Dollar shortage mints more forex bureausMonday February 27 2023
The local forex bureau business is flourishing as the trade finds itself in between a Shilling free fall and forex strife characterised by foreign currency demand-supply mismatches.
This has seen licensed forex bureaus expand operations by opening new outlets as the trade finds a sweet spot in the exchange rate volatility.
According to data from the Central Bank of Kenya (CBK) to December 2021, the number of licensed forex bureaus stood at 68 with 118 outlets between them, a 10-year high since 2011 when the number of forex bureau outlets stood at a similar number.
The expansion of forex bureaus has come on the backdrop of a weaker local currency which has for instance been on a decline for the last three consecutive years against the US dollar, recording losses of nearly 20 percent in the period since the end of 2019 according to official CBK data.
A directorate of forex bureau members from the Kenya Forex & Remittance Association places the number of forex bureaus at 119 at present.
“The only business anybody would want to invest in right now is in forex bureaus to take advantage of the volatility in the exchange rate. The basic driver of growth is the forex exchange situation in the country where demand is outstripping supply,” notes the CEO of the Kenya Forex & Remittance Association Mohamed Nur.
An analysis of the forex bureau directory shows the distribution of outlets has moved away from just the Nairobi Central Business District with the bureaus mushrooming in high-end residences and malls such as Lavington, the Hub and Ridge Ways.
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Nur attributes the shift in the distribution of forex bureaus to the expanded demand for foreign currency and in particular dollars with the dollarisation of payments including rent, school fees and even retail purchases forcing many, especially the rich to obtain hard currency.
“The demand for foreign exchange is no longer localized and the dollar is now demanded even in estates. The affluent want to change their money to dollars,” he added.
While banks remain the primary dealers in the foreign exchange market, forex bureaus have been able to carve a niche for themselves by selling forex at a discount to bank rates.
“Forex bureaus are making use of the difference in exchange rates between commercial banks and the open market. For example, NCBA Bank is buying a dollar at Sh124 and selling it at Sh137, and a forex bureau can buy a dollar at Sh127 in the open market and sell it at Sh134. This gives them a competitive advantage of Sh3 on each side against the banks, allowing them to earn a profit of Sh7 for every dollar,” said FXPesa lead market analyst Rufas Kamau.
Forex bureau outlets are however not expected to appear at every street corner given the tight regulations prescribed by the CBK which has seen at least 60 forex bureau outlets close shop between 2012 and 2021.
For instance, the CBK Forex Bureau Guidelines require persons transacting in the business to have a minimum core capital of not less than Sh7.6 million ($60,000) and have sufficient funds to meet the requirement of non-interest bearing deposit of Sh3.8 million ($30,000) by the CBK.
Forex bureaus were established and first licensed in Kenya in 1995 with the goal of fostering competition and narrowing the exchange rate spread in the spot foreign exchange market.
The forex bureaus are expected to keep thriving under current market conditions even as competition between the entities and banks is expected to find new ground for the volatile foreign exchange market.
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“As long as there is a difference in exchange rates between the open market and official rates set by CBK, there will be opportunities for forex bureaus to make a profit through arbitrage,” adds Rufas Kamau.
“The free market will eventually normalize rates as bureaus compete with each other for arbitrage opportunity.”