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Proposed mechanism to reduce cost of remittances
KUWAIT CITY, Feb 6: The Central Bank of Kuwait is considering stopping the use of correspondent banks for Gulf financial transfers made by local banks, reports Al-Rai daily.
According to an official source, the Central Bank is currently testing the ability of local banks to implement Gulf financial transfers without relying on a correspondent bank, provided that the transfer to any Gulf state directly through the Central Bank will be in accordance with this mechanism “if approved.” It is the only party that determines the exchange rate of the requested currency and at the same time the transfer implementer without any fee, in order to enhance efforts of the Gulf unit financially, and to facilitate transfers between countries of the region and raise their rate of relative safety.
This mechanism is of double importance, as it will reduce the cost of remittances for the customer. In its implementation, it depends on clearing between the dinar and the Gulf currency only without the introduction of the dollar in the process.
For clarification, local banks, for conducting Gulf or international financial transfers on behalf of clients, will rely on correspondent banks to deliver the transfers carried out to the clients ’account. That process is carried out through two steps – conducting a clearance between dinar and dollar, and transferring the amount to the desired foreign currency to the customer.
In the meantime, the bank has the right to purchase different levels of currencies, depending on its concentration, by contracting with one or more banks in the country for the foreign currency. It can yet record a reasonable profit margin above the announced exchange rate; thanks to the clearing carried out between dinar and dollar, then to the target currency. As for the new instructions, the amount will be transferred in one step – clearing between dinar and the required Gulf currency – provided the Central Bank issues a daily list of exchange rates for each Gulf currency, to which local banks adhere for their customers, without adding any margin of profit.
As a result, the role of the correspondent banks in Gulf transfers will be canceled because the regulator will cover any direct Gulf transfers, and each bank must notify the Central Bank of its need for the transfers, to transfer them to its Gulf counterparts.
In turn, the cash institution receiving the funds will transfer the amount transferred to it to the customer account specified in the process. The Central Bank will then deduct the transfer value from the account of the bank in operation, according to the pricing of the Gulf currencies announced to it.
For simplicity, a hypothetical transfer of a Gulf currency can be inferred, during which a Saudi customer transfers one million riyals to an account in the Kingdom. In the past, the bank used to set a specific margin above the announced exchange rate, adding it to the total process, being concerned with providing the required transaction amount, and then clearing the value between dinar and dollar, and then with the Gulf currency, followed by transferring the amount through a correspondent bank to the customer’s account in his country.
As for the new instructions, the local bank will require the Central Bank to directly transfer the million riyals to the account that the customer will specify, in which case the Central Bank will clear the amount between the dinar and the riyal “for example,” according to its pricing, without clearing the dollar. Here, the Central Bank is the only entity that rates Gulf currency transfers, as it is the one that will transfer the required amount to the corresponding central bank. It means the transfer will be executed directly, without contracting with any other commercial bank, as is the practice in clearing bank checks, which it runs daily between local banks.
And to that, dealing with banks in Gulf transfers with the Central Bank will be direct, whether in terms of fixing the price or direct transfer. It is assumed that other Gulf countries are committed to applying this mechanism to their banks.
In the face of this trend, a disagreement emerges in the banks over the new control procedure, in terms of the fact that this mechanism will lead to loss in the bank profits that it records from the financial transfers to the Gulf states according to the new regulatory instructions. The banks will have to settle only with determining the transfer fee on the external transfer, which is decided to be about KD 8, without achieving any profit rate margin.
Even this fee, according to the experiences of exchange companies, is preferable to be reduced by banks, in order to improve their competitiveness in front of clients, especially since all banks will rely on the Central Bank to conduct the transfer, without any contracts with correspondent banks.
As for oversight, the source affirmed the importance of this application, indicating that it increases intra- Gulf trade activity, provides instant transfers, facilitates clearing operations, and reduces its cost to the customer. This is in addition to raising the competitiveness of banks in the face of digital applications.
The bank revenues will increase even though it is sufficient for drawing, thanks to the increase in operational activity. The source explained that application of the mechanism under study for implementing Gulf currency transfers is straightforward with the procedures required to activate the role of the Committee of Governors and Gulf monetary institutions.
It has been taken into account that there are transactions that serve these trends invisible to the public, such as cyber cooperation between the Gulf central banks, exchange of credit information, and other partnerships that promote Gulf unity.
It also comes within the forms of cooperation activated in the recent period between the banks within the Gulf Cooperation Council states. It is related to activating the use of bank cards without an intermediary currency, directly, where clearing takes place between the five Gulf countries directly.