The operations of forex bureaus appear to be very opaque and confusing for many, especially people who have very little understanding of financial markets and financial services. In a simple language, forex bureaus are licensed agencies that buy and sell money. Maybe, that is not simple enough.
Buying your Money
In Ghana where the local currency is the Ghana cedi, a lot of the transactions that take place in the country are settled in the local currency. When you happen to have foreign currency in your possession, you may not be able to use it to buy the regular stuff like waatse, kenkey, trotro fares, pay for electricity and water bills and the clothes you wear.
You need cedis to be able to easily pay for such items as you walk the streets of Accra and other towns and villages. So what you ultimately do is to walk into a forex bureau with the foreign currency and an ID card (many do not insist on presentation of ID cards) to exchange your foreign currency for the local currency, cedi. When you get to the bureau, a rate is quoted for you. The rate is the price at which the forex bureau is willing to buy your foreign currency. If you trade at that rate, then this is what happens
- You have sold your foreign currency to the forex bureau for Ghana cedis
- The forex bureau has bought your foreign currency with Ghana cedis
The price that the trade is executed is usually the buying rate advertised by the forex bureau, indicating that, that is the price they are willing to pay for (buy) a unit of your foreign currency.
Selling you Foreign Currency
On the other hand, there are many others in the country who require foreign currencies to make international settlements or in some cases, make local settlements in dollars (not a practice encouraged by the regulators). What you have in your hands is Ghana cedis, and you can only settle that transaction in say, US dollars. So you go to the forex bureau with a valid ID (many do not insist on presentation of ID cards) and request for dollars. When you go there a rate is quoted for you. The rate quoted for you is the price at which the forex bureau is willing to sell you foreign currency, say US dollars. If you agree, two things happen
- You have bought foreign currency (eg. US dollar) from the forex bureau with your Ghana cedis
- The forex bureau has sold you foreign currency (eg. US dollars) for your Ghana cedis
The price that the trade is executed is usually the selling rate advertised by the forex bureau, indicating the price they are willing to sell you a unit of foreign currency in exchange for your local currency, cedi.
How do they Make Money?
This is what you’ve been waiting for, I guess. Like many products, you buy and sell to make money. You buy at a price and sell at another price to make profits. The profit is determined by the difference between your buying and selling price multiplied by the units of the product sold. The same logic applies in the business of buying and selling money (foreign currencies). For illustration purposes, if the USD rate against the Ghana cedi is quoted at 3.95 for buying and 4.0 for selling, then it means
- The forex bureau is willing to buy a unit of US dollars from you at 3.95 Ghana cedis
- The forex bureau is willing to sell you a unit of US dollars at 4.0 Ghana cedis
It means for every $1 sold, the forex bureau receives GHc4 and for every $1 bought, the forex bureau pays out GHc3.95. This leaves the forex bureaus with a profit margin of GHc0.05. Too small?
No. Forex bureaus engage in huge volumes of forex transactions before the close of each day. In this illustration, for every $10,000 purchase and sale, a profit of GHc500 is recorded. Such volumes are for small bureaus on daily basis. In our example, a $100,000 trade leaves you with a profit of GHc5,000 at the end of the day. The more you deal the more money you make. It is a risky business especially when you operate in volatile markets. Kenya and Nigeria have a more vibrant Bureau de change markets and a generally active forex market than Ghana.
The forex bureau and the entire forex market is a highly regulated business in most countries including Ghana, Kenya and Nigeria.
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