AFTER two difficult years, exchange companies expect to finish the current year with flying colours thanks to exchange rates volatility.

Net pre-tax profit of all 24 forex companies combined fell about 10 per cent to Rs386 million in 2010 and plunged 31 per cent in 2011 to Rs266 million as volatility in exchange rates witnessed in 2009 somewhat eased in the following two years.

Exchange rates volatility means more transactions and wider gaps between buying and selling rates of dollars and foreign currencies. That is the core of exchange companies’ profitability.

This year their profits may rise because in first six months to June exchange rates were quite volatile. And one cannot be sure if volatility would not hit back again keeping in mind the external sector worries.

But for many exchange companies, especially the big ones, profitability also stems from providing services related to handling of home remittances and outward transactions of foreign exchange for foreign educational or medical expenses or travelling abroad.

A Karachi-based exchange company is even involved in inland transfer of funds under a joint venture with the National Database and Registration Authority (NADRA).

These companies also provide foreign exchange to those going to Saudi Arabia for performing Umrah or Hajj so their business gets a boost in Ramazan and immediately afterwards. During this season they make profits not on big gaps in foreign currencies’ sale and purchase but on their large volumes.

But industry insiders reveal that not all exchange companies reveal their real profits. Central bankers say scarce human resources make it difficult for them to gather the kind of evidence that is required to prove under-reporting of profits.

“ The SBP keeps chasing forex companies that do not comply with its rules in entirety and has suspended business licences of a few of them in the recent past,” remarked an official.

Executives of foreign exchange companies say they have played a historic role in facilitating growth of home remittances and in meeting local demand for foreign exchange.

But they complain that whereas banks receive big incentive from the government for attracting home remittances they are denied of this incentive. Now under the directives of President Asif Zardari a committee comprising SBP officials and representatives of exchange companies is working on a formula to address it.

About two dozen foreign exchange companies help Pakistan get at least 20 per cent of the total $13 billion plus remittances though their own estimate is just double—40 per cent.

They also sell millions of dollars to banks that they bring from Dubai after reselling non-dollar foreign currencies there. The companies themselves buy heaps of these non-dollar currencies like pound, sterling and euro and UAE dirham from people who keep these and other currencies with them as a kind of investment.

“As we speak now exchange companies alone are meeting 100 per cent demand for foreign exchange for Hajj pilgrims and banks are completely free to focus on other areas. That’s a big relief to banks,” boasts president of a leading forex firm.

Our external sector is already in pressure. And recession in the UK and a serious debt and economic crisis in eurozone are big threats to growth in our exports. We ought to keep working on how to sustain the current rising trend in home remittances. “So, our policymakers should not undermine the role of exchange companies. These companies have the capability to literally double its volume of remittances within a few years,” said a former central banker well-versed with their working.

“I have closely watched the transformation of money changers’ offices into what you call exchange companies now. They can bring into banking system a large part of all forex inflows that currently find their way into Pakistan through Hundi or Hawala.

The actual pie of total remittances is almost double the official inflow of $13 billion. If exchange companies and banks work in harmony we can easily raise remittances to $20 billion within two years from now.”

Central bankers complain that exchange companies lack corporate culture. They are not staffed by adequately qualified people.

Many of them lack transparency in business. And in case of some companies it is too difficult to separate their genuine transactions from the fake ones.

On the other hand, executives of exchange companies complain that they are not being allowed to expand their franchise networks on one pretext on the other to facilitate operations of exchange companies being run by commercial banks.

In 2011 three bank-run exchange companies out of the total 24 earned the bulk of industry’s total Rs266 million pre-tax profits.

These were Habib Currency Exchange (Rs66m), Habib Qatar International (Rs47m) and NBP Exchange (Rs44m). Only two privately owned companies Wall Street (Rs38m) and H & H Exchange (Rs33m) chased them.—Mohiuddin Aazim