The State Bank has so far received half a dozen applications from big money changers for conversion of their business entities into foreign exchange companies. The state-run National Bank of Pakistan has also sought SBP permission to set up an exchange company as its subsidiary.

The list of the money changers who are in the run for setting up exchange companies include (i) Khanani & Kalia International (ii) Galaxy International (iii) Wall Street (iv) Dollar East (v) H& H Exchange Company and (vi) KKI Exchange Pvt. Ltd.

The SBP is expected to clear these and any other applications —that may pour in—by the end of September or even earlier. After that the companies that may get NOC from the SBP would file applications with the Securities & Exchange Commission of Pakistan to get themselves incorporated as exchange companies. But before starting business they will again return to SBP to get a licence for this purpose.

The process may get over by the end of this year or even earlier and foreign exchange companies should start operating from early next year—if not before.

It was in March last year that the then Economic Advisor of the SBP, Dr. Mushtaq A Khan, and former Foreign Exchange Advisor Hanif Akhai floated the idea of creating exchange companies. They had co-authored a confidential paper wherein some practical steps were suggested to get Pakistan rid of foreign exchange crisis: Converting the business of money changers into exchange companies was one of them.

The idea won the blessings of the IMF. But the Fund made its own observations on this issue and secured assurance from the SBP that the rules of business of the exchange companies would be so designed that they could not be used for money laundering and illegal transfer of funds.

Accordingly the set of rules laid down by the SBP for the working of exchange companies provide sufficient safeguards against money laundering that has emerged as the chief concern of the US and other countries after 9/11.

Following are some key checks placed on the proposed exchange companies:

(i) the companies are required to limit their daily exposure upto 50 percent of their capital base (the minimum required capital is Rs 100 million);

(ii) they cannot make forward buying/selling of foreign currency with individuals;

(iii) they will record the name, address, ID card/passport number of those customers that buy or sell more than $10,000 worth of foreign currency;and

(iv) they will record names, addresses and other particulars of both the remitter and the beneficiary while handling money transfers and remittances.

These and some other checks seem logical given the fact that the exchange companies—unlike money changers—will be allowed to handle electronic transfer of money to and from outside Pakistan and sell foreign exchange to corporates and banks on certain conditions.

The operations of the exchange companies need to be supervised cautiously also because they are allowed to have upto 50 percent foreign equity—and are also permitted to repatriate abroad the profit on it.

Money changers say no foreigner has so far contacted them for exploring the possibility of joint venture in exchange companies but owners of Pakistani origin of two international exchange companies are making inquiries through official channels. Whether they would find it feasible to invest in exchange companies in Pakistan is a question the answer of which lies in what feedback they receive.

Money changers who have applied for the SBP’s NOC for setting up exchange companies say the number of applicants—with or without foreign partnership—may hardly rise to a dozen. And bankers say that most banks are least interested in setting up exchange companies through subsidiaries because the projected earnings of these companies are too small—and the investment both financial and human is too expensive. (Banks are not allowed to set up exchange companies on their own.Exchange companies are also not allowed to accept deposits directly or indirectly or engage themselves in any other business other than that of their own.)

The reason why the National Bank has decided to set up a subsidiary to act as an exchange company is that it has the experience of running one such company with local partnership in Dubai—and it has also handled on behalf of the State Bank export of non-dollar currencies to Dubai by the money changers.

The SBP has given the money changers two years time to either convert their business into exchange companies or pack up and quit. But leading money changers say this is simply impossible adding that if they were forced to close down their shutters a grey market of currency exchange will reemerge in Pakistan.

Their logic is simple: the present paid-up capital requirement for a money changer having multiple branches is Rs 5 million. It is impractical to think that 20 of them will pool resources to set up an exchange company the minimum with a paid-up capital, which has been fixed at Rs 100 million with the condition that the same will be doubled after three years. Currently there are 469 money changers throughout Pakistan that have got the SBP licence. There are many more who have no licence but have been working smoothly: all efforts to crackdown upon them have failed.

“If the paid-up capital requirement remains unchanged at Rs 100 million and if we are forced to close down our business majority of licensed money changers will go underground,” warns president of Forex Association of Pakistan Malik Bostan.

The Association has recommended to the SBP that the minimum paid-up capital of exchange companies should be cut down to Rs 50 million. Interestingly not only the money changers but senior officials of the central bank too are divided on the question of what should be the paid-up capital requirement.

One leading money changer who has applied for the SBP NOC to set up an exchange company says that the minimum paid-up capital should have been fixed at Rs 250 million—if not Rs 500 million.

He says that Rs 100 million (or $1.7 million) is too small a capital for the exchange companies that would be making foreign exchange transactions with banks and corporates—multinationals included.

Before finalizing the rules of business for exchange companies the State Bank had debated the issue of minimum paid-up capital at length. It would be interesting for the public to know that the SBP initially wanted to fix the minimum capital at Rs 500 million but the idea was dropped later on and it was fixed at Rs 100 million.

Those central bankers who were in favour of Rs 500 million capital had some valid arguments including this one: “Overseas Pakistanis are expected to switch a significant proportion of their remittances from hundi to the proposed exchange companies. Since these remitters are generally not aware of the various types of risks involved in such transfers a high capital would encourage exchange companies to adopt proper business procedures /systems to minimise the risks.”

Besides it is quite easier for the central bank to keep an eye over a limited number of large exchange companies (say a dozen or so) rather than to monitor the operations of 469 licensed money changers.