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The East African : June 16th 2014
The EastAfrican 46 TOUGH TIMES More forex bureaus fail BoU scrutiny Analysts blame ≥ising ≥isks of poo≥ compliance on falling ≥evenue ma≥gins in the indust≥y By BERNARD BUSUULWA The EastAfrican past seven months highlights the increased risks of non-compliance amid falling revenue margins and an influx of new players. Combined Forex Bureau is the lat- T est victim. Other affected operators are Express Forex Bureau, whose licence was cancelled in March over failure to seek BoU approval for changes in its shareholding contrary to the Foreign Exchange Regulations of 2006; Pakasa Forex Bureau was closed in November 2013 for unclear reasons, with the BOU saying the operator had breached antimoney laundering guidelines. Analysts blame the rising risks of poor compliance on falling revenue margins in the industry. While diminished margins are attributed to the increase in players in the market, reduced trade flows with South Sudan and low corporate demand are cited for depleted weekly turnover experienced since January. “We discovered evidence of un- authorised money transfer services at Combined Forex Bureau, which constitute a big risk to the health of Uganda’s financial sector. Transactions arising from such services equally endanger clients because any loss of money suffered by the public does not merit compensation by Bank of Uganda,” said Andrew Kawere, assistant director in BoU’s Non Banking Financial Institutions Department. Average margins on foreign ex- change transactions by forex bureaus have dropped from Ush20 ($0.008) per transaction in 2010 to roughly Ush3 ($0.001) currently, according to Mr Kawere. The number of licensed forex bu- reaus has risen from 200 in 2010 to nearly 250, with an average of three licence applications received he closing down of forex bureaus by Bank of Uganda in the NUMBERS Licensed forex bureaus have risen from 200 in 2010 to nearly 250, with an average of three licence applications received by BOU every month. Minimum capital requirement for forex bureaus is Ush20 million ($7,800) and Ush50 million ($19,501) for money remitting agents. Total weekly market turnover fell to less than $10 million in the first quarter of 2014, according to industry sources — a marked decline blamed on diminished trade volumes between Uganda and South Sudan. Average margins on foreign exchange transactions done by forex bureaus have dropped from Ush20 ($0.008) per transaction in 2010 to roughly Ush3 ($0.001) todate The influx of new players has meant a dilution of trade volumes. Pic: File by BoU every month. The surge in market players is mainly pegged to soft entry conditions, for example a minimum capital requirement of fUsh20 million ($7,800) and Ush50 million ($19,501) for money remitting agents. Fall in turnover Total weekly turnover fell to less than $10 million in the first quarter of 2014, according to industry sources — a marked decline blamed on diminished trade volumes between Uganda and South Sudan. Most forex bureau operators have now taken up mobile money transfers and agency banking to stay afloat. “However, the growing number of new players in the sector is largely driven by ignorance about market performance instead of real profit indicators,” explained Lameck Kiiza, chairman of the Uganda Forex Bureau and Money Remitters Association. The influx of new players has led to a proliferation of small operators in downtown shopping malls — a phenomenon that has diluted transaction volumes in this segment. In contrast, bigger operators located close to the entrances of prominent hotels continue to post “Reduced trade flows with South Sudan and low corporate demand are cited for depleted weekly turnover since January.” better returns from regular streams of high-end clients despite a difficult economic environment. “Average weekly market turnover has dropped by nearly 90 per cent compared with an average of $20 million-$30 million recorded in 2013,” noted Stephen Kaboyo, a forex dealer and financial analyst. Net forex purchases recorded by forex bureaus rose from roughly $1.5 billion in 2009 to $1.8 billion at the end of 2010. They increased to $2.2 billion in 2011 and $2.6 billion in 2012 respectively, according to BoU data. In comparison, net forex sales re- corded by forex bureaus grew from $1.49 billion in 2009 to $1.89 billion in 2010. They rose to $2.01 billion in 2011 and $2.03 billion in 2012 respectively. BUSINESS JUNE 14-20,2014 $250m fo≥ L. Tu≥kana p≥oject By KENNEDY SENELWA Special Correspondent THE OVERSEAS Private Investment Corporation (OPIC) has approved a $250-million loan for a 300MW power plant in northern Kenya. Funding agreements for the $870-million Lake Turkana Wind Power Project (LTWP) were signed in March. The board of OPIC, an agency of the US government, on May 29 approved the $250-million loan for development, construction, commissioning and operation of the wind farm, said corporate secretary Connie Downs. Norway-based DNV GL is providing the Kenya Electricity Transmission Company (Ketraco) technical expertise to build 426km of overhead cables to transfer 300MW from the Lake Turkana Wind Power plant. The transmission line is expected to cost about $191.5 million. “Our wind farm construction can start after Ketraco’s transmission line has begun,” LTWP chairman Carlo Van Wageningen said. He said the first 50MW of the Lake Turkana Wind Power Project will be online 27 months after construction has begun, while the entire wind farm will be operational in 32 months. Power Africa Initiative of the US provided technical advice for the project. DNV chief executive David Walker said electricity that will be generated at LTWP will be fed into the national grid at Suswa. “The 400kV transmission line will be an important part of the country’s electricity generation infrastructure, allowing 300MW of LTWP and planned future geothermal plants to deliver low cost renewable power,” he said. LTWP has signed a 20-year power purchase agreement with Kenya Power, the electricity distributor. Af≥ican ai≥lines beset by closed ai≥spaces, small ai≥po≥ts and high levies By SCOLA KAMAU Special Correspondent THE INTERNATIONAL Air Transport Association (IATA) wants African governments to open up their air space, reduce levies and speed up airports expansion. IATA said airport levies are pushing up costs by up to 21 per cent. African airports charge passengers as high as $60 to $80 on a return ticket, well above the world average of $40. Countries like Kenya have recently introduced a value added tax on new aircraft. For example, Kenya Airways faces a Ksh14 billion ($160 million) VAT bill for the six Boeing 787 Dreamliners and a Boeing 777-300 ER expected before the end of the year, besides the one Dreamliner that was delivered last month. “You will notice that even within Africa the national carriers or the largest airlines don’t even fly to all the neighbours around them,” said Tony Tyler, IATA’s chief executive, speaking at the 70th IATA Annual General Meeting and World Air Transport Summit in Doha recently. Africa has been faulted for fail- ure to heed the Yamoussoukro Declaration, an international accord that calls for fewer restrictions on cross-border travel. This, coupled with inadequate space at airports to guarantee bigger aircraft a safer landing, has pulled back African airlines’ performance. Africa is the weakest region, as in the past two years profits are barely positive at $100 million annually, representing a margin of just 0.8 per cent on revenues, with a similar performance being predicted in 2014. This will see the airlines miss out on the predicted global airlines’ net profit of around $18 billion, for a net profit margin of 2.4 per cent, according to IATA’s forecast, up from $6.1 billion in 2012 and $10.6-billion last year. North America and European airlines are predicted to make profits $100m African airlines’ profits in the past two years, fuelling fears they may miss out on predicted global net profit of around $18 billion of $9.2 billion and $2.8 billion, giving net margins of 4.3 per cent and 1.3 per cent respectively. Middle Eastern airlines and Latin American airlines are expected to deliver a net profit of $1.6 billion and $1 billion with a 2.6 per cent and 3 per cent profit margin respectively. African airlines account for only one per cent of the world’s air traffic. The number of global passengers ferried by African airlines stagnated in the first quarter of 2014, due to high fares and rising competition from big international players. Data released by IATA shows that African airlines posted a paltry 0.2 per cent growth in passenger numbers. “African airlines are still struggling ... because government sup- port including subsidies is rare, leaving airlines with less funds to finance expansion plans,” said Nick Fadugba, chief executive of African aviation Services Ltd. Despite the challenges, African countries have embarked on aggressive airport expansion plans. Ethiopia is working on a new terminal that will serve 22 million passengers annually up from the current 6.5 million, while Kenya’s Jomo Kenyatta International airport Terminal 4 is due for completion by March 2015, serving 2.5 million passengers per annum. Tanzania secured $164.3 million for the expansion of the Julius Nyerere International Airport to handle 3.5 million passengers annually from around 2 million currently.
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