The biggest shake-up in the country’s exchange house industry in more than 20 years is expected to trigger a wave of consolidation across the sector.
The legislation introduced by the Central Bank of the UAE this week, its first major review since 1992, raises the minimum capital required to operate exchange houses as well as tightening categories of business licences.
“The regulations allow for a two-year timeline for existing companies to comply,” said Promoth Manghat, the vice president of global operations at UAE Exchange. “But the cost of managing this business, including the cost associated with complying with the regulations, has come up and may trigger some small players to be pushed out.”
Exchange houses have boomed across the Emirates as the number of expatriates increases and more people send money to their home countries.
The capital requirement of Dh5 million under the new rules for exchanges wishing to offer remittance services inside and outside the country was still low compared to other GCC countries such as Oman, said Osama Al Rahma, the chief executive of Al Fardan Exchange and chairman of the Foreign Exchange and Remittance Group, an association of more than 50 exchange houses.
“This means a better future for the industry. It means more clarity in performance and companies and more adequacy in capital,” Mr Al Rahma said.
“It will allow businesses to run their business in a more rational and objective way in the long term rather than price wars for the sake of competing for customers in the short-term.”
Acting as the shadow banking system, the exchange industry handles billions of dollars in transactions every year on behalf of people paying wages, bills or sending money overseas.
Under existing capital requirements dating from 1992, exchange houses with an unlimited liability are required to have a minimum capital of Dh1 million to operate as a money exchange business and Dh2m as a money exchange and remittance business.
The capital requirement rises to Dh50m if the business wants to operate with limited liability, meaning the company is liable only up to a limit of that amount.
But the industry has changed since 1992, with new services and products introduced offering customers the ability to make transactions via ATMs, the internet and mobile phones.
Some larger exchange houses have also branched out to offer customers access to products sold by other financial companies such as investment in bonds and other savings schemes.
Inevitably, larger exchange houses have the ability to invest more in compliance with rules than smaller players.
“The introduction of these new rules shows the significance and importance of this industry, on the economy and how the regulators are managing the business,” Mr Manghat said.
The new rules had been under planning by the Central Bank for several years and were not a direct reaction to the recently reported troubles with Asia Exchange and Al Hilal Exchange, Mr Al Rahma said. “The majority of exchange houses have been thinking about how to better protect themselves, he said.
In May, the banking watchdog revoked the licences of two exchange houses. Al Hilal Exchange and Asia Exchange Centre for committing “major regulatory violations”, the regulator said at the time. Al Hilal Exchange also breached anti-money laundering compliance rules, the regulator added.
A surge of government spending and new projects across all sectors in the region has provided a boost for remittances.
“It’s been growing in a healthy way, not registering growth in the same way as in the past but due to volatility in the Indian rupee and the Egyptian pound and geopolitical issues in certain Arab countries,” Mr Al Rahma said.
“But there is growth within the construction industry, retail, hospitality and tourism.”
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