Are banks, forex bureaus fueling foreign exchange black market?

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A client counts money after a transaction at downtown forex bureau. / File.

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Derrick Kabayiza

The local forex market has grown over the past decade with dealers now spread across the city and some upcountry towns like Musanze.

The sector also formed an umbrella body, Rwanda Forex Bureau Association (RFBA), seeks to help streamline forex exchange business in the country.

The business is basically carried out by commercial banks and forex bureaus that are licenced by the central bank, which is the sector regulator.

However, the sector has also been infiltrated by illegal dealers that operate on the black market in city alleys and shops. This market should, however, be of concern to Rwandans. But we need to understand that its growth and survival thrives on the shortcomings and greed of recognised operators of forex dealers, including banks. For instance, it is difficult to buy foreign money in banks as many of them always claim to be short foreign currencies.

Similarly, their exchange rates are often so low that only a person who is not informed about the small dealers’ rates will buy/sell foreign currency to banks.

It is such practices that have made banks less competitive in comparison to other forex dealers. This might not be surprising because, in the past, banks have succeeded thanks to protection from State and not because they offered better services or rates.

That’s why the majority of Rwandans and visitors will prefer other forex dealers to commercial banks as they better exchange rates.

Besides, one is most likely to experience excellent customer service with forex dealership in downtown Kigali or in suburbs like Gisementi and Kimironko as opposed to unfriendly bank staff.

Small denominations

However, these players have an unnecessary handicap. Despite the fact that all foreign money denominations have the same purchasing value, the dealers unnecessarily pay lower rates for smaller denominations. For example, when you have say $50 or $100 bills, the day’s exchange rate will apply (the current rate is averaging 838/843 to the dollar buying and selling), but denominations like a $10 bill may be quoted at far less of about 823 per dollar or less, which leaves a huge difference. This stance has forced some prospective customers to the black market where rates are always higher.

One wonders whether this practice (quoting different rates for smaller and bigger denominations) is a question of bad business sense or fueled by the need to cheat that has blinded forex dealers or both.

The days when travelers had to conceal foreign currency at entry points are long gone, and Rwandans or visitors should not be cheated as this practice is not supported by any law.

As a matter of fact, many travelers prefer smaller denominations to bigger ones out of fear of counterfeits.

So, as long as forex dealers and banks continue to offer lower rates for smaller denominations, the black market will continue to thrive.

This should concern sector players, especially RFBA, as well as other stakeholders and the regulator, to act.

Other factors that drive the black market

Black markets typically spring up in any country that has the following common characteristics:

l Weak economic fundamentals, such as a high rate of inflation and limited foreign exchange reserves.

l Strict currency controls that limit the amount of foreign currency available to residents.

l A fixed exchange rate regime where the domestic currency is pegged at an unrealistically high exchange rate to the US dollar or another global currency.

l A lack of confidence among the citizenry in the value of the domestic currency.

As a result, substantial demand for foreign currencies is created in a country with the above attributes, as its citizens seek to hedge the value of their cash holdings.

However, the currency controls make it extremely difficult for people to buy foreign currencies with the domestic currency at the official exchange rate.

A black market, therefore, develops for foreign currencies that would generally be priced at a significant premium to the official exchange rate, because of its artificial value and the demand-supply imbalance.

The author is a banker