KARACHI, Aug 8: The State Bank has suspended the licence of a Karachi-based exchange company besides issuing a show-cause notice to a Rawalpindi-based company for violation of the prescribed rules. Chief spokesman for the central bank Syed Wasimuddin told Dawn that the SBP has suspended for 30 days the licence of Muhammadi Exchange Company and has served a 7-day show-cause notice to Rajgan Exchange Company.

He said that the two companies had violated certain regulations laid down for the operation of foreign exchange companies in B category. The regulations that the two companies are said to have violated required them and all other exchange companies in B category to limit themselves only to sale and purchase of foreign currency notes and coins.

The regulations barred them from all other activities like making electronic transfer of foreign exchange to and from Pakistan. A source close to SBP said that these companies had been found involved in activities beyond sale and purchase of foreign currencies. “And that may involve electronic transfer of foreign exchange to or from Pakistan.”

Officials of the erring exchange companies could not be contacted immediately. Nor any spokesman for the Association of Pakistan Exchange Companies (B category) was ready to comment on the SBP move.

The SBP lately extended the suspension of licence of one of the mainstream exchange companies. The company was found to have been selling foreign exchange at higher rates than publicly displayed.

A source close to SBP said lately the SBP served a show-cause notice to a Karachi-based exchange company in B category but he did not disclose the charge made against it. Even before that the central bank issued notices to many mainstream exchange companies for overcharging customers. But the strongest action it ever took was against one of mainstream exchange companies on the charge of currency smuggling and under-declaration of the foreign currencies being exported to Dubai.

These and some other actions taken against both mainstream and B category exchange companies suggest that SBP is trying to discipline them to check currency smuggling and all other moves that create an artificial shortage of foreign exchange in the open market.

But critics of SBP say it has so far failed to initiate a real hard action against a few mainstream companies that are believed to have a network of their own for informal transfer of foreign exchange to and from Pakistan.

There are two types of foreign exchange companies operating in the country — the mainstream companies which are required to have a minimum paid-up capital of Rs100 million and the smaller ones that can operate with a capital of Rs2.5 million. Under the SBP’s rules, whereas mainstream exchange companies can undertake electronic transfer of foreign exchange, the smaller companies cannot. The number of mainstream companies is 25 and they are also allowed to franchise their business. Smaller companies, 33 in number, were formed by money changers who were asked by SBP to pack up and quit from July 1, 2004.

In June this year, the central bank warned mainstream exchange companies to discontinue the practice of allowing their franchisees to remit foreign exchange abroad. It reminded them of the rules that allowed them as mainstream companies to make remittances but restricted their franchisees to only sell and purchase foreign currencies.

The SBP issued the warning as the outward remittances made by franchisees of exchange companies caused a shortage of foreign exchange in the market. Sources close to SBP say the central bank is keen to see a smaller number of foreign exchange companies operating particularly in B category. They say that stronger checks put on these companies would ultimately force some of them to quit or to merge with the others thus making the task of monitoring them a bit easier for the central bank.

Lately exchange companies have come under sharp criticism for their failure to attract enough foreign exchange remittances from overseas Pakistanis. According to a State Bank report, Pakistanis living abroad sent back home only $235m through foreign exchange companies in 2004. The amount was only six per cent of the total remittances of $3.944bn. The reason why these companies attracted such a nominal amount of remittances from overseas Pakistanis was that some of them were themselves involved in hundi transactions or informal transfer of foreign exchange into Pakistan.