The Role of Exchange Companies in Promoting Financial Inclusion and Risk Management in Jordan

Introduction

The exchange companies sector in Jordan is one of the essential pillars of the non-banking financial system, contributing to promoting financial inclusion, facilitating the movement of funds, and supporting economic activity—especially for small and medium transactions, individuals, and remittances from workers abroad. This is achieved through the sale and purchase of foreign currencies and the execution of rapid money transfers, extending even through holidays. The sector is characterized by distinct operational flexibility, including speed of execution, low commissions, competitive exchange rates, and ease of access to service, alongside extended working hours that reach 24 hours in some branches. Additionally, its reliance on accounts with correspondent banks in global banking institutions enhances the efficiency of executing operations across different time zones.

Despite the common belief that the requirements for exchange companies are less stringent than banks, the reality shows the opposite. Banks deal with established customers holding pre-existing bank accounts, whereas exchange companies deal with walk-in, variable customers. This imposes more comprehensive and strict verification and auditing procedures in accordance with Know Your Customer (KYC) requirements, Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) regulations, and the implementation of UN Security Council resolutions and other international bodies, both locally and internationally. Over the past decade, the sector has witnessed a remarkable transformation that has made compliance and risk management a core part of its business model due to technological developments and increasing regulatory requirements. Although this sector was historically associated with traditional services, it has witnessed a significant shift in its operational and regulatory nature over the last decade. This transformation was not merely a technical development or business expansion; it resulted from a combination of factors, notably the companies' efforts to expand and keep pace with rapid developments in financial technology (FinTech), along with the tightening of regulatory requirements and increasing risks associated with financial crimes.

In this context, compliance and risk management have become an integral part of the business model of exchange companies, particularly the major ones. It is no longer limited to being a regulatory obligation, but has transformed into a pivotal element contributing to achieving sustainability and enhancing trust in the sector at local and global levels.

Genesis and Evolution of the Exchange Sector in Jordan

In its early stages, prior to the second decade of the millennium, the exchange sector relied heavily on direct transactions and manual procedures, where activity focused on buying and selling foreign currencies and executing cash transfers using traditional methods. Over time, and with the increase in inward financial remittances, this sector gained growing economic importance.

Regulatory developments have contributed to gradually reshaping it towards a more disciplined environment based on clear policies and procedures. In particular, after the 2008 global financial crisis, reliance on this sector increased significantly, which prompted regulatory authorities to strengthen oversight, especially in the areas of governance, compliance, risk management, internal controls, alongside the role of external audit firms.

The trend towards digital transformation also emerged as an essential tool for strengthening control and oversight, as the use of technology contributed to developing work mechanisms and raising the level of transparency. Thus, work no longer relies solely on individual experience, but has become based on integrated institutional frameworks including internal control, risk management, compliance, IT management, in addition to cyber risk management.

Economic Role of Exchange Companies

The role of exchange companies is not limited to executing financial transactions, but extends to include a direct impact on supporting the national economy, as they form a major channel for the flow of foreign currency and play an important role in the continuity of local economic and commercial activity. This role can be highlighted through the following pillars:

This integrated role reflects the importance of exchange companies as a complementary part of the banking sector, not a substitute for it.

Exchange Companies and Financial Inclusion

Exchange companies have contributed significantly to promoting financial inclusion, especially for segments that do not deal directly with banks. These companies provided an important entry point to the formal financial system through simple, accessible services.

This role manifests in several aspects, notably:

The impact of this is not limited to the service aspect only, but extends to enhancing transparency and reducing reliance on informal channels, which contributes to mitigating risks associated with unregulated financial transactions.

Evolution of Compliance and AML/CFT

In recent years, exchange companies in Jordan have witnessed a clear shift in the concept of compliance, where it is no longer viewed only as a regulatory requirement, but as an essential tool for risk management and institutional protection.

This development is reflected in the adoption of several core practices:

This transformation reflects the transition of the sector from nominal compliance to active compliance based on analysis and understanding.

The Role of Technology in Developing the Sector

Technology has played a pivotal role in reshaping the exchange sector, contributing to improving operational efficiency and enhancing the level of compliance simultaneously. The use of technology is no longer an option, but has become a necessity to keep pace with market and regulatory requirements.

Among the most prominent manifestations of this shift:

These technologies have also contributed to reducing human errors and enhancing the ability to make data-driven decisions, which positively reflects on the level of risk management.

Disparity in Exchange Company Sizes and its Impact on Compliance

The difference between exchange companies in Jordan is not limited to operational size or geographical spread only, but extends to include the regulatory framework governing their work, which is designed to reflect the principle of proportionality between the company's size and the nature of the risks it faces. In this context, the Central Bank of Jordan adopted a system to classify exchange companies into four main categories (A, B, C, D), with each category carrying different requirements in terms of capital, permitted scope of business, and operational complexity.

This classification is an important regulatory tool that contributes to achieving balance between enabling companies to practice their business and ensuring their ability to manage the associated risks.

Regulatory Framework for Company Classification

According to the licensing regulations for exchange companies, the minimum capital for each category is determined to reflect the volume of expected operations, starting from lower levels for small categories and reaching higher levels for larger categories, as follows:

This is not limited to basic capital, but extends to additional requirements when expanding through branches, where companies are committed to increasing paid-up capital for each branch according to their category, reflecting a direct link between geographic expansion and operational risk level.

Scope of Business and Powers by Category

This classification results in a clear difference in the nature of business permitted for each category, directly affecting the risk level faced by each company, and consequently their compliance requirements.

For example, Category (A) companies enjoy the widest scope of powers, allowing them to:

These powers decrease gradually when moving to lower categories; Category (C) is limited to acting as a sub-agent in electronic transfers, while Category (D) is confined to a narrow scope focused primarily on buying and selling currencies and some limited services.

This gradation in powers reflects a regulatory philosophy based on linking activity volume and complexity to the company's capability to manage risks.

Implications of Classification on Compliance and Risk Management

The difference in categories is not a mere formal classification; it results in a real disparity in the nature of risks and compliance requirements. Category (A) companies, by virtue of handling larger transaction volumes and higher complexity of services, are more exposed to Money Laundering and Terrorist Financing (ML/TF) risks, requiring more advanced transaction monitoring systems, specialized compliance teams, and advanced application of the Risk-Based Approach.

In contrast, although lower-category companies engage in less complex activities, they remain exposed to abuse risks, especially in direct cash operations. This requires them to adhere to the same basic compliance principles, albeit within a scope proportional to their size.

Hence, the regulatory framework based on company classification contributes to:

It is worth noting that this classification is not static, as the regulatory framework allows companies to transition between categories upon meeting the necessary requirements, serving as an incentive for growth and institutional development. This reflects a regulatory orientation that does not merely impose restrictions, but encourages companies to develop their financial, operational, and regulatory capabilities, enabling them to expand within a regulated and safe environment.

Current and Future Challenges

Despite significant progress, the sector continues to face multiple challenges requiring continuous response. The nature of financial crimes evolves rapidly, forcing exchange companies to constantly update their tools.

Prominent challenges include:

In contrast, significant opportunities emerge, such as:

Conclusion

In light of the above, it is clear that exchange companies in Jordan have come a long way in transitioning from traditional institutions to modern financial entities relying on compliance, technology, and risk management. This transformation has strengthened their economic and social role, making them more capable of facing challenges. Furthermore, leading companies in Jordan, such as Al-Alawneh Exchange, have become highly attractive to global banks like the Bank of New York, Crown Bank, Bank of Sharjah, and Al Rajhi Bank, which have expressed interest in building business relations and opening accounts with leading exchange companies in Jordan and the region, especially those possessing a wide branch network exceeding 50 branches inside the Kingdom and more than 250 correspondent relations abroad.

With ongoing changes in the financial environment, maintaining this momentum requires continued investment in technology, enhancing compliance culture, and developing human competencies, ensuring the sustainability of this sector and its vital role in the national economy.