KARACHI: In the midst of an intensified crackdown against foreign currency smuggling and illicit hawala-hundi operations, the State Bank of Pakistan (SBP) has unveiled a series of stringent measures aimed at reforming the currency exchange sector. Currency exchange companies categorised as ‘B’ have been given a three-month ultimatum to either transform into full-fledged exchange firms or face the prospect of losing their licenses.
The SBP’s move comes in response to concerns over the weak operational structure and inadequate compliance levels observed within category ‘B’ exchange companies. The central bank has now advised both category ‘B’ firms and franchisees to either merge with established full-fledged entities or sell their businesses to stronger counterparts. Failing to comply with this directive within the stipulated three-month window will result in the automatic cancellation of licenses for standalone category ‘B’ firms.
In addition to this, the SBP has opened the door for leading banks to “establish wholly owned exchange companies to cater to the legitimate foreign exchange needs of the general public,” as outlined in a circular.
Earlier, the Exchange Companies Association of Pakistan (ECAP) raised concerns with the SBP regarding plainclothes policemen visiting exchange companies in Gujranwala, alleging violations of the law and unwarranted monitoring of currency transactions.
In a separate circular, the SBP has mandated that exchange companies increase their paid-up capital to a minimum of Rs500 million (excluding losses) by December 31, 2023, up from the current minimum requirement of Rs200 million.
These structural reforms have been introduced at a critical juncture when the caretaker government has launched a crackdown on foreign currency smugglers and hawala-hundi operators. These illicit activities have contributed to severe leakages in foreign exchange reserves, jeopardising the ability to meet import needs and service maturing foreign debt obligations.
Under the existing market-based exchange rate regime, the Pakistani currency has suffered a cumulative depreciation of over 6%, equivalent to Rs18.50, since the installation of the caretaker government in mid-August. This depreciation has driven the currency to an all-time low of Rs307 against the US dollar in the interbank market. In a circular, the central bank stated, “These reforms have been introduced to provide better services to the general public and bring transparency and competitiveness to the exchange companies’ sector.”
Speaking to Daily City News , Zafar Paracha, General Secretary of ECAP, revealed that there are nearly equal numbers of category ‘A’ and category ‘B’ exchange companies, however, there is a substantial difference in the scope of operations between the two.
Category ‘B’ companies are limited to currency exchange activities, while category ‘A’ companies are authorised to engage in importing and exporting foreign currencies, facilitating international remittances, selling foreign currency in the interbank market, and supplying US dollars to commercial banks to settle international payments made through credit cards.
The SBP’s circular notes that regulatory issues and weaknesses have been observed in the operations of category ‘B’ exchange companies and their franchises over the past few years. These issues have centred on deficiencies in governance, internal controls, and compliance with laws and regulations, necessitating structural reforms in the sector.
As part of these reforms, various types of exchange companies will be consolidated and transformed into a single category with a well-defined mandate. Category ‘B’ exchange companies have three options within the next three months: they can merge with existing exchange companies, upgrade from category ‘B’ to full exchange company status, or merge with one or more category ‘B’ companies to establish a new exchange company.
