Why hundi is so popular in Bangladesh
Only 51% of the remittances that come to Bangladesh comes through formal and legal ways. And the rest, 49% of the remittances, comes through hundi
Hundi is an informal cross-border money-transfer system that bypasses the legal banking system.
It is primarily an unwritten contract or order that guarantees a monetary payment that can be transferred through negotiation. Hundis are used as remittance instruments to transfer funds from one location to another, as credit instruments to borrow money, and as bills of exchange in trade transactions.
It is used as an informal funds transfer system by South Asian migrant workers in general, and Bangladeshi migrant workers in particular, in major labour-receiving countries of East and Southeast Asia.
The hundi is informal but well-organised.
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Bangladesh has the world's fourth largest diaspora, with 13 million people living or settling outside the country. The Middle East has the largest Bangladeshi overseas population. The number is estimated to be three million people. It is a source of the majority of remittances to Bangladesh.
According to Bangladesh Bank, expatriates sent $21.03 billion through official channels in FY21-22, compared to $24.77 billion the previous fiscal year. In July and August this year, the country received $2.0963 and $2.037 billion in remittances from the migrants overseas.
But is this really the total amount of the remittance Bangladesh earns? According to the World Migration Report 2022, Bangladesh has risen to the seventh largest remittance-receiving country.
No, it is not the total amount. Only 51% of the remittances that come to Bangladesh comes through formal and legal ways. And the rest, 49% of the remittances, come through hundi according to the finance minister. Regardless, banks have recently begun offering a 2.5% interest rate on money transfers from abroad. But hundi is more lucrative and convenient than the banking system.
So why is hundi so popular among Bangladeshi foreign expatriates?
Hundi is more convenient and faster than formal banking. Population and Housing Census 2022 says that 25.34% Bangladeshis are illiterate. The scenario is worst in the rural setting. The census found 28.44% rural people illiterate.
They don't even know how to write and sign. Doing transactions through banking is a complicated task for them because there are so many papers and formalities involved which might take days. Bankers ask many questions while withdrawing money.
In hundi, on the other hand, there are significantly fewer procedures. The entire process can be completed within a day. And hundi is safe for transferring money.
The difference in exchange rates
The local market and the bank's exchange rate are not the same. For example, in Bangladesh Bank, the current exchange rate is slightly above Tk95 whereas the local banks are exchanging dollars for Tk95, and the kerb market sells it above Tk105 per dollar (as of filing this article).
If a particular person sends $100 from abroad in the banking channel, that $100 will be exchanged with Tk9,700. With 2.5% interest added, the amount will be Tk9,942. After the fees charged, the amount will stand at Tk9,900.
But if someone sends the money through hundi, the receiver will get Tk10,500 because of the currency exchange rates. The hundi system exchanges currencies according to the kerb market.
So, people prefer to transfer money through hundi rather than banks to get more money. Even though they know that it is illegal, yet they are using hundi because there is no proof of transaction.
Last hope for illegal migrants
Many Bangladeshis are living abroad illegally. Hundi is the only way for them to transfer money.
Because without having a valid visa, no one can do formal banking. Hundi, consequently, turns out to be their last resort. Besides, Bangladesh doesn't have legal banking connections in some countries such as South Africa, Iraq, Libya etc.
So, if any Bangladeshis live over there, they can't send money through formal banking. Hundi is the only way of making transactions.
There are several reasons why people prefer hundi for their transactions. But it should be minimised. And the government should take immediate action to stop these.
The fastest way to stop hundi is to close the gap between bank and open market exchange rates. When there is no gap, fewer people would go to the hundi traders.
Besides, Bangladesh Bank can increase its incentive from 2.5% to 5% interest rate and reduce the formal procedures to collect remittances. Only then people will use banking channels for transferring money. We have less foreign reserves because exporters also try to use hundi as their means for the transaction.
Mahadi Hassan is an NSU finance Graduate.
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.
