FE Today Logo
Search date: 16-05-2018 Return to current date: Click here

The Hundi market and remittances

Forrest Cookson | May 16, 2018 00:00:00


The widespread discussions about remittance flows and the Hundi market are largely wrong in their understanding of what is happening. Much of the discussion by both international organisations and by economists in Bangladesh stress capital flight. However, capital flight is only a small part of the Hundi market operations in Bangladesh. This article sets out what I believe to be a more realistic explanation of what is going on.

Let's begin with a simple case: Mr. Ali want to send US $50,000 to Australia to buy a condominium. He cannot legally do this as Bangladesh Bank will not allow him to buy the foreign exchange. So Mr. Ali contacts a representative of the Hundi market, explains what he wants, giving the details of the account to receive the money, and gives Taka 4.25 million to the Hundi representative [Taka 85/US dollar]. The Hundi delivers the money to the Australian account. To obtain the dollars other Hundi representatives take the dollars from Bangladeshi workers in Saudi Arabia paying them Taka 82/US dollar. The dollars they take are used for the payment to Australia; the Taka received from Mr. Ali are used to provide the Taka to the worker's families. The Hundi market earns Taka 150,000 from this transaction covering their costs and profits.

The Hundi market needs three things: A demand from a Bangladeshi for foreign exchange that cannot be made according to the foreign exchange regulations; a source of dollars that is outside the control of the Bangladesh central bank; and trustworthy representatives to organise the market.

Whenever a state imposes capital controls preventing the free movement of funds, markets such as the Hundi are established. Further, the central bank in its endless efforts to enforce foreign exchange regulations becomes more and more intrusive in trying to limit the Hundi market. Notice, there is no foreign exchange transaction over Bangladesh borders. The foreign exchange is completely outside of Bangladesh financial institutions.

The development of mobile banking is not a major factor in this market. Blaming bKash and others is wrong. The existence of mobile banking makes moving money around inside Bangladesh cheaper and simpler, but the Hundi market has prospered for years without mobile banking.

The source of the Hundi market is the earnings of the Bangladesh workers who are abroad and want to send funds to their families. There are also wealthy Bangladeshi residents in developed countries who may want to send funds to family or for other reasons.

DEMAND FOR FUNDS, I.E. FOREIGN EXCHANGE: There are perhaps five demands. I list them in terms of the size and give an estimate of the size:

1. Under invoicing of imports: $10-15 billion per annum and growing.

2. Indian and Siri Lankan nationals working in Bangladesh [largely in the RMG industry] sending funds home: $3-4 billion per annum.

3. Capital flight by Bangladeshi nationals: $1-2 billion per annum.

4. Payment of bills for education and medical care largely in India: $ 1.0 billion per annum.

5. Coverage of the trade deficit of the informal trade between India and Bangladesh: $1-3 billion per annum.

These demands total $16-25 billion per annum. For the first two types of demands there is some empirical information. For the three small components, educated guesses have been made based on scapes of information.

The Hundi market will always adjust the exchange rates to divert remittances sufficient to fill these demands. If demands increase then a greater proportion will be diverted to the Hundi markets.

There are three ways of falsification of trade documentation: 1) Under-invoicing of imports is by far the most important in Bangladesh although it receives little attention. 2) Over-invoicing of imports of capital goods that come in with low or zero duties is the popular means of exporting capital for the very rich. There are many abuses but the import of power plants for the rental projects is the largest leakage. 3) Finally, under-invoicing of exports is possible when there is a middle man under the control of the exporter who can handle the contract with the ultimate buyer in the US or the EU. These last two are not part of the Hundi market; the Bangladesh businessman involved in such transactions manages to transfer the foreign exchange to his control for his own purposes.

What is the evidence?

For under-invoicing there are three points to make. (1) The Pre-Shipment Inspection (PSI) companies that worked in Bangladesh for several years found widespread under-invoicing, particularly from China (virtually all orders) and India (40-45 per cent of orders) but there were many sources of this abuse. (2) Customs has tried to keep the PSI companies out of Bangladesh. Before contracts were given to these companies a long battle in the bureaucracy was fought with Customs in opposition. During the period that the PSI companies were working the Customs did all that they could to undermine their effectiveness. Why? The reader can figure it out. When you know the answer you will realise that the PSI companies were able to reduce the under-invoicing but now it is open season since the PSI contracts have ended. (3) At present incomplete computerisation of the Customs documentation leads to no simple way to check prices against other price lists, comparable imports etc. There are very strong interest groups behind the under-invoicing and even if Customs wanted to stamp this out it would not be possible unless there was political support to do so from the top of the Government.

For the remittances flows from Indians and Sri Lankans, one only has to note the recent statements of the Minister of Finance.

Other flows are small. Education and medical care is estimated from information on the number of students and amount of healthcare visits in India. The informal cross-border trade is based on limited information as to how much this might be. Some of this is misrepresentation of quantities of formal imports. Coal is the best example: coal imports are several times the official reports [Based on use studies.]

As for over-invoicing of capital goods, this is indeed possible. But no serious effort has ever been made to contain this. The PSI companies did not deal with this as it does not impact Customs revenue collections and Bangladesh Bank was not interested.

To reduce the importance of the Hundi market it is necessary to reduce the demands. There are two actions that might have an impact: (1) Start up a PSI programme that will reduce the amount of under-invoicing; this is the very purpose of the PSI programme. If under-invoicing is found and harsh penalties are imposed, it will soon dry up and Hundi market demand will decline and diversion of remittances will fall. (2) Insist that the Indians and Sri Lankans working in the ready-made garment (RMG) sectors and telecommunication sectors be properly registered and pay taxes and remit their earnings officially. Care should be taken with contractors who provide staff or functions outside the main company. If the Finance Minister is right then there are thousands of workers in this category. Most will work for large reputed companies and it should be possible to find them. Such a drive should be sustained over a three-year period as it will be difficult to pin companies down. One trick is to have the Chairman of a company sign a statement that there are no foreign workers other than those identified and that he personally is responsible for any violations leading to fines and requirement to resign his post.

Together these steps would add as much as Tk 400 billion (40,000 crore) to revenues (40 per cent revenue on $10 billion equals Taka 32,000 crore + 2.5 per cent of $4.0 billion or Taka 8,000 crore). The Minister of Finance would surely like that.

Dr Forrest Cookson is an economist.

[email protected]


Share if you like