SBP unveils structural reforms in exchange companies sector to strengthen controls

KARACHI: The State Bank of Pakistan (SBP) on Wednesday said it would introduce structural reforms in the Exchange Companies' (ECs) sector to strengthen controls amid the massive fall in rupee's value in the open market.

“As part of the reforms, leading banks actively engaged in foreign exchange business will establish wholly-owned ECs to cater to the legitimate foreign exchange needs of general public,” the central bank said in a statement.

“Furthermore, various types of existing Exchange Companies and their franchisees will be consolidated and transformed into a single category of Exchange Companies with a well-defined mandate”

In addition, the SBP raised the minimum capital requirement for EC to Rs500 million from Rs200 million, raising the barrier to entry for the private sector.

"During the last few years, frequent regulatory issues/weaknesses have been observed in the Exchange Companies’ sector, particularly in the operations of ECs-B and franchises of Exchange Companies," the circular issued to the Chief Executives of all ECs and ECs-B reads.

Since the desired level of quality of governance, internal controls and compliance with laws and regulations has not been achieved, there is a need for introducing structural reforms in the sector, it added.

The SBP said the ECs of category 'B' (ECs-B) and franchisees of exchange companies have been offered options to transform into mainstream exchange companies. “ECs-B may graduate to exchange companies after meeting all regulatory requirements, within three months; otherwise, their license would be cancelled,” the statement said.

It added that franchisees of exchange companies may either merge or sell operations to the concerned franchiser company, within three months after meeting all regulatory requirements. For these purposes, “the ECs-B and franchises of exchange companies will submit their conversion plan and seek NOC from SBP within one month”.

SBP may, after scrutinizing the application, grant or refuse to grant the NOC if the applicants do not meet the regulatory requirements. The licenses of ECs-B, which do not approach SBP for the NOC within the stipulated time period, shall stand cancelled after the expiry of one month’s deadline, the notice further stated.

Franchises, exercising the option of merger, will approach the concerned exchange company providing it with the relevant details to submit the application to SBP, within one month of the issuance of this circular, along with the relevant documentary requirements.

SBP may, after scrutinizing the application, grant or refuse to grant the approval for the merger. In case of the sale of franchises by the franchisees, the concerned Exchange Company would also approach SBP, within one month of the issuance of this circular, along with relevant regulatory documentation for conversion of the franchise license to branch category. SBP may, after scrutinizing the application, grant or refuse to grant the approval for the conversion of a franchise license into a branch, it said.

The licenses of all those franchises, which do not opt for either merger or sale within the aforesaid stipulated time period of one month would stand cancelled, it further noted.

The SBP said the reforms have been introduced to provide better services to the general public and bring transparency and competitiveness in the exchange companies' sector. "This is expected to strengthen governance, internal controls, and compliance culture in the sector," it added.

The development comes as the gap between the inter-bank and open-market rates widened to over sharply in recent weeks, well above the prescribed limit by the International Monetary Fund (IMF).

The IMF has been pressing the SBP to take measures to narrow the gap between the two rates, which has been widening due to a shortage of foreign exchange in the country.