As remittance grows, can hundi be reined in?

A few months back, the Awami League regime started a war against hundi. The reason: Hundreds of thousands of migrant workers staged a remittance boycott, protesting the government's atrocities. They began sending money through unofficial channels, striking the AL government where it hurt the most. 

Now, with the AL government gone since August 2024, we are seeing a rise in remittances. But the hundi market is still operating and putting a dent in the government's coffers at a time when every dollar matters. 

Known for its speed, cost-efficiency, and anonymity, hundi appeals to many migrant workers, students studying overseas, and others seeking alternative remittance channels. Despite its illegality, the system thrives in parallel with formal financial institutions, contributing significantly to the economy's illicit financial outflows. 

Addressing the hundi problem is critical not only for ensuring financial transparency, but also for mitigating the economic consequences of an unregulated shadow economy.

So, can it really be stopped?

Understanding hundi's popularity

Hundi's appeal lies in its simplicity and efficiency. For many Bangladeshi expatriates, particularly those in low-income groups, formal financial institutions present hurdles such as documentation requirements, delays, and lower exchange rates. Also, many workers are undocumented, so there is no way for them to send money via any formal channel. 

Jyoti Rahman, an Australia-based macroeconomist, explains, "Suppose you are an undocumented worker in the Middle East, or you have gone to Europe by crossing the Mediterranean on boats, or you are staying in the US illegally. Then, the only way you can send money back home is through hundi. It is the natural market for hundi, and it will persist." 

While formal channels provide an exchange rate of around Tk108 per dollar, hundi offers rates as high as Tk115. This significant difference incentivises users to choose hundi over formal systems​.

Unlike banks, hundi brokers operate informally and deliver funds directly to recipients' doorsteps. For families in rural Bangladesh, this service eliminates the need to navigate bank procedures​. And for something illegal, hundi is surprisingly stable and trustworthy. 

Hundi operates on trust, with brokers leveraging personal connections and community networks. This trust-based system offers a level of assurance that many users find lacking in formal institutions.

Also, it was well-connected to the previous regime's illicit money transfer racket. 

Dr Selim Raihan, professor of Economics Department at Dhaka University and Executive Director of the South Asian Network on Economic Modelling (SANEM), said, "The players who used to launder money were also part of the hundi ring."

The integration of hundi with Mobile Financial Services (MFS) platforms like bKash and Nagad has further boosted its appeal. Brokers use MFS to settle transactions, creating a seamless system that blends informal practices with formal technologies​.

During Covid-19, remittances soared, and one of reasons behind the surge was the shutdown of the hundi network, which needs human interaction, due to lockdowns. 

"More recently, we have seen the remittance spike of 2021, followed by another slump in 2022, and a non-boom in more recent years notwithstanding the record numbers of emigrant workers. The conjecture is that the recent remittance flows have been affected by hundi," Rahman says. 

He continues, "In 2021, because of lockdowns, the hundi channel was closed and formal remittances grew at a record pace. This was reversed in 2022. In 2023, and to a lesser extent in 2024, remitters relied on hundi as the informal market offered a better rate because of outflow of siphoned money as well as expectations of depreciation given the bleeding of reserves." 

Former NBR chairman Dr Muhammad Abdul Majid also pointed out the unstable exchange rate for the increase in hundi transactions during 2022-2024. 

"Hundi was offering a much higher rate than formal channels. So people used it. Why wouldn't they?" he notes. 

But despite the benefits it offers to remitters in the short term, hundi diverts remittances from formal channels, depriving the country of critical foreign currency reserves. With remittances forming a substantial portion of Bangladesh's forex earnings, this diversion intensifies the ongoing dollar shortage. It is estimated that hundi transactions account for nearly half of the remittance inflows​.

Hundi also serves as a conduit for illicit financial activities, including trade-based money laundering (TBML) and capital flight. According to estimates, Bangladesh lost an average of $16 billion annually between 2009 and 2023 through illicit outflows. And a big chunk of the money went out via hundi. 

In fact, after the sanction scare in 2023, many mid-level AL leaders sent their illegal wealth abroad.

Can remittance growth reduce hundi? 

Since August 2024, remittance has been steadily increasing, which is expected to ease pressure on the country's forex reserves. Earlier this year, remittance inflows had declined by 3.2% in July, but remittance inflows rebounded in subsequent months, with significant increases of 39% in August, 80% in September, and 21% in October. 

For the July-November period this year, total remittance inflows amounted to $11.13 billion, which is $2.32 billion, or 26.4%, higher than the same period in the previous fiscal year, according to central bank data.

This rise is due to increased confidence in the current government and the reduced influence of the informal hundi system. Furthermore, Bangladesh's economy is expected to stabilise in the future, and the trust is pushing remittance numbers upwards. 

"After 5 August, the interim government has taken good and effective measures to stabilise the currency and fix the exchange rate. The central bank has tried to streamline the remittance process as well. So, people are sending more remittance now," Dr Abdul Majid says.  

According to Jyoti Rahman, "The top brass of the central bank was thoroughly corrupted; hence, the governor and two deputy governors fled after the fall of the Hasina regime. This never happened before. Even on 17 December 1971, the then central bank officials reported to the Indian military officers for duty. This shows the extent of corruption in the central bank under Sheikh Hasina. And so, the confidence of the people was low. 

"A lack of trust and confidence in a country's economic outlook and top management is a self-fulfilling prophecy. It will worsen the economic condition, as we have seen in 2022-23," he adds. 

"But, now, both the finance adviser and the governor of Bangladesh Bank are both well-welcomed. The people have confidence in them, so they are not going for the informal channels. Also, the market is expecting the Bangladeshi currency to stabilise. So, the gap between the hundi and remittance exchange rate will close down as well. It will greatly reduce hundi transactions," Rahman further says.

Dr Selim Raihan says that after the fall of the past regime, the usual hundi rings have been inactive. So, the remittance is increasing. 

He also cautions that unless the government can solve the issues of corruption and ease the remittance process of migrant workers, hundi may come back. 

"We need lasting reforms. Otherwise the remittance inflow will be temporary and hundi rings may start again. We need to uproot the roots of corruption, illicit money transfer and other issues. We need to address the institutional deficiencies." 

At the same time, Dr Majid points out that all of the remittance may not be from our migrant workers. It can also be some corrupt individuals trying to send their money back to avoid government crackdown on money launderers. 

"The government has repeatedly vowed to bring back the laundered money. So, many businessmen who had previously laundered their money abroad may send some of it back, fearing repercussions. If the government can stabilise the currency and the exchange rate, and crack down on corruption and money laundering, we will see less hundi in the future," he adds.