KARACHI, Feb 22: Newly-established foreign exchange companies are in problem. The major challenge faced to them is this: The State Bank has withdrawn its decision to ban export of non-dollar currencies by the money changers and allowed them to continue it upto March 15. The two exchange companies that have so far started working find it extremely difficult to compete with money changers in export of non-dollar currencies.
The reason is that money changers can take out any amount of their non-dollar currencies to exchange the same with US dollars abroad but the exchange companies cannot. Since these companies are supposed not to take a daily exposure exceeding 50 per cent of their paidup capital they can export non-dollar currencies worth half of their paidup capital only. What makes it look even odd is that whereas money changers are supposed to have a minimum paidup capital of Rs5 million, exchange companies are required to have a minimum paidup capital of Rs100 million.
The two exchange companies that have so far started operations have paidup capital of Rs300 million each. So in order to avoid exceeding their exposure limit each can export third currencies worth only Rs150 million or $2.6 million a day.
But money changers whose capital base is microscopic compared to that of the exchange companies can export any amount. “How then we can compete with the money changers?” questions an irate official of an exchange company.
“We have requested the State Bank to increase our exposure limit to 75 per cent,” says Muhammad Naeemuddin who heads NBP Exchange Company—a wholly-owned subsidiary of state-run National Bank. He says this would automatically enable the exchange companies to increase their daily volume of export of non-dollar currencies.
Money changers and exchange companies need to export non-dollar currencies to bring their equivalent in US dollar back home. The money changers are supposed to sell 80 per cent of that amount to banks that is ultimately mopped up by the State Bank of Pakistan. This indirect buying of US dollars by the SBP helps it build up its foreign exchange reserves after putting a stop on direct dollar buying from money changers in July last.
Another big problem facing the exchange companies is a very high statutory liquidity reserve requirement. These companies are supposed to keep 25 per cent of their paidup capital in SLR which their officials say is a big amount. The two companies having a paidup capital of Rs300 million each have placed Rs75 million each in SLR. H&H Exchange Company has opted to put this amount in current account and its sponsors are averse to earning interest by keeping the money in the form of T-bills. “This means a loss of around Rs 25 million per year as the T-bills rate is more than three percent,” says a company official. “But our refusal to earn interest which is un-Islamic highlights the need for the State Bank to develop an Islamic version of the conventional treasury bills.” Al-Meezan—the first Islamic bank has developed such T- bills and SBP and ministry of finance are currently examining its practicability.
The two exchange companies have requested the SBP to lower the limit of SLR to 10 per cent. “If that happens it would enable us to have more liquidity available for undertaking the day-to-day business,” says Haji Haroon of H&H Exchange Company. A visit to the head office of the company located in Saima Towers Off I.I. Chundrigar Road shows a lot of money has gone into establishment as it has a reasonable security and operational system in place.
Operational expenses of rival NBP Exchange Company next door (housed in Shaheen Complex) are also high as the company has hired expensive staff and is spending a lot on overheads.
“Would you believe we have to pay Rs8000 to the security whose armoured vehicle carries cash from the main NBP branch hardly 2 km from here,” says an official of the exchange company.
“The cost of operations of money changers is nothing compared to that of the exchange companies,” he asserts disclosing to Dawn that many of them have riders instead of hired armoured vehicles to carry cash. The official seems right. Dawn has seen teenagers carrying millions in what looks like a plumber’s bag to and from their offices. Their salary: Not more than Rs5000 on average.
What irks the exchange companies most is the manner in which the Forex Association of Pakistan — an unregistered body claiming to group around 480 money changers — made the SBP reverse its decision of disallowing them to export non-dollar currencies.
The SBP had issued a letter to Karachi Customs on February 14 that the permission accorded earlier to money changers for currency export was being withdrawn from February 15 and exchange companies are being allowed to start currency export instead. But on the next working day the central bank allowed money changers to continue to export non-dollar currencies for one more month i.e. up to March 15.
Money changers were so desperate that they managed to secure a very strong assurance from some senior SBP officials on Saturday (Feb 15) about extension in the permission for currency export.
Perhaps that was why a representative of H&H Exchange Company was stopped from proceeding abroad with non-dollar currencies on Sunday noon and was not allowed to catch a flight to Dubai until late evening. “The customs official present at the airport could not justify why he had stopped H&H man,” said a company insider who declined to be identified. Officials of the company make no comment.
“I know this happened,” confirmed a leading money changer who went on to add that FAP had made all hue and cry over currency export issue just to borrow time for some top money changers who have got permission to set up exchange companies but are holding back their plan. What lends credence to this statement is the fact that immediately after re-allowing third currencies export by money changers SBP summoned those who have got its final approval for setting up exchange companies. SBP Foreign Exchange Advisor Zafar M. Shaikh warned them in the strongest possible words to make their proposed exchange companies operational positively by March 15. FAP President Malik Bostan was also present. Five top money changers assured the SBP official that their exchange companies would start working before the deadline is over.
“The extension in the permission for currency export to money changers is the first success we have got,” says Malik Bostan. “But after March 15 we would seek further extension as we believe that currency export should not be left with exchange companies alone. Money changers should also be allowed to undertake it,” he told Dawn. “If our demand is ignored we would seek legal recourse ...because it is an issue concerning the bread and butter of thousands of people dependent on 479 money changers,” he said.
“Money changers can even take to streets.”
But for insiders this is a hollow warning. “Bostan wants to borrow time for those top money changers to establish exchange companies who are currently exporting third currencies through him,” said a local money changer.
Whether or not money changers take to street or move courts after they are finally disallowed to export third currencies one thing is clear: if the controversy prolongs it would scare away those who have a clean track record and enough resources to set up and run an exchange company.
“The very basic purpose of creating exchange companies with a huge paidup capital was to replace money changers,” says a medium size money changer with clean track record who is in the process of setting up an exchange company. “The money changers should realise that stopping them from currency export is just one phase of the declared SBP policy that two years after the creation of exchange companies money changers will have to pack up and quit.”