Institutions often debate the benefits and drawbacks of remitting payments in hard currency versus local currency in developing countries. INTL FCStone Ltd has extensive worldwide experience in both methods, and based on that experience, we believe that local currency payments serve our customers best. Here’s why:
By sending hard currency directly to the beneficiary bank for conversion locally, an organization potentially opens itself up to uncontrolled loss and relies on the local bank as its sole rate source. In many cases, the bank then converts the funds at the rate of the day, which is usually much less favorable than what can be attained by soliciting competitive bids. In fact, it is not uncommon for the difference to be as much as 5 percent – and, in some cases, even more. In addition, there are added fees associated with sending hard currency to be converted locally. As a result, it is more advantageous to fund in local currency, thereby ensuring access to competitive rates and maximum levels of funding for field projects.
The financial markets and banking systems in many developing countries are inherently volatile and can be negatively impacted by political instability, corruption and perpetual underdevelopment. Therefore, maintaining large sums of hard currency in-country leads to many potential complications including misappropriation of funds, substantial country and credit risk, and an overall lack of accounting transparency. By transacting in the international market for local currency, the funding and accounting process is made more secure and accurate while reducing the potential for corruption and fraud.
Global compliance standards have been raised significantly in recent years. With the introduction of new laws and regulations in many countries worldwide, organizations must be aware of and adhere to current regulations regarding international currency transfers. By actively monitoring the currency exchange process from its head office, an organization can ensure not only that it is compliant but also that all financial dealings are undertaken with approved counterparties.