Thinning the ranks
Foreign exchange bureaus struggle to meet the requirements of a new banking law. Niveen Wahish reports
A debate has been raging since last year over the new banking law's articles that deal with foreign exchange bureaus. The law, when first submitted to parliament for consideration, had stated that foreign exchange bureaus must raise their capital to LE20 million. Representatives of foreign exchange bureaus dubbed this figure as outrageous, and by the time the law was finally ratified, the capital required of foreign exchange companies was lowered to LE10 million. But the companies themselves view even this amount as unrealistically high. When the companies were first established under a 1991 law legalising them, the minimum capital requirement was only LE1 million.
Mohamed El-Abyad, head of the forex division in the Federation of Chambers of Commerce, argues there is no reason why forex companies would need LE10 million in capital. "A capital of that size would not be utilised," he said. Currently, forex bureaus' daily operations never exceed LE100,000, he explained. "The rest of the capital would be sitting in the safe." The forex division had prepared a study earlier this year which showed that a minimum requirement of LE3 million to LE5 million would be more reasonable. El-Abyad believes that such large capital reserves would encourage these companies to undertake risky speculation.
But whether they like it or not, forex bureaus are obliged to abide by the new law or risk being closed down. The Central Bank of Egypt recently informed forex bureaus that they have six months to comply with the new regulation, which according to El-Abyad, is not enough time to accumulate the necessary capital.
The options available to forex bureaus are limited: raise their capital or close their doors. Companies who cannot increase their capital also have the option of merging together to form larger entities. But that would mean that companies would have to annul their current licences and acquire a new one, an arduous process, and one El-Abyad estimated few would willingly do.
The new capital requirements are expected to drastically shrink the number of forex bureaus operating in the market by 90 per cent. Already the number of forex companies has dwindled to some 73 companies as compared to 126 which previously did business. The licences of some were withdrawn for legal infractions, while others have been closed down by administrative orders.
During the past two years, forex bureaus were often pointed to as the source of speculation over the pound and one of the reasons why it has been continuously losing ground against the dollar. Since the pound was allowed to be traded according to market forces last January, the hands of forex bureaus in setting exchange prices were tied down. They are only allowed to sell or buy at the same rate as any bank they choose to sign a contract with, which El-Abyad says "goes totally against the idea of letting market forces set the value of the pound". Before the floating of the pound forex bureaus were allowed to set their own rates. The system tying forex bureaus to banks according to El-Abyad has proven unsuccessful particularly since the exchange rate of the pound differs noticeably from one bank to another. This means that some forex bureaus were luckier than others as a result of the fact that in theory, the difference in forex rates between banks should not exceed a fraction of a piastre, but in practice is often one of a few piastres.
"It's pointless to cut forex bureaus out of the market," El-Abyad said, stressing that they complement banks. "It would be too costly for banks to open up branches everywhere," he said.
