Every time analysts discuss the factors that contribute to money being transferred to other nations illegally, they highlight two significant points: Trade based money transfer -- under invoicing and over invoicing -- as the first, and use of hundi as the second.
The problem of trade-based money laundering is being addressed by Bangladesh Bank (BB) through a specific audit. But the real challenge open today is: How to limit the use of hundi? If the usage of hundi could be restricted, together with increased efforts by Bangladesh Bank to curtail trade-based money laundering, the country's current economic struggles could be resolved earlier than anticipated.
Remittances are one of the biggest sources of foreign exchange, as is common knowledge. This aids in reducing Bangladesh's current account deficit in the country's payment balance. Remittance inflow, however, is significantly out of proportion to the number of Bangladeshi employees who live abroad.
For instance, in 2022, Bangladesh sent the most migrant labourers ever, but remittance receipts did not increase accordingly. Though, last year, more than 11.35 lakh Bangladeshis flew out of the nation in search of employment overseas, nearly tripling the 6.17 lakh migrant workers who did so the year before, surprisingly, the amount of money that employees moved through the official channel fell 6.65% from $22 billion to $21.28bn in 2022.
This happened mainly for two reasons: First, after being hired in a host nation, new Bangladeshi migrant workers often go through a three-month probationary term. As a result, it takes them three to six months to start sending money home. The usage of the unauthorized portal, ie, hundi, is the second cause of the disparity.
In the hundi system, local agents distribute or collect money on behalf of friends, family members, or other agents without the benefit of legal protection or oversight, with the understanding that any outstanding debts will be cleared through subsequent transactions.
As stated in the definition, hundi has no legal foundation or binding. In contrast, sending money through a bank is safer since it offers legal support.
Even after that, the use of hundi is growing alarmingly. Reports indicate that only 51% of remittances to Bangladesh are sent in a formal, legal manner; the remaining 49% are sent through hundi. The reason why hundi is attracting more users lies in the benefits that hundi offers.
Compared to traditional banking, hundi is quicker and more practical. Documents are needed for official banking, and there are formalities. The complexities in banking procedure is challenging, especially for the rural people, while the door-to-door service is one of hundi's practical advantages.
Locals can obtain money without traveling to distant branches. Additionally, the hundi exchange rate is greater than the banking foreign exchange rate. Furthermore, there are illegal immigrants who do not comply with the legal requirements to send money home.
The sum of all these factors leads migrants to prefer hundi over banks.
Bangladesh Bank continues to make efforts to encourage migrants to adopt the official route. To promote remittance inflow, it has loosened its regulations. Even the incentives went up to 2.5%. This undoubtedly was helpful to some extent. The most recent period, January 2023, saw a about $1.96bn inflow of remittances. However, a sizable amount of money is still moving through non-banking channels.
Agent banking could be useful in bringing those monies into the financial system.
How agent banking could help
Agent banking refers to the provision of small scale financial and banking services to the underserved community by engaged agents under a legal agency arrangement. The activities and use of agent banking is increasing day by day as the rural people are becoming more familiar with it.
According to the Bangladesh Bank, there are 20,177 outlets managing more than 16 million accounts (14.47 million rural accounts) depositing Tk306bn. The inward remittance collection has also increased to Tk95.81bn which is 9.72% higher than the previous quarter.
Agent banking has collected around 16% of the total remittance inflow of Tk595.58bn through the banking channel. More significantly, the major share of the remittances collected through agent banking is going to the rural areas, which is expected to rejuvenate the rural economy.
Though agent banking is collecting inward remittance, it still has a lot to explore.
The underprivileged areas of Bangladesh have been experiencing agent banking but it is still less convenient for the workers who live abroad. It is necessary to establish more agent banking locations outside of the nation, particularly in the Middle East where there are more migrants.
Then, to match the hundi exchange rate, the incentives for remittance could be increased. And if it's possible, agent banking might be linked with Mobile Financial Services (Bkash, Nagad, etc) rather than adding more outlets around the nation to cut costs and maximize the use of the available resources.
Once agent banking offers similar conveniences, it will have the advantage over hundi because of its legality.
If these suggestions are put into practice, agent banking can successfully replace the use of hundi and increase remittances. It will lessen the strain on currency reserves and gradually lower inflation.
Dr Ashraful Alam Chowdhury is an Independent Researcher and writer. He completed his MSS in economics from Dhaka University and pursued post-graduation and PhD in Economics from Emory University, Georgia, USA. He has experience of working in the US, Bangladesh, Myanmar, and India.
