Exchange companies to be consolidated into one category under SBP reforms

KARACHI: The State Bank of Pakistan (SBP) unveiled a set of reforms related to exchange companies on Wednesday, citing frequent regulatory issues and weaknesses, especially in the operations of exchange companies in category B as well as franchises of exchange companies. 

In a circular, the central bank stated that since the desired level of quality of governance, internal controls and compliance with laws and regulations has not been achieved, structural reforms were necessary. 

There are two categories of exchange companies, A and B. Exchange companies in category A have a higher minimum capital requirement — Rs 200 million — while those in category B have a lower minimum capital requirement of Rs 25 million. The latter can only act as money changers. 

Under the SBP’s reforms, all exchange companies in categories A and B along with franchises of exchange companies will be consolidated and transformed into a single category with a well-defined mandate.

Thus, the central bank has given category B exchange companies three options: merge into an existing exchange company, upgrade from category B to an exchange company, or merge with other category B exchange companies to form a single exchange company. 

The SBP has also raised the minimum capital requirement for exchange companies to Rs 500 million (free of losses), saying this will strengthen their solvency and infrastructure.  

Category B exchange companies have been given one month to approach the SBP and obtain a no-objection certificate (NOC) for one of the three options. “All such applications for NOC must contain a conversion/merger plan, proposed shareholding structure, particulars/information/affidavit of shareholders and directors, as per Annexure 2AI and 2AII of Exchange Companies Manual (ECM), and board resolution(s) of the relevant company(ies), where applicable,” the circular stated. 

After receiving the NOC, category B exchange companies will have three months to complete the regulatory and legal requirements for a formal licence to begin operations. If they fail to do so, their licences will be cancelled. 

Meanwhile, franchises of exchange companies have been offered two options: either merge with the franchiser exchange company or sell the franchise to it. 

In either case, the franchises will have one month to approach the central bank for approval of the merger or sale. If they do not, their licences will be cancelled. 

Besides this, the SBP also stated that banks involved in the foreign exchange business will set up wholly owned exchange companies for the public. 

The central bank said the reforms will bring transparency and competitiveness and strengthen governance, internal controls, and compliance. 

The reforms come a little over a year after the SBP suspended the operations of several branches and franchises of exchange companies over regulatory violations. The central bank had launched a crackdown against exchange companies on apprehensions that they were not selling foreign currency to customers despite availability, leading to exchange rate volatility and a wide difference in rates offered in the interbank market and those quoted by the companies and commercial banks.