Transferring money abroad and exchanging currency has become a common practice among many living in Ghana. But even those who transfer money abroad regularly might find it hard to understand how the exchange rate works
Exchange rates are crucial in impacting the trade and economic performance of a country and often, they indirectly impact many different areas of your day-to-day life, from the cost of your groceries at the local market, to the cost of fuel, job opportunities and even the interest rate on your bank loans.
To help you get a good deal on your next money transfer, Gbenga Okejimi, Country Manager, Nigeria and Ghana, WorldRemit shares some insights into how the exchange rate works.
What is an exchange rate?
The exchange rate is the amount that one currency is worth when compared to another currency. For many of us the only time we deal with them directly is when it comes to travelling or sending money overseas.
What’s better – a high or low exchange rate?
A higher exchange rate is better if you’re buying or sending currency, as it means you get more currency for your money. A lower rate is better if you’re selling the currency. This way, you can profit from the lower exchange rate.
What is FOREX?
FOREX (foreign exchange market or FX) is a global market for currency trading used by individuals, businesses, and banks. If you make a transaction that requires a currency conversion, FOREX determines how much value you get for your money.
To put it in perspective, if you bought a car from a dealer in Accra and paid in US Dollars, you made a FOREX transaction. However, a significant portion of the foreign exchange happens for practical purposes – for example, when you’re travelling or buying foreign goods. However, a majority of currency conversion is made to earn a profit.
How often do exchange rates change?
The FOREX market never sleeps; it is active all day and all night. Exchange rates don’t change once a day or even once an hour; they are constantly fluctuating in response to the Ghanian economic, political changes and developments as they occur around the world.
What is a floating exchange rate?
A floating exchange rate is where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. This is in contrast to a fixed exchange rate, where the government determines the rate. Most countries around the world use a floating exchange rate and when a country uses this kind of an exchange rate, its government actions can only influence the rate, not regulate it.
What is a fixed exchange rate?
A fixed exchange rate is a currency that isn’t influenced by FOREX. Instead, the government controls the rate and regulates its value. Countries with fixed exchange rate like Hong Kong, Denmark, or Saudi Arabia, usually peg the exchange rate against an internationally popular currency (US Dollar or Euro). The country’s government then holds an abundant supply of both of these currencies. This allows them to buy and sell currency as required to keep their exchange rate at a fixed value.
What is an interbank rate?
Interbank rate, sometimes also referred to as the mid-market rate, is used when banks exchange currencies between themselves. This rate is usually better than the rate consumers receive. This is because currency exchange services aim to profit and often add fees or a mark-up to their exchange rate.
What factors influence the exchange rate?
Here is a brief explanation of some of the critical factors that help to determine the exchange rate.
Where to get the best exchange rate?
A good exchange rate is as close to the interbank rate as possible. You can find out what the current interbank rate is with a quick search online. And although you can’t control the currency market, you can choose who you transfer or exchange your money with. The two main options for sending money abroad are bank wire transfer or online money transfer.
Bank or building society wire transfers
Making the international transfer with your bank or building society may sound like a simple option, but the service comes with its price.
Some banks charge fixed fees for sending money abroad, which can end up being too expensive if you’re only sending a small sum of money. Many banks also offer low exchange rates, a tactic used to charge further ‘hidden fees’ on international transfers.
On top of this, wire transfers can be slow – sometimes taking days to arrive with the recipient, and not all recipients want or can receive money in their bank account.
Online money transfer services
Online money transfer services, like WorldRemit, tend to provide a quicker, more cost-effective way of transferring money overseas. A good online money transfer service will only make you pay a small fee and will offer a fair exchange rate, with any costs shown upfront. They will also often offer a variety of pay-out options, like cash pick up, bank account transfer, mobile money or airtime top up.
Avoid low exchange rates when travelling
If you are planning on travelling outside of Ghana and require foreign currency, you can avoid the low exchange rates provided by banks, airports, or currency exchange bureaus by using a money transfer service.
You can transfer money to your foreign bank account if you have one, or another popular option is to pick up cash from your money transfer service’s cash pickup agents while you’re abroad.
Distributed by African Media Agency (AMA) on behalf of WorldRemit.