Hi I am Maya Thornton runs a UAE-based consulting company that receives payments in GBP and regularly pays suppliers in EUR. I want to understand why the amount credited or debited by her bank differs from the exchange rate she sees online. How is the FX rate actually calculated?
When you convert foreign currency through a UAE business bank account, the rate you receive is generally based on a market or benchmark exchange rate, with the bank adding an FX spread or markup. Separate transfer, SWIFT or intermediary-bank charges may also apply.
What Makes Up the FX Rate?
- Benchmark exchange rate: The bank starts with a rate derived from wholesale foreign-exchange markets or published reference rates, including the UAE Central Bank's exchange-rate information.
- FX spread: The bank then applies a margin when buying or selling the foreign currency. The spread can vary depending on the currency, transaction size, account package and your banking relationship.
- Additional charges: A transaction may also attract fixed transfer fees, SWIFT charges or correspondent-bank fees. These are separate from the exchange-rate spread.
For example, if Maya sees one GBP-to-AED rate on a public currency website but receives a slightly different rate from her bank, the difference can largely come from the bank's FX spread, rather than an error in the transaction.
What About AED and USD?
The UAE dirham is officially pegged to the US dollar at approximately USD 1 = AED 3.6725. Therefore, AED/USD conversions have a much more predictable underlying exchange relationship than currencies such as GBP, EUR or JPY.
What Should Businesses Watch?
If your company frequently receives or sends international payments, don't compare banks based only on their advertised transfer fee. Look at the actual FX rate offered, the spread, SWIFT charges and any intermediary-bank deductions.
A business that makes frequent high-value international transfers may also be able to negotiate preferential FX pricing with its bank or use a suitable multi-currency account to reduce unnecessary conversions.
For accounting and UAE tax purposes, businesses should also distinguish between the commercial rate actually used by the bank and the applicable official/reference exchange rate required for reporting and tax calculations.
For you, the best approach would be to ask her bank for the all-in cost of a typical GBP or EUR transaction, rather than simply asking whether the bank has a low transfer fee.
