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MONEY TALKS: Making sense of foreign exchange rates

Monday September 16 2019

I need to sell them back to the bureau so I can get Kenya shillings. They will buy back the dollars from me. FILE PHOTO | NATION MEDIA GROUP

I need to sell them back to the bureau so I can get Kenya shillings. They will buy back the dollars from me. FILE PHOTO | NATION MEDIA GROUP 

BETT KINYATTI
By BETT KINYATTI
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Many harvests ago, I was a self-study accounting student at Strathmore University. I was sitting my certification with ACCA (Association of Chartered Certified Accountants), a global professional body offering the qualification.

The syllabus had 11 papers to sit, from three modules. The papers got more complex the more you advanced into the modules. It was like graduating from level to level. Like playing a game in the Play Station.

The first nine papers were fundamental – F1 to F9 – then you chose two from the professional ‘P’ level.

I hated tax and got wide-eyed at performance management. Management accounting was as dry as sandpaper but extremely useful; I apply most of the concepts about costing to my side-hustles today.

SKIN OF MY TEETH

Corporate and business was too verbose for my liking but I enjoyed quoting case laws at random. “In the case of Salomon v Salomon & Co Limited, 1897, where the veil of incorporation was pierced...”

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I failed the financial reporting paper and had to sit it a second time. As most people around the globe do – the dreaded F7, that paper has one of the lowest pass rates. I passed it at the second sitting by the skin of my teeth – the pass mark was 50, I scored a 51.

I know several people who have dropped ACCA in frustration because they cannot pass this paper.

I loved financial management! I loved it at the essentials level of F3, at the skills level of F9 and the advanced professional level of P4.

I mastered the concepts at the skills level and took them to bed at the advanced level. Some of the concepts were about assessing international projects for viability.

Questions like, ‘Does it make financial sense to run a Chinese project in West Africa? If so, show it in numbers in a project plan.’

I remember the 20-mark questions required that you first convert foreign currency to local currency before you begin tackling the question. If you get this conversion wrong, then you get the entire question wrong.

It is from here that I made sense of exchange rates.

Before then, I was like most about anyone in this town going around asking about forex, ‘OK, who is buying what and who is selling what?’ ‘Why do the rates have to fluctuate every day?’ ‘And why is the rate for buying different from the rate for selling?’ ‘Why do financial institutions trade in forex, anyway?’

POTATO MARKET

Let me illustrate it to you:

Imagine you are in Marikiti farmers market to buy potatoes.

It is 5.30am, the air is redolent with thirst for money. The traders in the market are lining up their wares.

You are the buyer here. Everything about the transaction about to transpire starts and ends with you. This is all about you – the buyer. Remember that.

All potatoes are of the same high quality. The only difference is how much each potato seller sells his gunia.

You, as the buyer, will want to buy at the lowest price. Right?

You walk around the market collecting prices.

Trader A tells you a gunia is Sh1,600.

Trade B tells you it is Sh1,500.

Trade C tells you Sh1,580.

Who will you buy your gunia of potatoes from?

Exactly. From Trader B, because he is selling it at the lowest price.

It is the same with buying forex: the product is exactly the same, the only difference is how much each trader is selling it for. How much will youbuy the forex for.

Let me illustrate to you in another personal example:

ZANZIBAR

GB and I were travelling down to Zanzibar in July. I was taking him on a surprise for his birthday. Zanzibar uses the Tanzanian shilling for locals. Non-locals can use still use it, or they can use the US dollar, Euro or Pounds.

Because Zanzibar is in East Africa, you can also use the Kenya shilling to make some payments. Some. For example, we used Kenya shillings to pay the Stone Town tour guide and to buy sunglasses for GB on the streets. We also tipped our driver in Kenya shillings. For our lunch, though, we were not allowed to pay in Kenya shillings. We had to pay in USD.

Anyway, I knew I needed to buy USD to use during the trip. I would have much preferred to buy the USD in the CBD but I was away on assignment so I had to buy them in Westlands.

I found a forex bureau selling a dollar at Sh106.

Had I been in the CBD or walked around Westlands, I may have found another bureau selling at a lower rate. Say at Sh105, or even Sh104.90. Hell, even Sh103.

(Date is important. The date I was buying these dollars was July 3, 2019.)

I had Sh9,000.

I negotiated for a better rate but the cashier told me through that glass partition, “Sh106 is the best price I can give you, my dear.” She had on blood-red lipstick and an extravagant weave. She paused and did her math on her computer then said, “Please give me an extra Sh10 so I can give you a round figure of dollars.”

I did the math on my phone then gave her a coin.

Therefore, with my Sh9,010, I bought $85.

BUY BACK

We flew down to Zanzibar that Thursday morning, and had a whale of a time over the weekend.

We went to the Old Slave Market in Stone Town. Entrance to the museum for non-local tourists was $5.

We walked on the beach, went snorkelling and had a romantic sunset cruise. (All this was covered in our package from the tour agent).

We also got some souvenirs on the streets totalling to $15.

Our meal plan was half-board so we had to pay for our lunch when we checked out. We paid for it in dollars. That came to around $30.

We returned home that Sunday. I had $35 in my pocket.

The dollars are of no use to me here in Kenya.

I need to sell them back to the bureau so I can get Kenya shillings. They will buy back the dollars from me.

Here’s the kicker – the bureau will buy them at a rate lower than what they sold to me.

On July 3, 2019, the bureau sold dollars to me at Sh106. The rate to buy the dollars back from me today – September 11, 2019 – is Sh100.

I will lose Sh210 from the transaction. That is, (Sh106 – Sh100) * $35.

This Sh210 is the profit these financial institutions make from trading in forex.

***

Do you have questions for the writer? E-mail: [email protected]

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