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How exchange companies take on Pakistan economy?

Remittances plays a crucial role in Pakistan’s economy. According to World Bank’s report the projected Pakistan’s remittances growth to remain moderate at 6.2% due to significant reductions in inflows from Saudi Arabia and Gulf States.

The country was ranked 7th amongst the top ten recipients of remittances globally in 2018 receiving $20.9 billion and with India ranked at 1st with $79.5 billion. The much needed inflow of dollars are like blood lifeline for Pakistan as it boosts foreign exchange reserves.

Pakistan received overall remittances of $19.3 billion in fiscal year ended on June 30, 2017, down 3% compared with $19.91 billion in fiscal year 2015-16. These remittances make up almost half the import bill and cover the deficit in the trade of goods account. The State Bank of Pakistan has been trying to devise ways to increase home remittances. The widening of current account deficit over the past one year-and-a-half has underlined the need to enhance the flow of remittances from abroad. With a view to promoting home remittances through legal channels, the State Bank has launched “Asaan Remittance Account” scheme for prospective beneficiaries of home remittances. It is believed that this move will facilitate opening of bank accounts by low-risk customers to receive home remittances through proper accounts instead of resorting to traditional cash over the counter transactions. This initiative has been launched in collaboration with Pakistan Remittance Initiative (PRI) to promote the use of bank accounts by home remittance recipients. Individuals can open these accounts with a simple, one-page account opening form, which is both paper-based and electronic, requiring only basic customer information. Some time back Pakistan had launched the Pakistan Remittance Initiative (PRI) to enhance the flow of remittances and the scheme produced positive results. But of late, the PRI seems to have lost its effectiveness. In view of this, the latest initiative of Asaan Remittance Account has been started.

Foreign Exchange Policy and its operations in Pakistan are formulated and regulated in accordance with the provisions of the Foreign Exchange Regulation Act, 1947. The objective of the Act is to regulate, in the economic and financial interest of Pakistan, certain payments, dealings in foreign exchange, securities, import/export of currency and bullion. Under this Act, the basic regulations are issued by the Government of Pakistan and the State Bank of Pakistan in the form of Notifications which are published in the official Gazette. However, directions having general application are issued in the form of FE Circulars and Circular Letters issued by State Bank of Pakistan.

After the promulgation of Foreign Exchange Regulation (Amendment) Ordinance 2002, State Bank has issued various FE Circulars and Circular Letters to Exchange Companies and Exchange Companies of ‘B’ category over the period. In order to update/compile related regulations for the convenience of users, Exchange Companies Manual 2016 has been prepared.

SBP issues licenses initially for a period of three years, which can be renewed. SBP can revoke the license under certain conditions. The minimum authorized and paid-up capital of an Exchange Company is Rs. 200 million. The exchange companies are allowed to have foreign participation in their equity upto a maximum of 50%. State Bank would permit repatriation of profits in proportion upto the extent of foreign equity. 25 percent of the Capital shall be maintained as Statutory Liquidity Reserve (SLR) with the State Bank in the form of unencumbered approved government securities. The Exchange Companies are authorized to deal in foreign currency notes, coins, postal notes, money orders, bank drafts, travelers’ cheques, transfers and other businesses as allowed by SBP. They can buy and sell foreign exchange from/to individuals in “Ready” value only. However, the exchange companies shall take prior approval of SBP before commencing inward home remittances operations. All the inward home remittance transactions of Exchange Companies should be routed through foreign currency accounts of the Exchange Companies maintained with banks in Pakistan. The funds against all individual inward remittances must first be received in Exchange Company’s accounts maintained with commercial banks in Pakistan. Exchange Companies are authorized to effect outward remittances only on personal account of individuals i.e. personal financial transactions and not those related to an individual’s trade or business requirements. All outward transactions of exchange companies should be routed through foreign currency accounts of the exchange companies maintained with banks in Pakistan.

 

With prior authorization from SBP, the exchange companies can export foreign currencies other than United States Dollar (USD) and bring in equivalent USD in cash or in their foreign currency accounts maintained with banks in Pakistan. The exchange companies are allowed to conduct branchless banking activities as agents of authorized financial institutions (Commercial/Islamic/Microfinance Banks).

However, the exchange companies are prohibited to engage in any other activity such as deposit taking, lending etc., directly or indirectly. Exchange Companies are also not allowed to enter into business related agreements with each other or with outside parties without obtaining prior approval/clearance in writing from State Bank. The spread between buying/selling rates of US Dollar, Pound Sterling, Euro, Saudi Riyal and UAE Dirham shall not exceed one percent of their buying rate. For all other foreign currencies, Exchange Companies shall ensure to maintain a competitive spread. Further, it must be ensured that prevailing exchange rates applicable for sale/purchase of major foreign currencies are displayed through notice/display board at a prominent place in each outlet of the exchange company. All dealings between an Exchange Company and its customers shall be supported by official receipts. Such receipts shall be prepared for every transaction in duplicate, one of which shall be provided to the customer.

The Exchange Companies are required to maintain proper accounting records and submit the same in such form as may be required by the SBP. The company should adopt proper techniques of internal control such as internal audit.

The Exchange Company can conduct the exchange business only from such premises as approved by the SBP . However, the network of an Exchange Company can have branches, 3rd Party franchise arrangements, payment booths, Company owned currency exchange booths or temporary booths. These networks can be extended with SBP permission. Exchange Companies are allowed to export all foreign currencies other than US Dollars. A prior SBP approval is mandatory before starting the foreign currency export business. All Exchange Companies should ensure that a minimum of 10% of US Dollars received against export of foreign currencies will be sold in interbank on an ongoing basis. Exchange Companies exporting permissible foreign currencies shall repatriate equivalent US Dollars in their foreign currency accounts maintained with banks in Pakistan. Such US Dollars against exports must be credited in foreign currency accounts within three working days from the date of export of foreign currencies.

To preserve the integrity and safety of the financial system, it is important to prevent the possible use of the Exchange Company sector for money laundering. To curb this SBP has been issuing various instructions to time to time to exchange companies in the shape of its FE Circulars and Circular Letters duly followed up with individual interactions during its monitoring and enforcement activities. To avert the risks posed by money laundering and financing of terrorism, the exchange companies must follow the guidelines related Anti Money Laundering (AML) and Combating Finance of Terrorism (CFT). Proper documentation of transactions, maintenance of proper AML/KYC standards, reporting of business transaction and other activities of Exchange Companies/Exchange Companies are mandatory.

The State Bank reserves the right to inspect the activities of Exchange Company at any time ensure adherence to the regulations issued by the State Bank. They are required to fully cooperate with the State Bank inspection team and provide full disclosure of information required during the course of inspection, including accounts, operations, IT systems and records.

The writer, Mr. Nazir Ahmed Shaikh is a freelance columnist and an academician by profession. He could be reached at  nazir_shaikh86@hotmail.com

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