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FOREX BUREAUS FIGHT CAPITAL INCREASE
BY ABDEL AZIZ NOSSEIR
They deal in money, but, when push comes to shove,
they don’t have enough of it to stay in business. Small foreign
exchange bureaus unable to meet the government’s new paid-in
capital requirement are facing closure, but several amongst them
say they don’t plan to go down without a fight. “We
have no other place to go but the courts,” says the owner
of a forex bureau who filed a lawsuit after authorities shut down
his company. “We’re not trying to antagonize the government...
we’re just defending our business.”
The Central Bank of Egypt (CBE) gave the nation’s 126 forex
companies one year to meet the £E 5 million paid-in capital
requirement outlined in Law 93/2005. The grace period ended on June
21, 2006 with dozens of forex bureaus still undercapitalized. Most
were forced to close.
Mohamed El Karaksi, operations manager at Suez Canal Bank, says
the capitalization requirement aims at bringing more stability to
the historically volatile forex market. “According to its
commitments to international agreements, the government must keep
the Egyptian pound floated,” he says. “So the best way
to keep the forex market stable and under control is to retain only
those big companies that can perform according to the CBE’s
operating regulations, and remove those small ones that can’t.”
To date, about 450 people have lost their jobs as a result of the
closures, says Mohamed El Abyad, head of the forex division at the
Federation of Egyptian Chambers of Commerce (FECC). It’s a
figure he knows all too well; his own company, El Abyad for Exchange,
was shut down in June for failing to meet the capital requirement.
The £E 5 million capitalization requirement is excessive,
El Abyad insists. He points out that many forex bureaus average
less than £E 500,000 in daily operations, so have little need
for £E 5 million paid-in capital. The only thing to do with
all that extra money, he adds, is put it in the bank where it will
be dead capital.
Previously, forex companies needed only £E 1 million paid-in
capital. Momentum to increase this amount began gathering as the
country’s forex bureaus came under attack for causing instability
in the currency market. They were blamed in 1999 for a dollar shortage
and for inflating the exchange rate after the floating of the Egyptian
pound in January 2003. In response, the government required forex
bureaus to be affiliated with a bank and restricted them to buying
and selling currency at the CBE’s official exchange rates.
To further rein in the industry, the Unified Banking Law, passed
in 2003, required forex bureaus to raise their paid-in capital to
£E 10 million. Some sued, claiming the law discriminated against
smaller operations. While an administrative court ruled that the
CBE should not suspend the operations of undercapitalized forex
bureaus, the case was referred to the Constitutional Court and is
still awaiting a verdict.
In the meantime, the cabinet passed Law 93/2005, which decreased
the capital requirement to £E 5 million and gave companies
until June 21, 2006 to comply. The CBE moved immediately to suspend
the activities of all forex companies that failed to meet the deadline.
“Forex companies that did not comply had to close because
if they didn’t, it would be a violation of public funds –
dealing in foreign money without a permit from the CBE,” explains
El Abyad.
Many small companies, which feel the law aims to put them out of
business, see little recourse available. One option is to find an
investor, though El Abyad suggests this is difficult because foreign
investors are not permitted in this sector and profit margins have
thinned as a result of the CBE setting currency exchange rates.
“If I had £E 5 million, I wouldn’t put it in a
forex bureau,” he says. “I would rather put it in a
bank and take the interest. With the current market conditions,
salaries, rent, electricity and 20-percent investment taxes, I don’t
think it’s worth it.”
Another suggestion is to merge the closed forex bureaus and pool
capital. But under that arrangement, El Abyad points out, each branch
would be held accountable for its partners’ actions. A possible
scenario where a bureau is forced to close because an affiliate
commits a wrongdoing has discouraged such mergers.
Tamer Shaker, who had to shut down his forex company, Golden Marriott
for Exchange, voices deep displeasure with the new law. “We
started our business in 1997 with £E 1 million and we got
the license after meeting all the requirements,” he says.
“It is unconstitutional to come now and tell me to increase
my capital or close. They should not coerce us to do it.”
Shaker has sought legal action. And he is not alone. He, along with
11 other forex bureaus, filed a class action suit against the CBE
to overturn Law 93/2005.
Mohamed Amin, the lawyer representing the 12 forex bureaus, argues
that the law is unconstitutional because it infringes on personal
property and it was not given due process. “When the People’s
Assembly approves a law... there must be a two-thirds majority and
the approval should be written, not verbal or by raising hands,
and this did not happen when this law was approved,” he says.
While Shaker remains optimistic that the final verdict, expected
July 29, will be in his favor, he is ready for the worst. “If
the verdict is not in my favor I will have to liquidate assets to
comply with the new law,” he says, indicating that merging
with other forex bureaus is not a viable option.
Critics of the new capitalization requirement argue that the forex
climate has improved dramatically compared to several years ago,
rendering the provision obsolete. A better approach, according to
Alaa Abou Alam, a financial economist, would be to calculate a required
paid-in capital proportional to a company’s volume of operations.
“Why would a small forex bureau in the countryside need £E
5 million in capital?” he wonders.
The new law may have the opposite of its intended effect of cutting
down the number of forex merchants, Abou Alam notes. Instead, he
suggests, the law may push merchants who cannot afford the paid-in
capital into the black market. It could also discourage investors.
“This is a bad sign for foreign investors because nobody will
trust a system that puts laws in effect that are retroactive on
projects established years before.”
Like many, Shaker feels the paid-in capital requirement adds yet
another layer of bureaucracy to an industry struggling to stay afloat
in a sea of red tape. Already, CBE authorities make monthly visits
to verify that forex bureaus are using official exchange rates.
Bureaus must also report client information on transactions greater
than $5,000 pursuant to money laundering rules. “All these
restrictions are making business uncomfortable,” he complains.
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