The return of hundi

Half of $40 billion annual remittance comes through informal channels

Dollar rate differs minimum Tk6 between formal and informal channels

Formal channel offers Tk86.45, hundi Tk91-92 against each dollar    

Bangladeshi expats cannot remit legally from several countries

Hundi – the means of sending remittances by informal channels which came to a standstill in the pandemic – has again returned to its earlier pace thanks to a large difference between the rates of the dollar in banks and the kerb market, according to top economists in the country. 

Banks are currently suffering from a dollar crisis due to various reasons, such as an increase in import growth in the country, they added.

As a result, banks are selling hard dollars at a higher rate than the price fixed by the Bangladesh Bank. Prices have also risen in the kerb market.

For these reasons, the difference between remittances coming through the formal and informal channels is at least Tk6 against each dollar. As a result, expatriates – despite the fear of losing money – are sending foreign currency by informal channels in the hope of making more profit.

Hundi is an informal system for transferring money in which local agents disperse or collect money on behalf of friends, relatives, or other agents without legal protection or supervision, trusting that all remaining obligations will be settled through future transactions.

According to some researchers and economists working on remittances and employment of migrant workers, the country's market for remittances is about $40 billion, half of which comes through informal channels.

They have commented that the country is being deprived of a lot of foreign exchange earnings due to its inability to control hundi.

According to a source familiar with the hundi trade, hundi "business" goes on in freestyle in a shopping centre at the capital's Naya Paltan.

This correspondent – in disguise as a dollar seller – contacted several money exchange centres at the shopping mall on Tuesday to inquire into the matter first-hand. Most of them claim that money cannot be brought from abroad in hundi.

When a proposal was made for the transaction of a large amount, an official at a firm on the fourth floor of the building offered the hundi transaction at a rate of Tk91 per dollar.

However, he was not interested in any bank transaction of dollars or any other money. Under its terms, the sender must pay hard dollars to its designated person. As soon as the person receives the dollars, the officer will pay taka to the recipient at his own office according to the rate.

How hundi is profitable 

On Wednesday, the Bangladesh Bank raised the dollar rate from Tk86.20 to Tk86.45. However, a number of private banks said they were buying dollars at Tk85.50. As such, if an expatriate sends $100 to the country through a legal channel, he would receive Tk8,550.

However, after adding a 2.5% government incentive and deducting a 1-2% charge from the remittance depending on institutions, the customer gets Tk8,593-8,678.

As there is no separate charge, a customer can receive Tk9,100-9,200 in hundi against every $100. In other words, if one sends it by the informal channel, one will get Tk422-607 more compared to what one would have through the formal channel.

Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), told The Business Standard that remittances that come through hundi will send more money directly to customers' homes than through the banking channel. People send money through hundi to get this benefit.

"The dollar exchange rate should be reduced, and although the effective exchange rate is very high, our nominal exchange rate is very low," he said.

"The rate is determined mainly by keeping in mind the cost of import and export income. The issue of remittances is kept at the backseat in deciding whether to increase or decrease it. However, considering all aspects, it seems that the value of our money needs to be devalued to a limited extent," he added.

Md Arfan Ali, managing director at Bank Asia, told TBS that the dollar exchange rate should be left to market demand and supply.

"Then the market will be balanced," he added.

Why hundi occurs, where dollars go

On the reasons behind an increase in hundi, Professor Tasneem Siddiqui, founding chair of the Refugee and Migratory Movements Research Unit (RMMRU), told TBS that there is no way of sending remittances by a formal channel from several countries such as South Africa, the Maldives and Iraq.

Again, many migrant workers staying there illegally also cannot send money by a banking channel, she added.

"So they are compelled to resort to hundi. Again a part of the remittance from Malaysia comes to the country through hundi via Singapore. A lot of money from the Middle East comes through hundi," she added.

Regarding the hundi process, Professor Tasneem Siddiqui said hundi traders hire agents where expatriate workers work.

Traders, on the one hand, collect foreign currency from agents and deliver money to people designated by the senders through their channels in Bangladesh. On the other hand, the coins collected are used in import-export business.

"Our import-export traders do under-invoicing and over-invoicing for reasons of tax evasion. They buy dollars from the hundi market and fill it. The money is also used in many illegal transactions, such as gold smuggling and drug trafficking," she added.

There are also some other ways of doing hundi business. A huge cycle is involved with this. They have people in every country inhabited by expatriates.

The researcher emphasised revising the tax policy and said that the government should formulate the policy in such a way as to reduce the demand for hundi. It is difficult to control the hundi business if demand is not reduced.

Khandaker Golam Moazzem also thinks that the foreign currency obtained through hundi is being used for illegal purposes.

He said the illegal activities had been somewhat inactive because of the pandemic. Now that the situation has returned to normal, they have resurfaced. As a result, the demand for foreign exchange in the hundi market has increased a lot.

"I think this is one of the reasons for the rise of the dollar in the informal channel. If there is not much improvement in this place, then even incentives will not bring about the results hoped for," he added.