KARACHI, Jan 4: Foreign exchange companies may not be able to make an early start of their business for they do not expect a break-even earning at the moment.

“The market is not conducive,” says managing director of NBP Exchange Company Muhammad Naeemuddin referring to a very narrow difference between exchange rates in Pakistan and Dubai. Dubai serves as a wholesale market for money changers in Pakistan and it is likely to retain this role for the exchange companies as well. NBP Exchange Company which is a wholly owned subsidiary of state-run National Bank was the second one after H&H Exchange Company to get SBP licence to start operations.

“We are fast on track,” says Naeemuddin adding that work is in progress on the head office of the company housed in the Shaheen Complex branch of NBP. He says that five more branches are being established in different cities of Pakistan and hiring of staff for the exchange company has almost been done.

He says that work will soon be started on the development of software and computerized inter-linking of the six branches of the exchange company. “We hope to finish all this by the end of this month or by mid of February in any case.

No official of H&H Exchange Company was available to say what stops them from going operational. But sources close to it say the company is seeking some clarifications from the SBP on a possible clash of interest between money changers and exchange companies.

It is a common knowledge that most money changers are still handling telegraphic transfer of money thanks to their contacts at home and abroad although under the rules they cannot receive or send money through TTs. This poses a great challenge to the exchange companies that are trying to make money out of the TT business — permissible in their case under the rules. Exchange companies also feel that they cannot do enough business to reach a break-even point if the money changers continue to export currency without any limit. They also feel that they can hardly compete with the money changers if the later remain engaged in illegal transfer of money known as Hundi. In that case the money changers will continue to give better rates to the remitters — thanks to their undocumented nature of business. The exchange companies that would be recording every transaction for the SBP as well as their internal auditors would find it difficult to match this rate and eventually lose business.

These and some other issues may have to be settled before the exchange companies may start operations. Removing any irritant in the way of smooth functioning of the exchange companies seems necessary also because they have much larger paid-up capitals than the money changers. Two of them namely i.e. NBP Exchange Company and H&H Exchange Company have a paid-up capital of Rs300 million each and the third one Khanani & Kalia International Exchange Company has a Rs100m paid-up capital. The paid-up capital of a money changer with multiple branches is only Rs5 million.

Large capitals is also making the exchange companies reluctant to start operations because this has raised their opportunity cost to a level where they need to earn at least 12 per cent on exchange transaction to keep themselves afloat.

“Currently one cannot expect more than 4-5 per cent earning through exchange companies operations,” says an official of one of the exchange companies.

But Ovais Kalia of KKI Exchange Company says he does not see any big obstacle in the way for exchange companies to start operations. “In our case everything is ready and we may begin operations by end of this month or early February,” he said when reached by Dawn over telephone. About the challenge facing the exchange companies from the undocumented nature of business of the money changers he said: “it will go with the time. Eventually the culture of documentation will prevail.”

“Money changers will serve as an unbreakable conduit between the exchange companies and the inter-bank market,” he remarked hoping that eventually the money changers will start selling foreign exchange to the exchange companies and the companies will sell the same in the inter-bank market.

If that is going to be the case the exchange companies must start business at once as the open market rates for the US dollar are lower than in the inter-bank market.