New business line sees forex trading profits hit Sh357m

Forex bureaus grew their collective profits rapidly last year even as players in the industry complained of increased competition forcing thinner revenue margins.

Central Bank of Kenya said the sector’s profits before tax shot to Sh357 million at the end of December compared to Sh27.5 million in 2012 partly due to adoption of agency banking.

The bureaus asset base (mainly cash holdings used as working capital) also recorded a jump to Sh2.7 billion from Sh2 billion over the same period. The sector recorded the growth in spite of 11 bureaus closing shop last year leaving 101 outlets.

“Most bureaus have a better portfolio mix; they have new products such as agency banking while also enhancing their operation efficiency,” said Joe Muriuki, the chief executive officer (CEO) of the Kenya Forex Bureaus Association.

Mr Muriuki also attributed the performance to a stable exchange rate which allowed for more transactions unlike in 2011 and 2012 when the shilling was volatile, causing some clients to stay away.

Bureau owners said the diversification was necessary for them to keep afloat as competition in the business, especially from banks, grew forcing them to reduce their margins. Commercial banks have invested more in their forex desks as they push for more non-interest income.

Some of the bureaus have diversified to offering M-Pesa services and signing contracts with banks to serve as agents.

READ: Forex bureaus target M-Pesa business in search for new revenue streams

Central Bank attributed the drop of forex bureaus to some of them opting to convert to money remittance providers while others succumbed to higher regulatory requirements put in place by CBK.

In 2011 CBK introduced new regulations for the sector which included higher capital requirements and limits on individual ownership to one bureau.

Owners of forex bureaus were required to increase their core capital to $60,000 from $30,000, which translates to Sh5.2 million from Sh2.6 million at current exchange rates.

CBK also doubled the minimum balance that forex bureaus must maintain to $4,000 from $2,000 (Sh350,000 from Sh175,000). The bureaus also put $30,000 (Sh2.6 million) non-interest bearing deposit with CBK.

“We have been lobbying that the deposit be substituted with other instruments such as bank guarantees,” said the forex bureaus association vice- chairman Tom Muchina.

Mr Muchina argues that the requirements deny the sector a cumulative Sh260 million which can fuel faster growth.

Last year CBK introduced new business of money remittance providers who are allowed to send and receive money across the country’s borders.

Forex bureaus had hoped to be included among the remittance providers but a last minute change of the Bill which they had helped formulate locked them out.

Forex bureaus are not allowed to serve as channels of remitting money to or from the country. The money transfer business has proven to be quite attractive in the country due to the commission income and as a source of cheap deposit.

Forex bureaus would also benefit from exchange margins as the recipients convert the amount remitted to local currency.

Some of the bureaus have invested additional capital to convert to money remittance to ensure they enjoy the lucrative business.

The bureaus were previously the major agents of the Hawala system of sending money which the government has been trying to regulate in an effort to curb illicit money flowing into the country.

Kenya has been in the spotlight over the last few years due to use of its system by criminals to launder money.

The government has criminalised money remittances into the country by any other channel apart from the remittance providers, banks, microfinance banks and Post Bank. To attract business the bureaus are also offering better exchange rates, taking away the business from rivals.