CHAPTER - V
Foreign Remittances
Foreign remittance can be defined as an act of transferring money from one country to an other. Bank issue remittances on behalf of the customers after receiving value of remittance, related charges and Govt taxes. Remittances payable within country are called “inland remittance. Remittances payable outside the country and received from foreign countries are called “foreign remittances.
Foreign remittances are not only source of funds for the banks but also play a very significant role in enhancing foreign exchange reserves of the country.
A discussion of foreign remittances
Foreign inward remittances have been prominent features of the Pakistan’s economy for many decades. It is often argued that remittances have played a stabilizing role, particularly during the Asian crisis when remittance flows have supported household expenditure and offset the sharp reduction in capital inflows.
Pakistan is a major exporter of manpower, possessing the one of the very high rate of out- migration relative to population many countries. The volume of departing Overseas Pakistani Workers have broadly matched the increase in the domestic labor force over the past 40 years.
This process reflects a range of factors. Creation of employment has generally not kept pace with the increase in the population. Relatively modest economic growth has also contributed to widening wage differentials with advanced economies.
Pakistan is now one of the world’s largest recipients of foreign remittances in absolute terms, behind India, Mexico and Philippine. Aside from exports of goods, remittances are the largest source of foreign exchange for the Pakistan. It is relatively stable source of foreign exchange compared to foreign direct investment and other private capital flows. Traditionally, a large proportion of our overseas labor force comprised workers in the construction and manufacturing sector. According to an estimation, the proportion of income from abroad as a share of total household income is increasing faster than the income generated locally. Labor force migration is largely a lower and middle class phenomenon in the Pakistan. Income
from abroad is less important for the higher income decides.
The positive and negative impact of foreign remittances on the economy
There are different views about remittances affect on economic activities:
1. Some of the negative views about remittances & migration of labor
can be seen as a financial counterpart to migration, which can offset
some of the output and other losses that may be associated with the
loss of skilled workers, the so-called “brain drain.” The extent and
economic impact of the brain drain is itself controversial. Some studies
have challenge the negative view that migration of highly skilled workers
is detrimental to those left behind. Further in developing countries like
Pakistan, India and Bangladesh, where rate of unemployment is very
high, migration of human resource, effects positively on their economy.
2. Some peoples argue that, emigrant can also result into resource
transfers. Take example of, Chinese population, it has played a
significant role in the acceleration of foreign direct investment into
China in recent years. Other side says that, in fact chines economy
cannot be compared with others. They have a different political and
social system; there is consistence in their economic policies, and
strong capital and economic base.
3. The economic impact of remittances is depending on the proclivity of
the remittance and its division between consumption and investment.
If remittances are used primarily to purchase non-tradable goods, this
could lead to an appreciation of the exchange rate and deterioration
in competitiveness. But in fact remittances that are consumed will
generate positive multiplier effects. The size of this multiplier effect
depends on whether remittances are received by urban or rural areas.
If remittances are received in ruler areas, these are used in investment
rather than consumption.
4. A large portion of the funds received as remittance from abroad are
used in real-estate. Due to investment in real estate, related industries,
such as cement, steel rerolling, aluminum industries etc. are also
flourishing.
5. Local labor force also gets job.
6. Remittance Flows results into stability of Income of lower and middle class.
7. A prominent feature of the Pakistan economy over the last four decades
has been the relative stability in the Forex resources generation, and
increase in per capita income.
From the above discussion we came to the conclusion that, there is no doubt that foreign remittances in the Pakistan are an important source of support, especially for the balance of payments. The volume of foreign remittances send by overseas Pakistani has crossed US dollar 3.5 Billions in the year 2008/ 2009. The remittances have contributed lot in improving balance of payment position of Pakistan.
Further analysis of these factors as important determinants of remittance flows are a topic for future research. Similarly, remittances lead to a growth in the Pakistanis case. After migration of labor, unemployed gets opportunities. Due to the enhanced purchasing power of the families of the overseas Pakistanis, local sale is increased, to meet requirement of the consumption goods, production is increased, and as such, it effects very positively on economic conditions of the country.
SBP role in enhancing Foreign Remittances
SBP being regulator plays very important role in broadening foreign exchange
reserves of Pakistan. With a view to encourage overseas Pakistanis and others to use the normal banking channels for home remittances, and to protect the remitters / beneficiaries from any losses that they may incur due to unwarranted delays in receipts of funds in the beneficiaries accounts,
SBP has put in place a mechanism, which ensures that :
i. In case where the beneficiary is maintaining his account at any branch
at the district headquarters, the amount of remittance shall be credited
within 48 hours (two working days) of the receipt of funds b the bank.
ii. In case where the beneficiary is maintaining its account at any branch
at tehsil or sub-divisional town, the remittance must be credited within
72 hours (3 working days) of the receipt of funds by the bank.
iii. Where the beneficiary is maintaining the account at any branch in a
village / rural area, the remittance must be credited in the beneficiary's
account within 96 hours (four working days) of the receipt of funds by
the bank.
iv. A Complaint and Monitoring Cell has been set up in the State Bank
and in banks which received complaints of remitters / beneficiaries,
who have not been remunerated by the banks on account of delays.
v. Where a tendency is noted by the State Bank on the part of any bank,
either through inspection or on the basis of the pattern of complaints,
to delay the credit in the beneficiary's account, penalties shall be
imposed on such banks under the provisions of the Banking Companies
Ordinance, 1962.
Role of State bank of Pakistan, Banking Services Corporation
(SBP BSC)
State Bank of Pakistan, Banking Services Corporation (Bank) came into existence after bifurcation of State Bank of Pakistan under SBP Banking Services Corporation Ordinance 2001 promulgated by President of Pakistan. It started operations from the 2nd January 2002. Consequent upon establishment of SBP, BSC (Bank), the Exchange Policy Department of the then State Bank of Pakistan has also been bifurcated into two Departments. The operation side comes under the jurisdiction of the SBP, BSC, Bank; the Policy side was shifted to the State Bank of Pakistan and working as a full-fledged Department. Incidentally, title of both the Departments is Exchange Policy Department. The business process and role of this Department in the SBP BSC (Bank), Head office is as under:
Exchange Policy Department (EPD), SBP, BSC (BANK), is an important department of the State Bank of Pakistan, Banking Services Corporation (Bank), Head Office Karachi.
The work of the Department is operational nature for which Foreign exchange offices are set up at 16 field offices in major cities of Pakistan. Administratively, the Department is divided into four Divisions, out of which one is looked after by a Joint Director and remaining three by Junior Joint Directors. These Divisions are again divided into eight units, which are headed by Assistant Directors.
State Bank of Pakistan, Banking Services Corporation (Bank) came into existence after bifurcation of State Bank of Pakistan under SBP Banking Services Corporation Ordinance 2001 promulgated by President of Pakistan. It started operations from the 2nd January 2002. Consequent upon establishment of SBP, BSC (Bank), the Exchange Policy Department of the then State Bank of Pakistan was bifurcated into two Departments. The operation side come under the jurisdiction of the SBP, BSC, Bank, and H.O. Karachi and is functioning as a full-fledged Department. The Policy side was shifted to the State Bank of Pakistan and working as a full-fledged Department. Incidentally, title of both the Departments is Exchange Policy Department.
The work of the SBP BSC (Banks) is operational nature for which Foreign exchange offices are set up at 16 field offices in major cities of Pakistan. Administratively, the Department is divided into four Divisions. These Divisions are again divided into eight units, which are headed by Assistant Directors.
Exchange Companies with Foreign Entities
The mobilization of home remittances is an important business activity for Exchange Companies (ECs). In this respect, Exchange Companies are expected to exercise utmost prudence in implementation of process involved. However, over a period of time, while reviewing agency arrangements of Exchange Companies, certain structural and operational flows / weaknesses have been identified which could damage Exchange Companies ability to effectively effect and mobilize funds from overseas. In order to facilitate Exchange Companies in their diligence process and bring uniformity & discipline in agency arrangements of exchange companies, following fundamental structure of agency arrangements is designed by SBP but overall responsibility of safeguarding interest of the company and avoidance of all related legal, regulatory and commercial risks would rest with the exchange company.
Selection of Foreign Entities
I. Only those foreign entities that have effective customer acceptance
and KYC policies and are effectively supervised by the relevant
authorities should be selected for agency arrangements.
II. No arrangements should be entered into or continued with a correspondent
entity incorporated in a jurisdiction in which it has no physical presence
and which is unaffiliated with a regulated financial group.
III. Particular attention should be paid when continuing relationships with
entity located in jurisdictions that have poor KYC standards or have
been identified by Financial Action Task Force as being “non-cooperative”
in the fight against money laundering.
Essentials of the Agreement
1. The agreement should be for payment of home remittances in PKR only.
2. All funds against home remittances should be received in advance in
Exchange Company’s FCY Accounts maintained with banks in Pakistan.
3. For transactions greater than USD 1,000 the agreement should require
foreign entity to provide address of senders in addition to his/her name.
However, address may be substituted with any unique Identification
Number/ National Identity Number/Customer Identification Number/Date
& Place of Birth.
4. The agreement should be non exclusive meaning thereby that it should
not restrict Exchange Company, directly or indirectly, to offer similar
competing services under other arrangements.
5. The agreement should give ownership rights of all related
accounting/book-keeping and other record to Exchange Company and
the same is be maintained for at least five years.
6. The agreement should not contain clauses which give blanket approval
to foreign entity to assign or transfer their part of the agreement or
any right or duty thereof, to any third party without prior approval of
SBP.
7. The agreement should be in compliance with all the regulations,
instructions, directives, circulars and other communications issued by
the State Bank and contains provision of incorporating any amendments
made therein from time to time.
8. The agreement should ensure compliance of prudent practices and
standard policies related to Internal Controls, Information Technology,
Anti Money Laundering and Know Your Customer etc.
9. The agreement should not compromise State Bank right to terminate
the agreement at any time.
Post-agreement Follow up
1. The Exchange Companies should continuously monitor market repute
and financial condition of the foreign entity to ensure that all the time
during validity of the agreement, foreign entity is capable to meet its
financial obligations under the agreement.
2. Foreign entity should be made bound to immediately bring into notice
of the company any change in laws, rules and regulations which may
effect business arrangements.
3. For any subsequent amendment in the agreement, prior approval of
SBP should be ensured.
4. Foreign entity should also be required to keep EC updated about any
change in its network.
SBP role in controlling inward and outward Foreign Remittances
Chapter X of the SBP foreign Exchange manual deals with Inward and outward Foreign Remittances. The salient features of this chapter are given below:
1. Inward Remittances.
The term 'inward remittance" means purchase of foreign currencies
in whatever form and includes not only remittances by M.T., T.T., draft
etc., but also purchase of travelers cheques, drafts under travelers
letters of credit, bills of exchange, currency notes and coins etc. Debit
to banks' non-resident Rupee accounts also constitutes an inward
remittance.
2. No Restrictions.
There is no restriction on receipt of remittances from abroad either in
foreign currency or by debit to non-resident Rupee accounts of banks'
overseas branches or correspondents. Authorized banks may freely
purchase T.Ts, M.Ts, drafts, bills etc., expressed and payable in foreign
currencies or drawn in Rupees on banks' non-resident Rupee accounts.
There is also no objection to their obtaining reimbursement in foreign
currency from their overseas branches and correspondents in respect
of Rupee bills and drafts which are purchased by them under letters
of credit opened by non-resident banks or under other arrangements.
3. Outward Remittances.
The term "outward remittance" means sale of foreign exchange in any
form and includes not only remittances by T.Ts, M.Ts, drafts etc., but
also sale of traveler’s cheques, travelers’ letters of credit, foreign
currency notes and coins etc. Outward remittance can be made either
by sale of foreign exchange or by credit to non-resident Rupee account
of banks' overseas branches or correspondents.
4. Mode of Remittances.
Authorized Banks should avoid issuing drafts in cover of outward
remittances whenever remittance can be made by T.Ts, or M.Ts, etc.
Where, however, the normal means of transfer is likely to result in
unnecessary hardship or inconvenience to the remitter, drafts may be
issued in the name of the beneficiaries of the remittance but such
drafts should be crossed by the issuing bank as "Account Payee only".
5. Prescribed Application Forms.
(i) There are three types of application forms for outward remittances:
(a) Form 'I' is to cover remittance against imports.
(b) Form 'T-1' is to cover sale of exchange for travel.
(c) Form 'M' is to cover all other remittances
(ii) Any person who wishes to purchase foreign exchange must lodge an
application with an Authorized banks on the appropriate prescribed
form duly supported by the requisite documents. On receipt, the
application should be examined and if the bank is satisfied that the
application is covered by the regulations and it is empowered to
approve the remittance on behalf of the State Bank, it may affect the
sale of foreign exchange. If the transaction requires prior approval of
the State Bank, the application should be forwarded by the bank to
the State Bank for consideration with comments under its stamp and
signature.
6. In some cases, applications are made by letters it should be
accompanied by Form 'T-1' or 'M' as the case may be, duly filled in.
If the remittance is permissible, the State Bank will return the form
duly approved. In cases where remittance is required to be made in
installments at periodical intervals (student permits etc), the State Bank
may issue special permits authorizing remittances in the desired
manner.
7. Applications to be submitted to the State Bank only through an
Authorized bank.
All applications for foreign exchange should be forwarded to the State
Bank through Authorized Banks who should arrange their delivery to
the State Bank through their own messengers or through post. All
applicants who present their applications directly to the State Bank
will be asked to resubmit them through an Authorized bank.
8. Forwarding Applications to the State Bank.
When submitting applications to the State Bank, Authorized Banks
should take all reasonable precautions to satisfy themselves as to the
bonafides of the applicants. Banks should exercise due diligence
(KYC/ CDD) while remitting funds. They should verify that:
a. The application form has been duly completed and signed by the
applicant and then affix their stamp.
b. Signature thereon in token of their having examined the application.
c. The Bank satisfied them that full documentary evidence as required
has been submitted.
9. Processing of Approved Form etc.
After receipt of approved forms or permits etc., from the State Bank,
Authorized Banks should see that the forms etc. have been approved
by the authorized officers of the State Bank and that they bear its
embossing seal.
Authorizations which are signed by officers, whose specimen signatures
are not available with the Authorized Bank, should be presented to
the nearest office of the State Bank for authentication. It is also important
that once a form has been approved by or on behalf of the State Bank,
the Authorized Bank should affect remittance only on behalf of the
original applicant for whom the form has been approved and in favor
of the beneficiary whose name appears in the approval. They must
in no case accept instructions from third parties.
In those cases where Authorized Banks are empowered under the
instructions laid down in F E Manual to approve applications on behalf
of the State Bank, they should ensure while approving the form that
the applications are complete in all respects and that all the necessary
documentary or other evidence as required has been submitted to
and examined by them and that they have satisfied themselves as to
the genuiness of the transaction.
10. Permits for Recurring Remittances.
(i) Permits issued by the State Bank are of three types. In the first type
of permits, the State Bank authorizes remittances up to a stated amount
within a stated period which an Authorized Bank may make on behalf
of the permit holder. Remittances under such permits may be made
during the period of validity of the permit in amounts as required by
the applicant provided that the total of such remittances under the
permit does not exceed the overall limit laid down in the permit.
(ii) The second type of permits covers remittances on a periodical (monthly)
basis but the periodical (monthly) limits are not cumulative and
remittances in all during any one period (month) must not exceed the
prescribed rate laid down in the permit. If remittances are not made
up to the full extent of the limit in any period (month), it is not permissible
to carry forward unutilized balance in order to make larger remittances
in subsequent periods.
(iii) The third type of permits allows remittances on a periodical (monthly)
basis but the periodical (monthly) amount is sanctioned on a cumulative
basis so that unutilized amounts for earlier periods (months) can be
remitted in subsequent periods (months). Unutilized amounts may,
however, be accumulated only within the validity of the permit and the
entire unutilized balance of such permits will lapse after the last day
of the validity of the permit. In such cases it is not permissible to make
remittances in advance of the entitlements of the subsequent periods
(months).
(iv) Requests for utilization of lapsed quotas should be forwarded by
Authorized Banks to the State Bank giving full reasons for non-utilization
on due dates supported by suitable documentary evidence, wherever
available.
11. Effecting Remittances against Permits.
In all cases where permits are issued by the State Bank, it will be in
order for the Authorized Banks to effect remittances against the permits
subject to reporting on form 'M'. Authorized Banks must state on form
'M' the number of the permit against which the remittance has been
made and also certify that the remittance has been endorsed on the
permit.
The remittance must be endorsed on the reverse of the permit giving
the amount and date of remittance under their stamp and signature.
When the permit is exhausted, it should be returned to the State Bank
by the Authorized Banks along with the form 'M' on which the last
remittance is reported.
In all cases where the purpose for which the permit was granted
ceases to exist and no further remittances are required or are
permissible, the unutilized permit should be returned to the State Bank
with an advice that the permit should be cancelled.
12. Period of validity of approval by the State Bank.
All Authorizations given by the State Bank are valid for a period not
exceeding 30 days from the date of approval unless they are expressly
approved as valid for a specified longer period or unless they have
been revalidated for a further period. Similarly, permits issued by the
State Bank are also valid for specified periods as stated on the permit.
Authorized Banks should not effect any remittance against approved
forms, permits etc., which have been lapsed unless they have been
duly revalidated.
13. Release of Foreign Exchange for Travel Abroad.
Foreign exchange is issued to the travelers against specific or general
approval given by the State Bank. It may be drawn in any foreign
currency equivalent to the sanctioned amount.
In cases where a traveler desires to draw foreign exchange partly in
foreign currency instruments and partly in foreign currency notes,
Authorized Banks will prepare two separate 'T-1' forms. In the portion
meant for their certificate, the Authorized Banks will give on both the
'T-1' forms a suitable indication as to the amounts of foreign exchange
released in foreign currency instruments and notes.
Authorized Banks will give a suitable indication to this effect, both on
the original sanction as well as its photocopy which will be attached
with the relative 'T-1' forms and surrendered to the State Bank along
with the monthly returns of foreign exchange transactions.
14. Processing of Approvals given on one Authorized bank’s Form
by another Authorized bank.
There may be instances where a traveler or a remitter might approach
an Authorized Bank for issue/remittance of foreign exchange against
approved form 'T-1' or 'M' bearing the identifying prefix and serial
number of another Authorized Bank. While releasing/remitting foreign
exchange against such form 'T-1' or 'M', Authorized Banks should
insert their own identifying prefix and serial number borne on one of
the blank 'T-1' or 'M' forms in their possession, and score out the prefix
and serial number already appearing on approved form 'T-1' or 'M'
under proper authentication. The Authorized Banks should, however,
destroy that blank form 'T-1' or 'M' whose serial number is so inserted
by them.
15. Reporting of Remittances.
Authorized Banks should submit to the State Bank along with the
appropriate returns as laid down in SBP Manual Chapter XXII, forms
‘M’, ‘T’-1 and 'I' as the case may be, in cover of each remittance
effected by them. Where remittances are approved by the State Bank,
the approved forms should be submitted in original. Where approval
is given by the State Bank by letter or through issue of permit, particulars
of the letter or of the permit should be given on the appropriate form
before submitting it to the State Bank with the returns.
16. Cancellation of Outward Remittances.
In the event of any outward remittance which has already been reported
to the State Bank being subsequently cancelled, either in full or in part,
Authorized Banks must report the cancellation of the outward remittance
as an inward remittance. The return in which the reversal of the
transaction is reported should be supported by a letter giving the
following particulars:
a) The date of the return in which the outward remittance was reported.
b) The name and address of the applicant.
c) The amount of the sale as effected originally.
d) The amount cancelled.
e) Reasons for cancellation.
17. Cancellation of Inward Remittances.
In the event of any inward remittance which has already been reported
to the State Bank, being subsequently cancelled either in full or in part,
because of non-availability of the beneficiary, Authorized Banks must
report the cancellation of the inward remittance as an outward remittance
on form 'M'. The return in which the reversal of the transaction is
reported should be supported by a letter giving the following particulars:
I. The date of the return in which the inward remittance was reported.
II. The name and address of the beneficiary.
III. The amount of the purchase as effected originally.
IV. The amount cancelled.
V. Reasons for cancellation.
18. Utilization of Exchange for the purpose it is obtained.
Where any foreign exchange is acquired by any person other than an
Authorized Bank for any particular purpose or where any person has
been permitted conditionally to acquire foreign exchange, the said
person will not use the foreign exchange so acquired otherwise than
for that purpose or fail to comply with the prescribed conditions. In
cases where the foreign exchange so acquired cannot be used in full
or in part for the purpose for which it was acquired or any of the
conditions subject to which the foreign exchange was released cannot
be complied with, the foreign exchange should immediately be
surrendered to an Authorized Bank.
