During the ongoing Dollar Crisis, informal and illegal channels of foreign exchange, i.e. Hundi has to be countered. But what is Hundi? Why has it become popular and what measures could lessen the use of Hundi?
In 2023, Bangladesh was expected to receive a total of USD 23 billion in remittances, making it the seventh-highest recipient of remittances. In January 2024, remittance inflows in Bangladesh were recorded at USD 2.10 billion. Remittances are increasing at a rate of 7% inside the nation; nonetheless, while being the seventh-largest recipient of remittances worldwide, Bangladesh’s remittances as a percentage of GDP in 2023 were 5.2%, less than those of nations like Nepal, Sri Lanka, and Pakistan. According to a research conducted by South Asian Network on Economic Modeling (SANEM)’s Bazlul Haque Khondker, the amount of money received in remittances that goes through Hundi is 49%, and the rest (51%) arrives through legitimate channels. As the country navigates its way through a foreign reserve crisis and trade deficit, preventing the use of Hundi can prove to be a boon to Bangladesh’s growing economy. This article looks into Bangladesh’s long-standing Hundi issue and explores a variety of measures that can be taken by the government and financial institutions to tackle Hundi networks.
According to the ILO research titled “In the Corridor of Remittance: Cost and Use of Remittance in Bangladesh,” foreign nationals sent USD 14.46 billion in remittances to Bangladesh during the 2012–13 fiscal year. This accounted for 60–70% of the entire amount remitted. This indicates that an additional USD 4.3 billion to USD 5.7 billion were obtained through illicit means. Thus, a significant amount of remittances were being transmitted by hundi, which continues till date.
What is Hundi?
The term “Hundi” finds its etymological roots in the Sanskrit language, where it signifies “to collect.” In Bangladesh, “Hundi” refers to a prevalent method of informal cross-border money transfer. Essentially, it represents an undocumented agreement or instruction that facilitates the exchange of payments in cash. Particularly prominent among migrant workers originating from South Asia, notably Bangladesh, and employed in the primary labour-receiving countries of East and Southeast Asia, the Hundi system operates as an informal channel for financial transactions. It operates beyond the confines of the established financial infrastructure in Bangladesh, thereby rendering it illegal. However, it serves multiple purposes within the informal economy, functioning as bills of exchange in commercial transactions, credit instruments for obtaining loans, and as a means of remittance for transferring funds between locations.
The hundi operator, often called “Hundiwala,” is a key player in the hundi system. In essence, the hundi operator is a banker or foreign exchange trader who makes it easier for money to move between members of the hundi network. The task of transferring money without physically moving it falls to the hundi operator. They link the sender and the recipient, who may be in separate places, by acting as middlemen in hundi transactions. The hundi operator is essential to the operation of the hundi system because they maintain records that are intended to track the amounts owed to other hundi operators. The function of the hundi operator is crucial in facilitating unofficial financial transfers outside of established banking channels, especially when it comes to remittances and international transactions.
Why Do People Use Hundi?
Those who use hundi for financial transactions, usually have incentive to bypass the formal channel and go for an informal one. It’s not that only remittance earners use hundi. There is evidence of the elites of Bangladesh using hundi as a mechanism of foreign exchange. Albeit different groups of people have different motivations.
Convenience
Remittance earners send their hard earned money home for their loved ones – parents, spouse, offsprings, siblings and other family members. There are non-exhaustively three issues that aggravate this issue.
Complexity of Formal Channels
In most of the cases, their family members are not well-educated to maintain the formal process of withdrawing money from banks. Not all banks have easily understandable guidelines.
Inaccessibility of Banks
On the other hand, the banks do not have branches everywhere in the country. The nearest bank can be faraway, especially in the rural areas. A significant concentration of bank branches exist in the urban centres of Dhaka and Chattogram, comprising over 56 percent of the total bank branches nationwide as of March 2018. Surprisingly, despite urban areas accommodating only about a quarter of the total population, more than 52 percent of the bank branches are situated there. This discrepancy indicates a notably higher density of banks in urban areas compared to rural regions.
Easier Alternatives
With the advent of Mobile Financial Services (MFS) in every corner of the country, it has become easier to access hundi channels from the remotest village. As of December, 2019, the country had 971,000 MFS agents, many folds higher than bank branches.
Exchange Rate
When one is sending money from abroad for their loved ones, they will always expect a better exchange rate. Whoever provides a higher exchange rate becomes their go-to option regardless of legality. While the official exchange rate is BDT 110 per USD, hundiwala provides a higher rate, thus making hundi a more lucrative option for the user.
Under-invoicing and Tax Invading
Under-invoicing refers to showing a lesser value than the real value in terms of imports and exports. In essence, this is done to avoid paying taxes. In the event that a lesser price is displayed, the importer receives the true amount through Hundi. The governor of Bangladesh Bank demonstrated in 2022 that an LC was established showing the price of USD 20,000 to import a $100,000 Mercedes-Benz. The remaining sum is sent via Hundi. Under invoicing of imports is around USD 10-15 billion per year and rising.
Illegal Migration
Migrants who immigrate illegally have no option other than using informal channels. The BRAC Migration Programme has uncovered that over the past decade since 2009, a total of 62,583 Bangladeshis entered Europe illegally. There are many more unaccounted illegal Bangladeshi migrants in the middle eastern countries.
Recommendations
Bangladesh Bank immediately ordered the monetization of the ERQ (Export Retention Quota) account status of exporters opened in foreign currency at double the previous rate. The purpose of extending the ERQ status was to save dollars for regular imports and the immediate needs of exporters, making various payments hassle-free and fast. In this way, traders can save from ‘conversion loss’ by breaking dollars into taka and buying dollars again quickly.
Besides, reducing the net open position (NOP) limit to 15 percent will reduce the service capacity of commercial banks to open LCs or letters of credit. Moreover, exporters have been asked to encash ‘term deposits’ of the ERQ balance. A reduction in ERQ may later lead to exporters having to buy dollars from abroad to pay their foreign debts and liabilities, which will also increase costs. If the businessmen need money suddenly, they have to get permission from Bangladesh Bank to meet all those liabilities and buy dollars.
Forcing the trader to redeem the dollars deposited for the import of raw materials actually discourages essential imports. A policy of buying dollars in a few days and selling dollars held abroad to meet liabilities may prove counterproductive. On one hand, export trade has become difficult due to Bangladesh Bank’s decision, which may increase the settlement of transactions in hundi by showing a lower LC value. These decisions by Bangladesh Bank may have an impact on the fact that the dollar has recorded a high exchange rate in the hundi market.
Many foreign exchange rates are in force in the country. The rates of domestic commercial banks, the kerb market, and foreign banks are different. Bangladesh Bank has a daily announced rate, which has been violated recently in some instances by some banks. Expatriates cannot buy or sell dollars at fixed rates. The Bank LC settlement dollar rate has also increased. When an expatriate sends or exchanges foreign currency to a bank, they go to the kerb market to make a profit.
In August 2023, the exchange rate difference between the bank and the kerb market was close to 8 taka. Even after the 2.5 percent incentive announced by the government, Hundi is the preferred medium for expatriates. The exchange rate in the hundi market is profitable. As a result, Hundi Market is everyone’s choice for profit. Many feel that instead of giving incentives, the value of money should be left to the market. Incentives also increase the likelihood of smuggled ‘black money’ returning ‘white’ through legitimate channels, encouraging bribery and corruption in the country.
Bangladesh is determined to maintain the value of the taka, but there are allegations that the taka is overvalued. One proof is the Real Effective Exchange Rate (REER). Bangladesh’s REER is higher than the NEER (Nominal Effective Exchange Rate) rate. REAR has been steadily increasing recently. That is, the purchasing power or ‘price competitiveness‘ of taka is weaker than the dollar exchange rate announced by Bangladesh Bank. This provides a logical explanation for the high exchange rate in the hundi market.
Expatriates and businessmen face three problems when they exchange foreign currency at the bank and get less exchange. One, the currency goes to the kerb market, or hundi. Two, Bangladesh’s reserves are reduced. Third, the source of foreign currency income of commercial banks is reduced, and the way of selling foreign currency is closed. In addition, there is the harassment of deducting 10 percent of expatriate income at the beginning.
Students, businessmen, patients, or tourists going abroad are subjected to various malpractices. On the other hand, if you want to sell currency brought from abroad, banks provide lower rates and ask for different documents. If you want to buy, why should you go, where should you go, submit the visa-invitation letter, bring this-that, notarize that, fill such-and-such form, verify from this-that place, and photocopy so many copies, there are no dollars in addition to these expenses, come tomorrow, meet the boss, banking hours are over today – these are red tapes. Money on one hand and labour hours wasted on the other.
On the contrary, hundi agents bring money and foreign currency to the house when called—sir, when will you need it? How much will you need? Commercial banks often do not behave like foreign exchange dealings is one of the statutory banking services.
Once, hundi was dangerous, but now it is safe. I have learned from talking to expatriate workers that sending money to parents abroad is just a phone call away. That is, if you tell the amount from the office to a foreign shop or agent by phone, they either send the same amount to Bkash, or take it to your home in the village or city on a motorcycle.
On the contrary, there is a lot of fuss when it comes to cashing expatriate income in the bank. Many times, lack of knowledge regarding the use of identity cards (NID) for encashing remittance is a hindrance to depositing expatriate income in banks. There are no fees for sending money to Hundi, unlike many banks that charge.
The banking system is often not very user-friendly. The idea of financial inclusion is often disregarded for earning higher profit. Opening a bank account has not been easy for the poor, less educated, or illiterate people. Most private banks do not have branches at the upazila and union levels. With few exceptions, the use of debit and credit cards is not accessible by the rural population. It is difficult to get banking services in rural society as the banking sector is not interconnected among themselves. As mobile banking is linked with foreign remittance hubs, this problem has reduced, but there are complaints of scamming. There are complaints that mobile banking agents are involved in hundi business. Mobile banking needs to ensure robust monitoring and speedy resolution of complaints.
On one hand, Hundi is accessible; on the other hand, hundi’s home service is perceived positively by people. Banks started agent banking but could not build trust. One can think about how the banking sector can provide home services in the case of expatriate income.
‘Money exchanges’ have to be closely monitored. Who are hundi agents, who buy and sell large amounts of foreign currency, who do currency trading—these can be figured out; honesty is required.
About the Author
A R Tahseen Jahan is the Co-Founder and Head of Policy at The Confluence. An undergrad student of Development Studies at the University of Dhaka, she worked on topics of economic development and public policy analysis.