KARACHI: United Bank Ltd (UBL) is going to set up an exchange company as a wholly owned subsidiary with a capital of Rs1 billion.

The announcement by one of the biggest commercial banks on Tuesday follows a circular by the State Bank of Pakistan (SBP) last week in which the banking regulator initiated “structural reforms” in the exchange companies segment.

Speaking to Dawn, Chase Securities Research Director Yousuf M. Farooq said most commercial banks are likely to establish either stand-alone subsidiaries or separate counters within their branches to buy and sell foreign exchange at the retail level.

Commercial banks weren’t allowed to conduct foreign exchange business with the general public until recently. Exchange companies fulfilled the foreign exchange needs of people at the retail level while banks handled the dollar-denominated transactions in the interbank market. A steep rise in the dollar price, which also led to a widening gap between open market and interbank rates, reinforced the perception that several exchange companies weren’t playing by the book.

As part of a nationwide, multi-agency crackdown against dollar hoarding and smuggling, the SBP asked commercial banks to establish wholly owned exchange companies to cater to the “legitimate” foreign exchange needs of the general public.

The proposed measure is aimed at bringing the retail buying and selling of foreign exchange into the regulatory ambit of the SBP. It’s expected to ensure discipline in the foreign exchange business at the retail level as the SBP has the reputation of being the sternest among all regulatory authorities, said Mr Farooq.

The SBP has also directed that various types of existing exchange companies and their franchisees be consolidated and transformed into a single category of exchange companies with a well-defined mandate. The minimum capital requirement for exchange companies was also increased from Rs200 million to Rs500m.

Meanwhile, UBL told investors it’s going to sell its 55pc stake in UNBL UK to the Bestway Group. UNBL UK is a banking institution incorporated in the United Kingdom. It came into being in 2001 after the merger of the UK branches of UBL and National Bank of Pakistan Ltd, according to Topline Securities.

The principal activities of UNBL UK are to provide retail banking, wholesale banking and treasury services to financial institutions and trade finance facilities to businesses of all sizes. The transaction is expected to have a positive impact of 200 basis points on UBL’s consolidated capital adequacy ratio which, in turn, will increase the bank’s dividend-paying capacity in the future, the brokerage said.

Published in Dawn, September 13th, 2023