Why the 2.5% remittance incentive should be retired

In calendar year 2025, Bangladeshis abroad sent home $32.81 billion through official channels — a record, and 22% higher than the year before. It steadied our reserves, eased pressure on the taka, and kept millions of families afloat.

Sitting inside that achievement is a policy we have not honestly examined in seven years. The 2.5% cash incentive on inward remittances, introduced at 2% in 2019 and raised to 2.5% in 2022, now costs the exchequer roughly Tk7,000 crore – about $580 million – a year. It has survived three finance ministers, two political transitions, and a change of leadership at Bangladesh Bank. The question we should ask now is whether it should survive a fourth review.

My argument is that it should not. The scheme has become, in substantial part, a publicly-funded subsidy to flows it was never designed to reward – and the national statistic it produces is no longer a clean measure of what our migrant workers send home.

What the previous governor said

This is not a new concern, and it is not mine alone. In August 2024, Dr Ahsan H Mansur stated publicly that "Dubai-based companies are exploiting the stimulus" by aggregating remittances from Saudi Arabia, Oman and other Gulf states and routing them through Dubai into Bangladesh to claim the 2.5% incentive. He recommended discontinuing the programme and redirecting the subsidy to health and education.

In January 2025, as governor, he sharpened the point, "An unscrupulous group is purchasing and stockpiling these remittances and selling them to Bangladeshi banks at inflated rates, attempting to destabilise the country's dollar market from abroad." He added that "remittance inflows through legal channels could rise further if intermediaries benefiting from the system are eliminated."

That statement remains on the public record of Bangladesh Bank. It describes a structural problem, not a personality-driven one, and the problem does not disappear because the governor has changed.

Two ways the system is being gamed

Remittance does not only travel from a worker's hand to his mother's bank account. It also travels through aggregators — licensed exchange houses and corporate remitters in the Gulf and Southeast Asia. Most are legitimate. But the design of the scheme creates two very different arbitrage opportunities, and both are being exploited.

The first is geographic. A handful of operators have industrialised a simple play: collect foreign currency inside or outside Bangladesh, route it through a Dubai-based aggregator as "wage earner remittance," collect the 2.5% top-up on arrival, and repeat. 

Transfers up to Tk5 lakh receive the incentive with no documentation at all. The KYC regime was built for the individual migrant and is being exploited by people the policy was never meant to reward. This is the pattern Dr Mansur described from the governor's chair.

The second is quieter, more technical, and in my view more consequential.

The misclassification problem

As someone who has spent 25 years building payments infrastructure, this is the version of the problem I find most concerning. Bangladesh Bank's own rules are explicit: the 2.5% incentive applies only to wage earner remittance. It does not apply to FDI, donations, trade payments, gifts, exports, or — critically — freelancing, IT services, or remote jobs. Service exports by Bangladeshi freelancers and IT firms fall under a separate export-cash-incentive regime, not the wage earner scheme.

On paper, that is a clean line. In practice, the line is drawn inside the processing systems of receiving banks, and those systems are not built to hold it. When an aggregator sends a lump-sum transfer into a Bangladeshi bank account, the bank sees a correspondent-bank entry with whatever purpose code the sender chose. 

If the sender codes it as a wage earner remittance, the receiving bank's core system typically auto-applies the 2.5% top-up without independently verifying whether the underlying flow is a migrant's salary, a freelancer's invoice payment, a trade settlement, or something else. 

The receiving bank has neither the data nor, in many cases, the commercial incentive to push back: it is competing for remittance market share, and its top-of-funnel metric is total volume classified as wage earner remittance.

This creates a predictable arbitrage. A licensed FX aggregator handling freelancer payments for, say, an Upwork or Fiverr population – a flow that is legally ineligible for the 2.5% – can batch those payments and remit them under wage earner coding to capture the incentive. A trade-payment flow can be similarly relabelled on the way in. The Treasury ends up paying 2.5% on money it was never supposed to subsidise. 

Freelancers who play by the rules navigate a much harder 4% claim process than aggregators quietly collecting 2.5% on the same flows. And the national remittance statistic – the very number we celebrate as a record – is inflated by service-export flows miscounted as wage earner remittance.

How much of FY25's 27% year-on-year jump is genuine channel-shift from hundi to formal banking, and how much is misclassification harvesting the subsidy? We do not know. The people running the scheme cannot tell us, because the data infrastructure to separate the buckets does not exist at the point of processing. A banking system that cannot classify what it is processing is not ready to distribute subsidies on it. That is the honest way to say this.

What our neighbours do

Bangladesh is one of only a few remittance-receiving economies that pays a direct cash subsidy on incoming transfers. The two largest recipients in the world take different paths.

India, the world's largest recipient at $129 billion in 2024, runs no cash incentive at all. It relies on a market-clearing exchange rate, the Liberalised Remittance Scheme, and a suite of NRE, NRO and FCNR rupee and foreign-currency accounts that give non-resident Indians legitimate, tax-advantaged instruments to hold and repatriate earnings. The policy focus is on infrastructure — digital rails, low-cost corridors, bilateral agreements — not on paying senders to send.

The Philippines, at roughly $40 billion in 2024, also avoids direct cash subsidies. It uses indirect instruments instead: tax-free investment accounts for overseas Filipino workers, the Pag-IBIG MP2 diaspora savings programme with above-market yields, reduced remittance fees negotiated with licensed operators, and welfare insurance linked to sending behaviour. These cost a fraction of what Bangladesh spends on the 2.5%, and they reward the worker rather than the intermediary.

Neither country has had to fend off public allegations from its central bank governor that a significant share of its remittance statistics is being recycled for subsidy capture. That is not an accident of design. It is a consequence of not making a classification at the point of transfer which determines whether the state writes a cheque.

The proposal

Retire the 2.5% incentive, phased over four quarters — 1.5%, 1.0%, 0.5%, zero — paired with full unification of the exchange rate. The crawling peg introduced in May 2024 has already narrowed the gap between the official and kerb-market rates. The FY25 surge was driven by that narrowing and the hundi crackdown, not by the subsidy. Let the exchange rate do the work the subsidy was meant to do. 

Redirect the Tk7,000 crore to where it will actually reach workers: half to migrant skills training (Indonesian workers earn $1,200–1,500 a month against our $300, and the only gap is skill), a quarter to reducing remittance fees (the World Bank puts the cost of sending money to Bangladesh at 6.5%, more than double the SDG target), and a quarter to migrant welfare.

The deeper reason to move in this direction is that indirect incentives collapse the classification problem. If the state stops paying a different rate for different types of inflow, banks no longer need to classify at the point of processing, aggregators no longer have an arbitrage to exploit, and our remittance statistic stops being a function of how a purpose code was populated in a SWIFT message. One flow, one treatment, one number that actually means what it says. It is a cleaner system by design.

If full retirement is politically difficult in one budget cycle, the minimum reform is threefold. First, a per-NID annual cap — say Tk20 lakh per National ID per year — which preserves the benefit for real migrant families and makes industrial recycling mathematically unworkable. Second, lower the unverified-transfer threshold from Tk5 lakh back to Tk1.5 lakh, with live BMET-checkable verification above that. 

Third, and aimed squarely at the banking system: Bangladesh Bank should require every authorised dealer to implement transaction-level classification logic before the 2.5% is auto-applied — cross-checking sender employer, recipient NID, BMET record, and aggregator type against the eligibility rules the central bank already publishes. This requires no new legislation. It requires banks to build software that enforces the classification rules already demanded.

The choice

We built the 2.5% incentive in 2019 for good reasons. None of those conditions holds today with the same intensity. The kerb-market gap has closed. Hundi is being squeezed. And the programme, by the previous central bank leadership's own admission, has become a channel that rewards intermediaries more than it rewards migrants – and, I would add, quietly inflates the very statistic it was supposed to strengthen.

A policy that made sense in 2019 does not automatically make sense in 2026. The wage earners of this country deserve better than to have their name attached to someone else's misclassified transfer.

Zakaria Swapan is the founder of iPay Systems Ltd., the first Payment Service Provider licensed by Bangladesh Bank, and Founder and CEO of Priyo Inc. (San Francisco), a financial platform for the global workforce. 

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