Should You Invest in Foreign Currency Accounts?

I received several question from readers asking opinions on foreign currency account (FCA). Some people look at it as if it is a very safe and high yield investment because some foreign currency denominated account gives more than 7% interest per annum.

In order to post a thorough research for you, I fired some emails to most of the banks in Malaysia. Guess what? Only Citibank’s Ms. Amie Heryanie from Internet Service Support replied my email enquiry within 2 working days. At the point of writing this post, the other banks still haven’t responded yet. If after reading this report, and you had made up your mind to open a FCA, please consider Citibank as your first choice.

What is a foreign currency account? How it works?

Foreign currency account is an account maintained in a bank in another currency than the currency of the country in which the bank is located. In Malaysia, FCA is an account denominated in currencies other than Malaysia Ringgit. Banks which are designed by Bank Negara Malaysia to open foreign currency accounts are called “Designated Banks”.

Denominations offered :

USD (840) = US Dollars
GBP (826) = Pound Sterling
AUD (036) = Australian Dollars
SGD (702) = Singapore Dollars
EUR (978) = European EURO
JPY (392) = Japanese Yen
CAD (124) = Canadian Dollar
CHF (756) = Swiss Chronos (Francs)
NZD (554) = New Zealand Dollars
HKD (344) = Hong Kong Dollars
THB (764) = Thai Bhat

Photo by bradipo

Purposes of opening a FCA

Nowadays, banks promote foreign currency account investment heavily. What is the main purpose for a person to put his money into a foreign currency account?

1. Hedge against exchange rate fluctuations
Foreign currency accounts can be a good option for importers and exporters. If you open an account in the currency in which you make the bulk of your transactions you can hedge against exchange rate changes by keeping money in the account until the rate is beneficial to you.

2. An alternative form of investment with potentially higher interest rates
For example, a fixed deposit FCA denominated in New Zealand Dollars gives 8.2% interest rate per annum for the period of 12 months, as offered by United Overseas Bank.

3. For future child education funding
If you plan to send your child to study in Australia, saving your child’s education fund in an Australian Dollars denominated FCA will save you the worries of Australian Dollars appreciation.

4. For non-resident employed in Malaysia to retain foreign currency salary received from overseas.

5. Transactions are less costly and save a significant amount of money lost through the exchange conversion process to :

• Individuals with children studying overseas
• Individuals who are employed overseas or have regular income from abroad
• Repatriation of funds from individual FCAs offshore send back to FCAs onshore

Risk Involved in FCA

Because of the risk-return trade-off, higher potential returns are associated with higher risk. Foreign exchange markets can be volatile. Currency positions held in these markets may involve actual losses. What’s the risk involved with a foreign currency account?

1. Market Disruptions
From time to time, significant events can occur that disrupt the normal operations of financial markets. Such events may reduce the liquidity of a currency or of the foreign exchange markets generally. Examples:

• failure of a major institution
• war
• a major political event
• failure of a government to meet its financial obligations (sovereign risk)

If, as consequence, there is a movement in the exchange rates, such events could result in a financial loss to holders of foreign currencies.

2. Market Risk
Market risk is the risk that prices including exchange rates and foreign currency interest rates will move adversely. There is a risk that exchange rates and foreign currency interest rates will change, possibly suddenly and substantially, causing you to incur a significant actual loss as a result of your investment

3. Currency Risk
Currency risk is the risk that because of adverse exchange rate movements the value in Ringgit of your FCA may fall. Should you hold an offsetting position in the foreign exchange markets or in a commitment to spend this currency then your loss maybe offset in part or in full by the offsetting position.

4. Interest Rate Risk
The foreign currency interest rate that you receive on your FCA is determined by the Bank by reference to a variable foreign currency interest rate in the currency of your holdings. Consequently, you may experience a reduction in your interest income should interest rates for that foreign currency fall.

There is no interest rate risk if you are investing using Time Deposit Account with fixed tenure.

5. Credit Risk
Credit risk is common to all investment products that you may hold with the banks. In all cases, you are reliant on the ability of the bank to meet its obligations to you under terms of the particular product.

Please take note that interest earned is subject to 5% withholding tax.

Type of Accounts

1. Time Deposit Account
With foreign currency Time Deposit Account, you can deposit your foreign currencies for a period of ranging from 1 to 12 months and enjoy high interest rates. Standard Chartered Bank Malaysia provides tenures as short as 1 week.

• Similar to Fixed Deposit
• Tenure ranging from 1 week to 12 months
• Minimum initial term deposit requirement
• Interest paid upon maturity

2. Call Deposit Account
Call deposit account have features like a Checking Account but without interest earned.
Some banks provide interest rates return. For example, UOB’s Foreign Currency Call Account let you earn as high as 6.2% p.a. denominated in New Zealand Dollars.

• Minimum initial call deposit requirement
• Interest rate calculated daily and credited monthly
• No minimum withdrawal amount required

3. Multi-Currency Account
This type of account is a special product offered by RHB. RHB Multi-Currency Account is an interest-bearing account that offers customer the opportunity to hold up to 13 foreign currencies in one account. For a multi-currency account, it is also divided into two groups – the call deposit and time deposit.

Requirement to Open a FCA Account

The criteria to open the said account is as below:

• Minimum age of 18 or 21 years old (depends on bank’s policy)
• Copy of IC (Malaysian)
• Passport & work permit with validity not less than 24 months (if foreigner)
• Secondary Documents  (proof of employment/education)
• Minimum deposit of USD1,000-10k or equivalent, depends on banks

Note: FCA are offered to individual account holders only.

Standard Terms and Conditions

• Residents without domestic credit facilities are free to open foreign currency accounts with no caps on limit.
• Residents with domestic credit facilities are capped to USD150,000.00
• for foreign currency accounts (FCAs) opened solely to facilitate education and employment overseas; and convert Ringgit for credit into foreign currency accounts (FCAs) up to RM100,000.00 per annum, for purposes other than education or overseas employment.
• With all of the above, all account openings are subjected to bank branch manager’s approval and must be within the guidelines of the Exchange Control of Malaysia (ECM).

Definition of Domestic Facilities
Resident obtaining any Ringgit advance, loan, trade financing, hire purchase, factoring, leasing facilities, redeemable preference shares or similar facility in whatever name or form, other than-

• One personal housing loan & one vehicle loan (hire Purchase) obtained from residents
• Credit card & charge card facilities
• Trade credit terms extended by a supplier for all types of goods & services
• Forward exchange contracts entered with authorized dealers
• Inter-company borrowing within a corporate group

The following are also considered domestic borrowings:

• 1 housing loan, 1 Overdraft, no car loan
• 2 car loans, no housing loan
• 1 housing loan, 1 Overdraft and 1 car loan
• No housing loan, 2 Overdraft, no car loan
• 2 Housing Loans, no car loan

Malaysian with NO Domestic Facilities :

• Totally no loans of any kind
• Only 1 Housing Loan & 1 Car Loan
• Only has credit Cards

Individuals with more than one credit card or charge card are NOT considered as domestic borrowing

Charges Involved

Charges vary depends on bank and the type of service. Below is the charges involved in a Call Deposit accounts at Citibank.

1. Service Charge – RM25 is imposed when average monthly  balance is less than USD5,000 or equivalent.

2. FAF Charges

Note: *FAF rate : (Buying OD + Selling OD/TT)x ½

FAF charge of 1.5% will be levied on any deposits and withdrawal of any FCY cash

Example:

FAF charge paid in FCY cash : 1.5% x FCY = FCY
FAF charge paid in Ringgit : 1.5% x FCY x *FAF rate = RM  XXXX.XX

Placement
By FCY cash : 1.5%
By DD/TC : No FAF charges (if same currency)
By incoming TT : No FAF charges (if same currency)
From FCY Call Account transfers : No FAF charges (if same currency)

Cancellation/Redemption
By FCY cash : 1.5%
By DD/TC : No FAF charges (if same currency)
By outgoing TT : No FAF charges (if same currency)
To FCY Call Account transfers : No FAF charges (if same currency)

Links to Banks

Citibank | Foreign Currency Time Deposit
United Overseas Bank – Personal Banking – Deposits – Foreign Currency Account
RHB BANK – Multi-Currency Account
Maybank – Individual Foreign Currency Account
CIMB – Foreign Currency Current Account
Standard Chartered : Foreign Currency Account
EON Bank Group Malaysia: Treasury & Investment Banking – Foreign Currency Accounts
Hong Leong Bank – Foreign Currency Fixed Deposit
Combinations Account – HSBC Bank Malaysia Berhad | HSBC Malaysia

Should you invest in FCA?

If you want to know my opinion on investing in foreign currency account, my answer is,”No, I am not interested at this moment.”
FCA is suitable for those who have specific purposes such as the frequent export import businesses, parents with child studying overseas, or expatriates working in Malaysia.

I personally regard a FCA like a liquid cash account. Most of the time I am in Malaysia and I spend using Ringgit Malaysia. When I shop online, I use PayPal if possible. Most of my money is invested, in investment-linked funds, in unit trusts, local shares market and properties.

If you have a lot of cash (a few hundred thousands), FCA might be a good investment vehicle for you to diversify your portfolio and lower the Ringgit fluctuation risk.