Asif Ali (not his real name) is a Bangladeshi working in the middle east as a construction worker. He has to support a family of five back home. Every month, he sends his family money through hundi. He goes to his local hundi broker, gives the address of his family and hands him the dollar he wishes to send home. The hundi agent will deliver the money directly to Ali's home in taka, his uneducated mother won't even have go to the bank. He hasn't even considered using a bank as he finds the method intimidating, and more importantly, hundi traders offer exchange rates higher than the official one; for example: at the moment, the official channel offers Tk108 per dollar, while hundi agents offer Tk115 per dollar.
Experts say hundi - or money transferred through informal channels - accounts for nearly half of a possible $40 billion the country earns in remittances. According to the Criminal Investigation Department (CID), the hundi syndicate has laundered around Tk75,000 crore in the last one year through different Mobile Financial Services (MFS) in the country.
The country is naturally being deprived of a lot of foreign exchange earnings due to its inability to control hundi, which becomes more relevant in these times of dollar crunch.
During the earlier days of the Covid-19 pandemic when the lockdowns were implemented, hundi lost momentum due to the restrictions on the movement of people, especially cross-border movement. A Bangladesh Institute of Bank Management (BIBM) study concluded that stagnation of hundi had pushed the country's remittance up during the pandemic. In many ways, the uptick in remittances served as a huge blessing during tough times.
However, in recent times, it has once again picked up pace as the country's forex market became unstable following the rapid appreciation of the US dollar against the taka starting in May.
The unwavering attraction of Hundi
Hundi is not just popular in Bangladesh. Wherever there are restrictions on foreign exchange, the cost of doing business and sending money is high, channels like hundi are popular. That is why hundi is especially popular in South Asia.
"Hundi usually provides better rates and the receipient gets money more easily then former channels," explained Muhammad Abdul Mazid, former Chairman of the National Board of Revenue (NBR).
This is how it works: let's say Mr X wants to send $500,000 to Canada to buy a home for his wife. He cannot send the money legally, as Bangladesh Bank will not allow him to buy this much foreign exchange through legal channels. Bangladeshi nationals are allowed to spend up to $12,000 or an equivalent amount of money in other currencies in a calendar year. So Mr X contacts a Hundi broker, explains what he wants, gives the details of the account to receive the money, and pays them the money at a rate of Tk110 per dollar.
The Hundi delivers the money to the Canadian account. To obtain the dollar, other hundi representatives take the dollars from Bangladeshi expats in the Middle East, paying them Tk100 on the dollar. The dollars they take are used for the payment to Canada; the Taka received from Mr X is used to provide the Taka to the expats' families.
As the hundi system has complete flexibility in setting the exchange rate, it has the ability to adjust the terms according to the demands for dollars from persons who have Taka. Another important aspect is that the hundi operators get the money to the recipients in a simpler, more pleasant way, than do the banks.
Bangladesh caps the dollar exchange rate for remittance at Tk108. But in the Hundi market, the price stands somewhere around the Tk115 mark. So, sending in money through Hundi is more profitable.
"The difference of dollar rate between the banking channel and hundi plays a big role. For example, one might get a rate of Tk101 when sending money through the banking channel. On the other hand, while trading through hundi, they might get around Tk110-115. This is a big margin. Even the 2.5% incentive the government provides to encourage the use of proper channels can't make up for the gap," said Mazid.
"Then nationalism, patriotism all go down the drain. People just think about the profit they stand to make," he added.
Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), told The Business Standard that remittances that come through hundi send money directly to customers' homes, unlike through the banking channel, which serves as a strong incentive.
Corruption is also a major driving force propping up the hundi business.
"Where does the demand for hundi come from? There are two major sources. One is the visa business. Bangladeshis travelling abroad for work have to buy visas. This is an illegal trade, so they can't pay for their visa with money bought from the banks. They don't buy the visas themselves; they give money to the brokers. The intermediaries use the money to buy visas from the people who sell visas of countries like Saudi Arabia, Kuwait, Qatar etc. This demand depends on how many people are going abroad in search of work. This number is on the rise so the demand will go up as well," said Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office.
"Another big demand is money laundering connected with corruption. The people who are committing corruption at a large scale and don't feel comfortable keeping their money here, they also use hundi," he added.
"When capital flows out of a country, it is generally either through hundi or under invoicing. But to under invoice, you have to be a businessman. You have to import and export. But for a corrupt government official laundering money or an ordinary man sending his children the proceeds of a property sale, they have to resort to hundi," said Dr Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh.
"Someone who has permanently relocated to another country might sell off their house or land. What do they do with the money? They take that money through hundi. That demand is there. In our law we call it money laundering. But countries where a capital account is convertible call it transfer of property, transfer of assets, transfer of money," he added.
"Ordinary people are transferring their legal money through this illegal channel."
Dr Mansur is of the opinion that in countries where there are currency restrictions in place, hundi thrives there. That is why hundi is really popular in the Indian subcontinent. Cracking down on dealers or stricter law enforcement might disrupt hundi in the short term but in the long term, as long as things remain the same, hundi will always bounce back.
How to stop Hundi?
"When people send money through banking channels, they expect two things. First, they will get a good rate. Second, whoever they send the money to will get it quickly. If this can be ensured, people will stick to the banking channel," said Mazid.
Some Middle East banks have a non-automated system, leading to delay in processing remittance. These banks do not have modern systems like electronic fund transfers. They also have limited exchange tie-ups, causing problems in bringing remittance.
Studies have shown many remittance receivers don't like dealing with banks and find understanding the procedure of remittance encashment challenging. In contrast, hundi agents either deliver the money right to their doorsteps or, more recently, they can easily encash the money from MFS services.
"If the banking channel is very smart and smooth, if it is very service oriented, only then can money be sent quickly. The exchange rate should be maintained by Bangladesh Bank. The monetary policy of the economy the money originates from and goes into, also plays a role," added Majid.
The government of Bangladesh has introduced two benefits to attract remitters to use proper banking channels. If one sends in foreign exchange, they won't have to pay taxes on that money. The other benefit is that if one sends remittance through proper banking channels, they get a 2.5% incentive.
"The main reason behind the rise of hundi is the volatility of the dollar rate. Another reason is the 2.5% incentive rate has also become shaky. There used to be a $5,000 cap when it came to availing this incentive. That has been lifted. Our remitters struggle to send even $5,000 at a time," said Mazid.
"Another thing is, people had to submit relevant documents to avail the incentive. But now they don't. That is dangerous. Without relevant papers, there is no way to differentiate between remittance, profits from business or laundered money,'" he added.
Remitters who send in their hard-earned money can't be blamed for feeling hard done by, as anyone can now avail this incentive.
"Another issue is people who laundered money out of the country, if they bring back that money have to pay a 7.5% income tax. However, remitters didn't have to pay taxes on the money they sent back home. Since it is no longer necessary for remitters to provide any documents for the money they send, it is hard for remitters to differentiate themselves," said Mazid.
Experts don't believe that simply passing laws or providing such incentives can stop hundi. There needs to be more fundamental changes made to the current structure to stop it.
"The water always flows from the plateau to plains, simply putting up a dam won't do. If you can do something at the source, only then it will work," said Mazid.
"If we cannot control the incentive to launder money, passing laws will not do us any good. People don't feel safe keeping their ill-gotten gains in the country. This includes corrupt government officials, criminals and corrupt politicians. Since an election is coming up, we will see a rise in capital flight," said Dr Mansur. "Only if we can establish the rule of law and convince future generations to stay, can we stop capital flight. Because money does not travel alone, it travels with people," he concluded.