Loss-making exchange houses being turned into agent banks

Banks are working to turn their exchange houses into agent banks as their overseas operations have largely flopped.

The central bank has so far allowed banks to open 67 exchange houses overseas to facilitate remittance sent to Bangladesh. Of them, 35 are now in operation while 10 closed and 22 did not start the operation at all, according to data from Bangladesh Bank.

As the most exchange houses have flopped, banks are now concentrating their focus on a business model similar to agent banking, bankers said.

BB is allowing banks to go for agency agreement for opening exchange houses to serve non-resident Bangladeshis, moving away from its earlier stance which barred banks to appoint agents for running such branches. 

Under the agency agreement model, a bank starts an exchange house in partnership with a local agency in the host country. The model is similar to the agent banking now flourishing in Bangladesh.

A local resident who runs businesses and has infrastructure in place will be appointed as agent to collect remittance.

Currently, 36 banks have exchange houses in 13 countries and most of which are unprofitable, according to the central bank data.

Higher operational cost is blamed for the loss incurred by banks, which prompted them to adopt alternative business model like appointment of agents, said Selim RF Hussain, managing director of Brac Bank. Banks are mostly facing setback in London for higher operational cost and strict regulation, said a senior executive of BB.

Of the 10 closed exchange houses, three were in the UK, two in Australia, two in Canada, two in the US and one in Singapore.

The UK is the most competitive market where most Bangladeshi banks are doing business. Alone in London, 10 banks have exchange houses to serve remitters.

The banks are: Bank Asia, Brac, Exim, IFIC, Mercantile, Prime, Pubali, Southeast, Mutual Trust and Standard bank. State-run Sonali Bank also has a company in the UK which runs as a full-fledged bank.

Among the exchange houses, only that of Brac Bank is making profits thanks to its agency arrangement business model. The exchange company logged a profit of Tk 30 lakh in 2016.

The bank formed a company named Brac Saajan Exchange Ltd jointly with local partners. The exchange company provides remittance service to Bangladeshi communities across the country through agents.

The operational expenditure of Brac Bank is low because of the agency agreement, said Hussain. The UK-based partners have equity participation in Brac Saajan and get share of the profit.

Brac Bank holds 85 percent share into the exchange company while the rest is owned by local agents. “This is a cost-effective model, which has made the exchange company profitable,” said Hussain.

Hussain said although the agent model poses some challenges including reputational risk but they are manageable.

Banks are incurring losses in the UK as they spent huge amount of money to rent offices from the very beginning of their operation, according to Hussain.

A senior executive of BB said Brac had started the agency agreement model without prior approval from the central bank and later took the post-facto approval.  The post-facto approval is taken after a project has already begun.

Prime Bank's exchange house in the UK only made profit for the first time in 2016. Until last year, it had been incurring losses since its opening in 2010.

The bank has received approval from BB to remodel its business in line with that of Brac Saajan.

Hasanul Zahed, head of the international division for Prime Bank, said Brac Bank's business model has become successful as it has been able to reach the remitters with minimum cost through the agents. “So, we have started to follow the similar model.”

Banks however are making good business in Singapore and Malaysia as the countries are relatively small in size, allowing the licencees to cover the markets through only one or two branches.

Among all banks, National Bank has the highest number of exchange houses abroad. It has offices in Greece, Oman, South Africa, Singapore, Malaysia, the Maldives and the US. The bank had sought permission from the central bank to shift to the agency agreement model in the UK, but the attempt was unsuccessful.

ASM Bulbul, deputy managing director of National Bank, said the bank wants to roll out the agency agreement model as it is cost-effective. The bank will apply again to the central bank seeking the permission, he said. b