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Banks are under scrutiny for making so called exuberant profits on foreign exchange earnings. Some of have made more money during the April-June quarter under the head than in the entire calendar year of 2021. The currency was depreciating. Market was volatile and risky. All banks made money,while some made a lot more. That’s how it goes.

Should banks be penalized for making money? Are banks a charity organization? It’s an unnecessary issue that is being created at the highest level while any expropriation could have been handled at the SBP level. The institution has in the past penalized banks on non-compliances. This can happen again. Why create an issue at the highest political level? Why summon banks’ presidents and SBP leadership in front of a senate standing committee? Why not focus on the core of the issue i.e., the dollar shortage?

The numbers circulating on the social media are taken from the published financial statements of the banks. The banks usually publish the headline income from dealing in foreign currencies. People have simply assumed that the entirety of the FX income is coming from banks scalping customers with higher exchange rates for conversion from PKR to USD when remitting foreign currency payments for letters of credit or remittances. And lower exchange rates when banks are buying exporters' proceeds or converting incoming remittance flow. Banks are accused of buying low and selling high, and booking all of it in the FX income line.

This is not the complete picture. There are different heads and subheads under the FX income. Perhaps banks should, in their own interest, provide better disclosure to ensure transparency and clarity. There are diverse ways to make money such as income from FX swaps of varying maturities between overnight and 1-year term. These are liquidity management transactions where a bank sells USD against PKR to another bank with a commitment to buy it back at a future date at an agreed upon swap rate or premium. A simultaneous sell and buy does not create a pricing impact on the PKR. It is the same as a badla transaction at the stock exchange were the badla is denominated in a pricing addon to the buy-back leg. The main board price of the stock remains un-affected.

Similarly, the FX line includes the surplus from the revaluation of USD assets of banks. In the case of banks with offshore branches, the asset value of their branch networks abroad increases when the PKR devalues so that increase also shows up under the FX income line. Even so, it does not impact the domestic market demand and supply of USD and does not impact the exchange rate in doing so.

Also, there is the impact of complex products such as currency derivatives or cross-currency swaps. A USD loan taken on by a local company is swapped with a local bank against PKR for a period of 5 to 10 years. The bank pays the interest on the loan and commits to return the USD to the borrowing corporation at the end of the swap. Meanwhile, the borrower has taken on a PKR loan from the local bank and is paying KIBOR on the loan. When the currency devalues, the bank shows a surplus on the USD it is holding for the customer but since the bank also has to pay back the USD after 5 or 10 years, it records an off-setting loss in its financial statements under the line Income from derivatives. Again, the FX income line inflates because of the devaluation but there is an off-setting impact on the overall financial position of the bank. It just shows up in a separate line.

In short, the foreign exchange income line in the financial statements is an amalgam of multiple accounting items that the banks should actively disclose so that stakeholders may hold them accountable for exchange rate manipulation or fleecing their customers.

Then in simpler terms, the trade volume has increased too and the value of PKR has declined substantially due to currency depreciation. The same spread in percentages is yielding higher return in PKR. The other argument is that banks are charging higher spread to compensate for the volatility. SBP might feel that the compensation for risk is higher as numbers are showing. There might be some cases of expropriation. SBP team should investigate it and impose fine where necessary. But such things should not be circulated and perceived as banks taking poor importers for a ride.


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Govt focus is on irrelevant things. They should help businesses to strengthen economy.
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