5 Foreign Exchange Banking in PK Guide
CHAPTER - V
Foreign Remittances
Foreign remittance can be defined as an act of transferring money from one country to an other. Bank issue remittances on behalf of the customers after receiving value of remittance, related charges and Govt taxes. Remittances payable within country are called �inland remittance. Remittances payable outside the country and received from foreign countries are called �foreign remittances.
Foreign remittances are not only source of funds for the banks but also play a very significant role in enhancing foreign exchange reserves of the country.
A discussion of foreign remittances
Foreign inward remittances have been prominent features of the Pakistan�s economy for many decades. It is often argued that remittances have played a stabilizing role, particularly during the Asian crisis when remittance flows have supported household expenditure and offset the sharp reduction in capital inflows.
Pakistan is a major exporter of manpower, possessing the one of the very high rate of out- migration relative to population many countries. The volume of departing Overseas Pakistani Workers have broadly matched the increase in the domestic labor force over the past 40 years.
This process reflects a range of factors. Creation of employment has generally not kept pace with the increase in the population. Relatively modest economic growth has also contributed to widening wage differentials with advanced economies.
Pakistan is now one of the world�s largest recipients of foreign remittances in absolute terms, behind India, Mexico and Philippine. Aside from exports of goods, remittances are the largest source of foreign exchange for the Pakistan. It is relatively stable source of foreign exchange compared to foreign direct investment and other private capital flows. Traditionally, a large proportion of our overseas labor force comprised workers in the construction and manufacturing sector. According to an estimation, the proportion of income from abroad as a share of total household income is increasing faster than the income generated locally. Labor force migration is largely a lower and middle class phenomenon in the Pakistan. Income
from abroad is less important for the higher income decides.
The positive and negative impact of foreign remittances on the economy
There are different views about remittances affect on economic activities:
1. Some of the negative views about remittances & migration of labor
can be seen as a financial counterpart to migration, which can offset
some of the output and other losses that may be associated with the
loss of skilled workers, the so-called �brain drain.� The extent and
economic impact of the brain drain is itself controversial. Some studies
have challenge the negative view that migration of highly skilled workers
is detrimental to those left behind. Further in developing countries like
Pakistan, India and Bangladesh, where rate of unemployment is very
high, migration of human resource, effects positively on their economy.
2. Some peoples argue that, emigrant can also result into resource
transfers. Take example of, Chinese population, it has played a
significant role in the acceleration of foreign direct investment into
China in recent years. Other side says that, in fact chines economy
cannot be compared with others. They have a different political and
social system; there is consistence in their economic policies, and
strong capital and economic base.
3. The economic impact of remittances is depending on the proclivity of
the remittance and its division between consumption and investment.
If remittances are used primarily to purchase non-tradable goods, this
could lead to an appreciation of the exchange rate and deterioration
in competitiveness. But in fact remittances that are consumed will
generate positive multiplier effects. The size of this multiplier effect
depends on whether remittances are received by urban or rural areas.
If remittances are received in ruler areas, these are used in investment
rather than consumption.
4. A large portion of the funds received as remittance from abroad are
used in real-estate. Due to investment in real estate, related industries,
such as cement, steel rerolling, aluminum industries etc. are also
flourishing.
5. Local labor force also gets job.
6. Remittance Flows results into stability of Income of lower and middle class.
7. A prominent feature of the Pakistan economy over the last four decades
has been the relative stability in the Forex resources generation, and
increase in per capita income.
From the above discussion we came to the conclusion that, there is no doubt that foreign remittances in the Pakistan are an important source of support, especially for the balance of payments. The volume of foreign remittances send by overseas Pakistani has crossed US dollar 3.5 Billions in the year 2008/ 2009. The remittances have contributed lot in improving balance of payment position of Pakistan.
Further analysis of these factors as important determinants of remittance flows are a topic for future research. Similarly, remittances lead to a growth in the Pakistanis case. After migration of labor, unemployed gets opportunities. Due to the enhanced purchasing power of the families of the overseas Pakistanis, local sale is increased, to meet requirement of the consumption goods, production is increased, and as such, it effects very positively on economic conditions of the country.
SBP role in enhancing Foreign Remittances
SBP being regulator plays very important role in broadening foreign exchange
reserves of Pakistan. With a view to encourage overseas Pakistanis and others to use the normal banking channels for home remittances, and to protect the remitters / beneficiaries from any losses that they may incur due to unwarranted delays in receipts of funds in the beneficiaries accounts,
SBP has put in place a mechanism, which ensures that :
i. In case where the beneficiary is maintaining his account at any branch
at the district headquarters, the amount of remittance shall be credited
within 48 hours (two working days) of the receipt of funds b the bank.
ii. In case where the beneficiary is maintaining its account at any branch
at tehsil or sub-divisional town, the remittance must be credited within
72 hours (3 working days) of the receipt of funds by the bank.
iii. Where the beneficiary is maintaining the account at any branch in a
village / rural area, the remittance must be credited in the beneficiarys
account within 96 hours (four working days) of the receipt of funds by
the bank.
iv. A Complaint and Monitoring Cell has been set up in the State Bank
and in banks which received complaints of remitters / beneficiaries,
who have not been remunerated by the banks on account of delays.
v. Where a tendency is noted by the State Bank on the part of any bank,
either through inspection or on the basis of the pattern of complaints,
to delay the credit in the beneficiarys account, penalties shall be
imposed on such banks under the provisions of the Banking Companies
Ordinance, 1962.
Role of State bank of Pakistan, Banking Services Corporation
(SBP BSC)
State Bank of Pakistan, Banking Services Corporation (Bank) came into existence after bifurcation of State Bank of Pakistan under SBP Banking Services Corporation Ordinance 2001 promulgated by President of Pakistan. It started operations from the 2nd January 2002. Consequent upon establishment of SBP, BSC (Bank), the Exchange Policy Department of the then State Bank of Pakistan has also been bifurcated into two Departments. The operation side comes under the jurisdiction of the SBP, BSC, Bank; the Policy side was shifted to the State Bank of Pakistan and working as a full-fledged Department. Incidentally, title of both the Departments is Exchange Policy Department. The business process and role of this Department in the SBP BSC (Bank), Head office is as under:
Exchange Policy Department (EPD), SBP, BSC (BANK), is an important department of the State Bank of Pakistan, Banking Services Corporation (Bank), Head Office Karachi.
The work of the Department is operational nature for which Foreign exchange offices are set up at 16 field offices in major cities of Pakistan. Administratively, the Department is divided into four Divisions, out of which one is looked after by a Joint Director and remaining three by Junior Joint Directors. These Divisions are again divided into eight units, which are headed by Assistant Directors.
State Bank of Pakistan, Banking Services Corporation (Bank) came into existence after bifurcation of State Bank of Pakistan under SBP Banking Services Corporation Ordinance 2001 promulgated by President of Pakistan. It started operations from the 2nd January 2002. Consequent upon establishment of SBP, BSC (Bank), the Exchange Policy Department of the then State Bank of Pakistan was bifurcated into two Departments. The operation side come under the jurisdiction of the SBP, BSC, Bank, and H.O. Karachi and is functioning as a full-fledged Department. The Policy side was shifted to the State Bank of Pakistan and working as a full-fledged Department. Incidentally, title of both the Departments is Exchange Policy Department.
The work of the SBP BSC (Banks) is operational nature for which Foreign exchange offices are set up at 16 field offices in major cities of Pakistan. Administratively, the Department is divided into four Divisions. These Divisions are again divided into eight units, which are headed by Assistant Directors.
Exchange Companies with Foreign Entities
The mobilization of home remittances is an important business activity for Exchange Companies (ECs). In this respect, Exchange Companies are expected to exercise utmost prudence in implementation of process involved. However, over a period of time, while reviewing agency arrangements of Exchange Companies, certain structural and operational flows / weaknesses have been identified which could damage Exchange Companies ability to effectively effect and mobilize funds from overseas. In order to facilitate Exchange Companies in their diligence process and bring uniformity & discipline in agency arrangements of exchange companies, following fundamental structure of agency arrangements is designed by SBP but overall responsibility of safeguarding interest of the company and avoidance of all related legal, regulatory and commercial risks would rest with the exchange company.
Selection of Foreign Entities
I. Only those foreign entities that have effective customer acceptance
and KYC policies and are effectively supervised by the relevant
authorities should be selected for agency arrangements.
II. No arrangements should be entered into or continued with a correspondent
entity incorporated in a jurisdiction in which it has no physical presence
and which is unaffiliated with a regulated financial group.
III. Particular attention should be paid when continuing relationships with
entity located in jurisdictions that have poor KYC standards or have
been identified by Financial Action Task Force as being �non-cooperative�
in the fight against money laundering.
Essentials of the Agreement
1. The agreement should be for payment of home remittances in PKR only.
2. All funds against home remittances should be received in advance in
Exchange Company�s FCY Accounts maintained with banks in Pakistan.
3. For transactions greater than USD 1,000 the agreement should require
foreign entity to provide address of senders in addition to his/her name.
However, address may be substituted with any unique Identification
Number/ National Identity Number/Customer Identification Number/Date
& Place of Birth.
4. The agreement should be non exclusive meaning thereby that it should
not restrict Exchange Company, directly or indirectly, to offer similar
competing services under other arrangements.
5. The agreement should give ownership rights of all related
accounting/book-keeping and other record to Exchange Company and
the same is be maintained for at least five years.
6. The agreement should not contain clauses which give blanket approval
to foreign entity to assign or transfer their part of the agreement or
any right or duty thereof, to any third party without prior approval of
SBP.
7. The agreement should be in compliance with all the regulations,
instructions, directives, circulars and other communications issued by
the State Bank and contains provision of incorporating any amendments
made therein from time to time.
8. The agreement should ensure compliance of prudent practices and
standard policies related to Internal Controls, Information Technology,
Anti Money Laundering and Know Your Customer etc.
9. The agreement should not compromise State Bank right to terminate
the agreement at any time.
Post-agreement Follow up
1. The Exchange Companies should continuously monitor market repute
and financial condition of the foreign entity to ensure that all the time
during validity of the agreement, foreign entity is capable to meet its
financial obligations under the agreement.
2. Foreign entity should be made bound to immediately bring into notice
of the company any change in laws, rules and regulations which may
effect business arrangements.
3. For any subsequent amendment in the agreement, prior approval of
SBP should be ensured.
4. Foreign entity should also be required to keep EC updated about any
change in its network.
SBP role in controlling inward and outward Foreign Remittances
Chapter X of the SBP foreign Exchange manual deals with Inward and outward Foreign Remittances. The salient features of this chapter are given below:
1. Inward Remittances.
The term inward remittance" means purchase of foreign currencies
in whatever form and includes not only remittances by M.T., T.T., draft
etc., but also purchase of travelers cheques, drafts under travelers
letters of credit, bills of exchange, currency notes and coins etc. Debit
to banks non-resident Rupee accounts also constitutes an inward
remittance.
2. No Restrictions.
There is no restriction on receipt of remittances from abroad either in
foreign currency or by debit to non-resident Rupee accounts of banks
overseas branches or correspondents. Authorized banks may freely
purchase T.Ts, M.Ts, drafts, bills etc., expressed and payable in foreign
currencies or drawn in Rupees on banks non-resident Rupee accounts.
There is also no objection to their obtaining reimbursement in foreign
currency from their overseas branches and correspondents in respect
of Rupee bills and drafts which are purchased by them under letters
of credit opened by non-resident banks or under other arrangements.
3. Outward Remittances.
The term "outward remittance" means sale of foreign exchange in any
form and includes not only remittances by T.Ts, M.Ts, drafts etc., but
also sale of traveler�s cheques, travelers� letters of credit, foreign
currency notes and coins etc. Outward remittance can be made either
by sale of foreign exchange or by credit to non-resident Rupee account
of banks overseas branches or correspondents.
4. Mode of Remittances.
Authorized Banks should avoid issuing drafts in cover of outward
remittances whenever remittance can be made by T.Ts, or M.Ts, etc.
Where, however, the normal means of transfer is likely to result in
unnecessary hardship or inconvenience to the remitter, drafts may be
issued in the name of the beneficiaries of the remittance but such
drafts should be crossed by the issuing bank as "Account Payee only".
5. Prescribed Application Forms.