Money changers have to windup their business from June this year



Apr 12 - 18, 2004





The State Bank of Pakistan (SBP) has decided to replace the existing moneychangers business by foreign exchange companies with effect from July 1, 2004. So far, 15 licenses have been issued to establish moneychangers and some banks and by the end of the current financial year the number of companies is likely to go up by 25.

Certainly, it’s a major step taken by the SBP to change the entire complexion of the foreign exchange business in Pakistan. This fundamental change however arouses inquisitiveness in the mind about the logic for this big move or philosophy of the financial managers behind this change.

According to Dr. Ishrat Hussain, Governor SBP, the objective of converting money changers into exchange companies will not only make remittance transactions fully documented, but this will help curb the activities of unauthorized money changers and hundi business.

In order to further elaborate the situation, detailed discussions were carried out by PAGE with the leading money changers and those active in the foreign exchange business in Pakistan.

Ovais Kalia, a reputed name in the foreign exchange business, who is the chief analyst with Khanani & Kalia International (Pvt.) Limited, while dilating upon the subject said that unfortunately, the money changing business became vulnerable to a number of flaws in Pakistan. Keeping aside a few money changers, the branded names who still hold the privilege of running the business honestly within the framework and guidelines given by the SBP, a large number of the people engaged in this business indulged in the business beyond the lines drawn by the guidelines. There were more factors which led the financial managers to find substitute for managing business and replace them by foreign exchange companies.

Ovais Kalia while spelling out those factors point by point said that many private institutions came into the business without having a knack about the delicacies and professional back up, expertise and required professional knowhow. Many of them built strong contacts with overseas currency dealers which consequently brought in an element of smuggling of currencies in the country. Obviously this unhealthy trend was contradictory to the government policies to bring in documentation the national economy.

Some of the unauthorized money changers even did not bother to maintain any sort of record and documentation to support the transactions that they used to make on behalf of their customers. This eventually gave birth to an undocumented economy in Pakistan. Since they were operating beyond the given lines they were naturally not in a position to declare or disclose the actual transactions. Some foreign private companies engaged in this business were also not declaring their foreign exchange reserves and earnings which was also a great loss to the national economy.

Ovais went on saying that it was the irresponsible behavior and violation of the given code of conduct by the so-called money changers which paved way to convert the concept of open market into a haven of the customers to transfer illegal funds of their country to their desired destinations. Since the illegal operators are more swift in transpiring the business, it also attract the customers as compared to the cumbersome and time consuming legal channels because this involved less time, less charges and above all no documentation.

In this backdrop, the financial sector was confronted with serious threat for the country especially during the vents of nuclear test by Pakistan and September 9/11 events in the United States. In the face of a large network of unregistered money changers, the check system of the regulatory bodies was vulnerable to the lapses and thus there was no proper scrutiny of the currency business.

Another major factor which pampered the illegal trade was the growing spread between the inter-bank and kerb rates soon after the event when the foreign currency accounts were frozen in Pakistan. The gap between official and the kerb rates were even more than rupees ten to a dollar. Naturally, this wide gap of exchange rates was a great attraction for the business people as well as the customers which gave rise to "Hawala or Hundi" business. However, the gap between official and the open market rates start narrowing down, the dollar inflow through legal banking system improved.

In order to overcome the above stated factors, the government decided to replace money changing business by foreign exchange companies to bring documentation in the economy, to have a close check on the inflow and outflows of foreign exchange, to curb unauthorized money changing business and to discourage use of Hundi as the mode of transfer of funds.



The exchange companies now have a refined system of operations in place. All transactions are being recorded and reported and it is certainly a step forward aimed at restoring the confidence of general public, Ovais observed. There are two official channels for marketing remittances, the banks and the exchange companies. Since a good number of banks and exchange companies are active in the market, which offer more choices and more services to the customers in terms of better exchange rates. To have a wide network, the exchange companies are now streamlining their system by offering franchise to smaller partners to facilitate customers in remote areas of the country and to provide services of international standards even in the remote parts of the country.


Under the changing scenario, the newly emerged companies working all over the country formed a representative body in the first week of April which is called as "Exchange Companies Association of Pakistan" (ECAP). Currently, 15 exchange companies are operating in Pakistan which include Khanani & Kalia Exchange, al Sahara Exchange, Data Exchange, Dollar Exchange, Eastern Exchange, Galaxy Exchange, H&H Exchange, Malik Exchange, National Exchange, Noble Exchange, Pakistan Exchange, Paracha Exchange, PICIC Exchange, Wall Street Exchange, and Zero Exchange companies.

Initially, ECAP will be run by an ad-hoc committee which consists Haji Haroon as President, and Munaf Kalia as the General Secretary, Mehboob Moti as Vice President, Anwer Dar Vice President, Abdul Talib Treasurer, Malik Bostan and Naeem Uddin as members.

The newly formed body of the exchange companies is committed to extend its full cooperation to State Bank of Pakistan in its efforts for providing sound footings to the national economy.

Munaf Kalia, the General Secretary ECAP, while answering a question whether the 15 exchange companies would be able to deliver and suffice to cater to the need of the entire country, said that number of the companies will be gradually increased and hopefully by the end of June this year 10 more companies would come into operation. These companies have also been allowed to offer franchise in the down stream to meet the need.

Actually, the change has a multi-dimensional agenda. On one hand it will help to weed out unscrupulous elements involved in many sort of illegal activities causing serious damage to the efforts of bringing in a culture of documentation in the economy, while regularization would help building up country’s image in the financial world.

Munaf Kalia, who is also the CEO of Khanani & Kalia Exchange while supporting the change in the money exchange business said that in total, there were 469 money changers throughout the country which held the SBP license while there are many more that have no license but have been working smoothly as all efforts to crackdown upon them have failed.

Endorsing the idea of exchange companies, he said that we do support the decision of the SBP and that is why KKI is among the first to receive the exchange business lincense from the SBP obviously because this would help improving the foundation of our economy on sound footings. KKI carries the distinction of having the largest network all over the country to its business profile. It is spread over a broad-based customer bating 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 support of the IMF as well, However, the IMF made its own observations on this issue and secured assurance from the State Bank that the rules of business of the exchange companies would be so designed that they could not be used for money laundering and 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 support of the IMF as well, However the IMF made its own observations on this issue and secured assurance from the State Bank 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 lay 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 especially after the events of 9/11.


According to a SBP report, 90 percent of the foreign exchange that Pakistanis living abroad send back home every year through unofficial channels. It is estimated that non-resident Pakistanis send $8-10 billion every year of which major share goes through the Hundi system. The Hundi system not only in Pakistan but all over the world operates mainly through retail money changers, exchange companies and Hundi walas. The network of the unauthorized money changers can be broadly divided into three areas i.e. the Gulf region, Pakistan and Rest of the world. Out of the three, the Gulf region was the most active with an 80 per cent share in home remittance of which 75 percent came through Hundi walas while only 10 percent came through banking system.

Market sources say that money changers maintained their foreign currency accounts in the Gulf which were used for keeping funds collected through small Hundi walas as well as collections from the rest of the world. The sources say that it was through these accounts that client’s funds were transferred out of Pakistan. The unauthorized money changers used to take the rupee counterpart in Pakistan and transfer the funds to other countries either through its foreign currency account or through delivery of cash.

Money market sources say that within the Gulf region, Dubai stood as the hub of Hundi operations. Most unauthorized and illegal money changers and Hundi walas operated from there. It was a central point in the supply chain and all inflows from the entire world were channels into Pakistan through Hundi walas in Dubai. The foreign exchange was collected from retail Hundi walas and money changers and payments were made on behalf of the clients to their nominees in Pakistan. The system was well organized and very effectively managed. The rupee equivalent is paid in Pakistan within 24-48 hours.

The Hundi system, like any other country in the world became popular due to the following reasons:

—It requires no identification



—It offers better rates than official exchange rates

—It ensures delivery of the cash even to remote areas in less than 24 hours

—People take funds to a money dealer, who then contacts dealers in other countries to swap the amount they want to transfer

—It is difficult for regulatory authorities to supervise such deals, through the Pakistani administration which wants to keep track on larger transactions.


In early 2001, the government started to take serious steps towards the removal of illegalities going on in the foreign exchange market of the country. In this connection, a Task Force was set up for overseas Pakistanis to give recommendations. There was a dire need to rationalize the foreign exchange market and to remove the existing distortions that were inhibiting the flow of non-resident Pakistanis resources through the normal banking channels. This was clearly due to a largely unregulated moneychangers business and smuggling, which was receiving the lion’s share of the total inflow of remittances in the country. In this regard, it was observed that regulation of the business of money changers was inevitable with a view to gradually removing the current wedge between the official and open markets. In this connection following steps were initiated:

—A campaign against unlicensed money changers was launched without exception.

—a number of unauthorized persons engaged in illegal activity were apprehended.

—The regulatory framework of licensed moneychangers was strengthened.

—Under the rules all money changers were required to maintain an account with a scheduled bank and moneychangers defaulting on this requirement were faced with cancellation of licenses.


Under the SBP rules, all money changers will cease to run their business by June 30, 2004 and will have to transform themselves into exchange companies. SBP had already given two years time to all money changers to apply for getting a license of an exchange company and to fulfill all other legalities necessary for this transformation. Khanani & Kalia has the distinction to be the first forex house of Pakistan which was issued the exchange business license in 2002 and successfully transformed itself in an exchange company with all its existing eight branches on March 23, 2003.

The banks are also allowed to run this business. However, it is to be noted that the banks are not allowed to set up exchange companies on their own rather through subsidiaries. In this connection, a few banks including National Bank of Pakistan and PICIC have already started business operations. 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 SBP export of non-dollar currencies to Dubai by the money changers. 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 high. The exchange companies are allowed to franchise their business as well. It implies that the money changers which due to insufficient funds for meeting the paid up capital requirement to set up an exchange company, may take the advantage of getting their business regularized by taking franchise of existing exchange companies in the country.


The paid up capital requirement of Rs100 million for conversion from money changers to exchange companies is being felt as a major concern among the money changers. The present paid-up capital requirement for a money changer having multiple branches is Rs5 million. It is generally felt that if the paid up capital requirement of Rs100 million remains unchanged, majority of the money changers will be forced to close down their business. It is, however, feared that a good number of them after being out of business may operate under ground business which may open a grey market for money exchange in the country.

If a grey market is allowed to grow that may become more harmful then those who were doing business as money changers.




Though the idea of exchange companies came from the central bank, yet it was actually the brain child of the IMF for putting an effective check on the illegal cross border transfer of the money. There was a need to take serious action against all those financial institutions having links with the terrorists or their organizations in moving illegal funds or supporting the attacks financially. An operation was conducted to combat against money laundering and to confirm the connections of illegal money changers and Hundi operators with the terrorist organizations. Consequently, many of the money related business in different countries were banned. A list of suspicious names was also published with strong recommendations to thoroughly check the nature of transactions being performed by them. Conversion of money changers into exchange companies was in fact the idea floated by leading world financial institution with a perspective that with this mechanism, not only all transactions will get transparent but on the other hand will be lot more easy to stop the illegal activities carried out by the so-called money transmitters who were playing a major role in supporting terrorist organizations all over the world.


With the transformation into an exchange company, the money changers are now allowed to world with a broader range of services for their customers. The exchange companies along with their core business of currency buying and selling are now allowed to transit funds of their customers and in and out of Pakistan, making Demand Drafts, money orders and issuing Travelers cheques. This has opened new doors for the exchange in promoting their business among new segments of market, increase the size of their target markets and above all, a more prominent role in the economic set up of the country.