Business Daily (Nairobi)
Emmanuel Were
30 April 2008
Foreign exchange dealers manning treasury departments of leading banks are taking home hefty bonuses following an unusually active first quarter for currency traders.
The first quarter saw most surpass targets, meaning tidy payments for their services which are based on commissions and bonuses, when expectations are exceeded.
Charged with the responsibility of making money for banks through sale and purchase of foreign exchange, dealing is usually a touch and go affair.
The trade has been booming this year because of volatility in the shilling exchange rate. Speculative trades, which involved betting either way against the shilling have been particularly rewarding, dealers say.
"The exchange rate was going in one direction hence it was predictable," says Solomon Alubala, a dealer at Middle East Bank, commenting on the first quarter period when the post- election violence sent the shilling tumbling against the dollar.
The Central Bank had during the period blamed the volatility in the shilling on speculation among dealers, saying the economic fundamentals and expected inflows from asset sales and external assistance backed a strong shilling.
To make money in the foreign exchange markets, dealers speculated by buying dollars, as violence occasioned by the dispute in the tallying of the votes escalated.
With the shilling weakening further, they would then offer the dollars in the market at a higher rate ,making a handsome return.
In the first three months of 2008, the local currency buckled to trade at lows of Sh73 to the greenback. At this point, dealers in the foreign exchange market cashed in by selling the dollars at a lower rate just days earlier.
In this scenario, profits were about seven shillings for every dollar sold- an impressive 10 per cent return -on thousands of dollars that were traded.
The impact of this period is evident in first quarter results for banks released so far. KCB reported a 194 per cent increase in foreign exchange earnings to Sh470 million, more than half what it managed in the 2007 financial year.
Equity Bank, which announced its results recently, earned Sh246 million, dwarfing the Sh147 million it did for the whole of last year.
"Most of the international banks are likely to pay their dealers a bonus equivalent to a full year's salary for meeting targets," said a dealer who spoke on condition of anonymity. This will be in the first quarter of next year because targets are set on annual basis.
He gave an example of last year when banks did well in foreign exchange and top dealers received up to Sh10 million each in bonuses for the 2007 financial year that were paid out in March, this year.
A peace deal, restoration of stability by the naming of a coalition cabinet and the Safaricom IPO have helped the shilling to fight back trading at six month highs of Sh61.50 to the dollar on April 16.
Many market players say the shilling might further strengthen when large and foreign investors make payment for their shares under the delivery versus payment system.
An opportunity would therefore be granted for the dealers to add onto their first quarter gains by taking positions on the dollar.
Analysts believe that the fluctuations of the shilling, going beyond the first half of the year, will depend on sentiments from the political front and the business environment.
Fluctuations of the currency depend on some of the fundamentals , for example how well an economy is performing, leading to more investments.
Brazil and Russia are examples of countries which have had their currencies -the Real and Rubble respectively - appreciate as more foreign investors seek opportunities in the countries.
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