factors can appear in different forms, depending on the nature of a company and its activities. Business risks can have major forms which are external risks (that is risks coming from events taking place outside the organization) and internal risks (which are risks coming from events taking place within the organization).
This article discusses the types of business risk in Nigeria, gives real and promising examples, and also gives a clear way to manage these types of risks in order for businesses to run smoothly.
What do we understand about Business risk?
The term “business risks” can be said as the possibility of a commercial entity making inadequate profits or even losses due to some uncertainties, for example: changes in tastes, staff demotivation, changing preferences of consumers, strikes, increased competition, changes in government policy, obsolescence, etc.
Business risk can also be defined as the possibility of losing money or failing in business because of uncertain events or decision-making.
Business risks can also be described as events or circumstances that could negatively affect a company’s ability to achieve its objectives and goals, leading to losses or failure.
Types of Business Risks
Political and Regulatory Risk
This is a type of risk that has sudden changes in law, taxation, trade policy, or government conduct that could affect license to operate, cost base, or ability to move money. This matters in Nigeria because it has regulatory unpredictability, quasi-fiscal policies, and occasional restrictive currency or trade controls that have repeatedly affected businesses in Nigeria.
These are examples that have an impact on this type of risk:
- New taxes or enforcement drives that increase operating costs overnight.
- Local content requirements or licensing changes that affect foreign investors.
- Restrictions on foreign exchange or limits on repatriation of profits.
These are ways to manage this risk:
- Maintain a short political watchlist that includes three government agencies and three policy indicators like fix policy, tax rules, and import bans which should be reviewed monthly.
- Build relationships with local regulators then hire a part-time regulatory advisor or law firm on retainer.
- Structure contracts with explicit unforeseen circumstances and dispute resolution clauses where possible, use a trusted account or international arbitration for high-value deals.
Macroeconomic and Currency Risk
This type of business risk deals with inflation, interest rate shocks, and exchange-rate collapse that weakens margins and makes forecasting useless, and this matters in Nigeria due to high inflation and sharp Naira depreciation that have materially increased costs for firms with dollar-linked inputs. It has been reported that big companies have experienced heavy losses because of FX mismatches.
These are examples that relate to this risk:
- A manufacturer that has dollar debt but Naira revenue sees interest and principal become unaffordable after a Naira devaluation.
- Importers face sudden price increases and supply gaps due to foreign-exchange shortages.
These are ways to manage this risk:
- Match the currency of revenues and liabilities where possible and also if revenue is Naira, try to keep debt in Naira or hedge.
- Use natural hedges like price adjustments, local sourcing, etc before expensive financial hedges.
- Keep at least a 3 to 6-month working capital cushion in local currency for operating volatility.
- Price contracts with CPI or FX pass-through clauses when negotiating with customers.
Security and Physical Risk
This type of risk deals with theft, vandalism, kidnapping, protests, supply-chain disruptions, and regional instability that interrupt operations or increase costs, this risk matters in Nigeria because pipeline vandalism and oil theft have cost the economy billions and other sectors have faced kidnappings and local disruptions especially in certain regions. Nigeria has lost about $42 billion to crude theft and has also experienced domestic and refined petroleum products losses between 2009 and 2018. Unfortunately, the extent of pipeline vandalism has greatly affected the environment and the people who reside in Nigeria’s most oil-rich region, the Niger Delta.
These are examples that relate to this risk:
- Oil and gas companies are losing production because of pipeline vandalism.
- Logistics firms are facing road closures, theft of cargo, or driver kidnappings.
These are ways to manage this risk:
- Do a location risk map for every facility and route to avoid high-risk corridors unless the margin justifies mitigation.
- Invest in layered security that is to ensure local community engagement, physical measures like lighting, fencing, etc, and insurance is used where available.
- Build flexible supply chains that have multiple suppliers, alternative routes, and local buffer stock.
- Purchase kidnap or extortion and political violence insurance for exposed executives and assets.
Operational and Infrastructure Risk
This is due to failures or shortages in power, roads, ports, ICT, and logistics that increase downtime and operational cost. This matters in Nigeria due to frequent power outages and poor road and port logistics drive firms to run costly on-site generators, incur higher transport costs, and build inventory buffers. Historically, Nigeria has been recognized as a place of significant promise to global business groups and foreign investors looking to establish operations in Africa.
These are examples that relate to this risk:
- Factories running generators raise production cost per unit.
- Delays at ports are causing stockouts or expired goods for importers.
These are ways to manage this risk:
- Build operations that have redundancy like backup power, alternative suppliers, and SLAs with logistics partners.
- Move part of the supply chain closer to customers using regional warehouses to lower transport risk.
- Use data to track downtime costs and calculate return on investment for each mitigation e.g solar plus battery vs. diesel generator is a good idea.
Financial and Liquidity Risk
This type of risk deals with a lack of cash, inability to access credit, or weak financial controls that can sink a business fast and this matters because tight credit markets, rising interest rates, and FX shocks squeeze liquidity in which large companies have reported forex and liquidity losses.
These are examples that relate to this risk:
- Rapidly rising borrowing costs push interest expenses above projected margins.
- Customer late payments trigger a working capital crunch.
These are ways to manage this risk:
- Maintain conservative cash forecasts and weekly rolling cash flow models.
- Negotiate supplier payment terms and build staggered debt maturities.
- Keep at least one committed credit line and expand funding sources like local banks, development finance, vendor financing, etc.
- Implement simple internal controls like two-signatures for payments above a threshold and monthly reconciliation.
A Risk management checklist to implement
- Map the 8 risks for the sector which are political, FX, inflation, security, infra, liquidity, compliance, and talent.
- Rank by impact and likelihood and focus on the top 3.
- Assign single owners who monitor each risk and report weekly.
- Create a trigger threshold.
- Test plans quarterly by running a tabletop simulation for one big scenario.
- Buy insurance.
- Build a simple governance.
Conclusion
In Nigeria, risk isn’t an optional topic but it’s the operating context. The approach given above is simple: map the realistic risks, fix the top three with measurable mitigations, and consolidate those gains into repeatable processes. That way businesses don’t chase every scary headline they see, they improve the resilience of businesses one controlled step at a time.
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