Use of Hundi: How to stop the malpractice in rational ways

Hundi, or hawala, is an unauthorised and prohibited method of remitting money commonly practised in South Asia and the Middle East to avoid taxes, launder money gained from illegal sources, move dirty money from one region to another, finance terrorism, etc.

It is the other financial system based on trust, and there is no requirement for a middleman to transfer the money, and this is the easiest as well.

Non-immigrant students in the US are only permitted to work on-campus part-time for not more than 20 hours per week, so they are compelled to find off-campus jobs, including illicit "under the table" jobs, to meet their needs for food, shelter, tuition fees, and the necessity of remitting money to their families. 

Such students do not like the idea of depositing their savings into banks, which makes them almost untraceable, and they opt to use hundi to send money to their home countries.

It has been found that hundi is faster, cheaper, untraceable, and more flexible than the conventional banking system and is done privately.

The article has, therefore, attempted to describe why hundi continues to be popular among non-immigrant students and people from other diasporas. This writeup shows that students adopt hundi due to its low cost, high speed, anonymity, and trust, and how to convince them to use formal channels.

Prompt transfer and cost-effectiveness

Hundi is faster and cheaper than the conventional transfer services for small amounts of money transfer. A study found that South Asians, including Indian and Bangladeshi students in the US, prefer hundi because of the low charges as well as the speed. 

According to research, the students prefer hundi because they seek to avoid the costs and time that come with the conventional methods of transfer that make it more rational . These transactions are very cheap in comparison to those of formal banks or international money transfer agencies.

Legal issues

Non-immigrant students in the US are only permitted to work on-campus part-time for not more than 20 hours per week, and as a result, they are compelled to find off-campus jobs, including illicit "under the table" jobs to cater for their needs such as food, shelter, tuition fees, and the necessity to remit money to their families using hundi. 

Such students do not like the idea of depositing their savings into banks, which makes them almost untraceable, and they opt to use hundi to send money to their home countries. It has been found that hundi is faster, cheaper, untraceable, and more flexible than the conventional banking system and is done privately.

Certain students work in cash jobs to support themselves and their families. Since such earnings are unlawful, they do not deposit their money into legitimate banking institutions to avoid legal issues.

Research shows that, in light of Rational Choice Theory, the hundi system is, thus, the best way of avoiding legal and financial hassles.

Privacy and anonymity

The other equally important factor is that non-immigrant students and those who do cash-based jobs or are from sanctioned areas also use hundi because it does not involve the traditional financial systems that report transactions like Cash Transaction Report (CTR) and Suspicious Activity Report (STR). 

In the context of Rational Choice Theory research shows that students value the hundi system for the following reasons: it has no hard and fast rules; it is private and therefore is a rational way of bypassing conventional financial institutions.

Policy implications

The hundi system, thus used by non-immigrant students, has several policy implications that need to be discussed. These recommendations should help regulators understand the financial behaviours in relation to the rational choice theory that leads people to use informal systems like hundi.

Know Your Customer (KYC) and other regulatory framework

Instead of banning the hundi system, governments should try to keep it under their control. Thus, the control of hundi channels and the observed compliance with the KYC measures will contribute to the achievement of the deals. 

Hundi is used by students because it provides a rational choice to transfer money through a faster and cheaper method. If it is to be allowed, there is thus the possibility that the advantages could be kept while trying to avoid the disadvantages.

Improvement of banking and non-banking financial institutions

There is much that banks and the formal sector can do to increase their appeal to customers through lower costs and quicker transfers for low-value remittances. The current trend indicates that students like hundi since it attracts lower charges and a good exchange rate. In enhancing the formal systems, the policymakers could thus remove the use of hundi. 

The above results are consistent with the Rational Choice Theory, which assumes that students consider the costs and benefits of the decision-making process in choosing informal channels. If formal systems were made more competitive, then the rational choice for students might be to opt for legal routes.

Cashless economic structure

The drive to a cashless society and the integration of digital currencies, obviously initiated and monitored by the Federal Reserve and Bangladesh Bank, provides a chance to minimise the usage of informal systems. Digital wallets, remittance platforms, and Central Bank digital currencies are likely to provide faster, more reliable, and more secure services with fewer charges. 

According to Rational Choice Theory, students can prefer digital currency for money transfers as it is convenient and cheaper than hundi, and since digital currencies are legal and licensed, they can be used.

Nikhil Chandra Nath is a PhD Fellow in Criminal Justice at the University of New Haven.

Sushmita Das Dalia is an Assistant Officer at IFIC Bank PLC.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.