Earning 'good house keeping seal'

The State Bank, as a regulator of foreign exchange business in the country, often blows hot and cold over the working of foreign exchange companies. While they have licences to undertake the sale and purchase business of foreign exchange, they are generally accused of various kinds of misdemeanours, including violation of rules prescribed by the State Bank and certain mal-practices like money laundering and speculation to enhance their profits.
About a fortnight ago, the State Bank Governor had summoned the heads of these companies to remind them that it had been a year since they were asked to induct professional management, computerise their branches and promote a corporate culture.
However, SBP inspection reports indicate that they had done very little in this regard. Most of these companies had up to 90 percent of their family members on their boards of directors, which was not acceptable. Some of the companies had CEOs who were non-graduates and even non-matriculates, whereas they were supposed to induct professionally skilled people in the top management.
While the Governor was reported to be polite but firm, his deputy was stated to have been straightforward.
After lamenting that some of the foreign exchange companies were still involved in business mal-practices, he was reported to have told them not to pose innocent as if they were doing no wrong. They were asked not to insult the intelligence of the State Bank by thinking that its officials did not understand what was happening in the market.
We have indeed travelled a long way in terms of foreign exchange management. Prior to liberalisation of the foreign exchange regime in the early 90's, people going abroad had to obtain 'P-forms', from SBP, prior to getting forex from banks. It goes to the credit of Nawaz Sharif government for permitting SBP to license money-changers and bring this business from back alleys out in the open on main avenues. Obviously, people having structural linkages within Pakistan and with counterparts abroad were the first to get these licences.
They were forced to register with the tax authorities as a condition for the SBP licence. Later to close the gap between official and open market rates, SBP took on itself the responsibility to get the 'big boys' among the money changers to become exchange companies in order to start documentation of their operations. This challenge is as difficult as CBR's attempt to get the retailers to register for income and sales tax in order to reduce the size of the undocumented economy.
To preside over a business concern if one is not a graduate is certainly no crime and should not be regarded as such. Besides, there is no doubt that it is better to have professional management, computerised records and online branches and to develop a corporate culture.
It is a slow process that requires infusion of substantial resources, which at times are not readily available. The very fact that there is a cut-throat competition among money- changers would induce them to keep costs as low as possible. It will take a pioneer to convince them of the pay-off that comes from high-tech operations and professional management. Those who do not adopt modern practices would automatically be thrown out of the market. A participatory approach is always preferable than dictation from outside. We do not mean to say that the State Bank should not try to streamline the business of foreign exchange companies or be lenient with the companies flouting the law but only to advise that unnecessary regulation and reproach could also be counter-productive.
More important than this is the necessity to understand the background of the foreign exchange business in the open market. Hundi or Hawala market in Pakistan was essentially the product of a stringent foreign exchange regime requiring permission from the central bank coupled with inefficiency of the banking system and overvaluation of Pak rupee over a long period of time. Although illegal, this market continues to thrive not only because of better rates offered but due to hassle free and quicker delivery of funds, with flexibility in working hours. The competition in the informal market at times is so intense that even on the door-step service is offered to the clients. We cannot suppress this activity by force and regulations albeit the Hundi/Hawala activity has greatly reduced after 9/11 amid fears that Muslims are being targeted by the US government. But the demand will continue to exist due to low level of education in our expatriate work force and loopholes in the tax system.
There is no doubt that exchange companies and money-changers must be obliged to follow a certain discipline and upgrade their services by bringing in more professionals and technology in their business. They also need to strengthen their in-house auditing system. However, this should preferably be done with a persuasive approach. If the State Bank acts in haste and pushes them too hard, the exchange business handled by these companies could be diverted to the alleys once again.
The process of induction of Pakistani bankers from foreign banks into local banks, started six years ago, in order to upgrade the skills level and bring them at par with western banks. Similarly, it will take time for exchange companies to learn that the SBP licence is a 'good house keeping seal'. It is meant to raise their status in the eyes of regulators abroad and also give them respect in society.