Banking the unbanked is crucial for higher remittances

The hard work of millions of Bangladeshis working in countries such as UAE, Kuwait, Qatar, Oman, etc., yielded more than US$13bn in remittances in 2016 alone. Such inward remittances by them have become a significant foreign currency earning for Bangladesh.

It contributed about 6.7 per cent (2016-17) to the country's Gross Domestic Product (GDP), and increased foreign exchange reserves, per capita income and employment opportunities, leading to economic growth and poverty alleviation.

The country operates an exchange-controlled economy through the Foreign Exchange Regulation Act 1947 (FERA), and all inward/outward transactions are regulated by the Central Bank of Bangladesh (Bangladesh Bank). Though, most transactions take place through the Formal Fund Transfer System (FFTS), Informal Fund Transfer Systems (IFTS) such as hundi and hawala are also prevalent in the sector. These are tax avoiding devices and thus violate FERA, amounting to money laundering. If remittances received through IFTS are added to the reported annual figure of remittances, the total may exceed US$20bn.

It is not easy to accurately determine the amount of remittances through IFTS, but pundits say that the use of IFTS has been declining, i.e. 54 per cent in 2006 to 30-40 per cent in 2013 and 16 per cent in 2016 approximately. Remitters acknowledge that formal channels are more secure and reliable for money transfer as there is no possibility of losing money or falling victim to fraudulent practices, yet some still prefer IFTS over FFTS.

Most migrant workers come from poor villages, and are poorly skilled. Hence, their earnings are low as compared to the migrant workers from other countries. Also, they encounter many challenges in sending remittances, especially to remote areas of the country through FFTS, making them financially underserved.

Since banks prefer to do business with other banks, a bank account is necessary to transfer money, both for the transmitter as well as the beneficiary. Commercial banks in Bangladesh do not have the necessary infrastructure/resources to serve the needs of clients in remote rural areas.

The fixed transaction fees levied by banks for sending remittances, makes small remitters bear the same cost as for a large remittance, which dissuades them from using their services. Buying a money order is another option for remittance, but the cumbersome and lengthy process of encashing the same has limited the use of this service. Considering the quality of the postal services and banking system in Bangladesh, remittance may take up to four weeks. In contrast, remittance through IFTS takes 24 hours and is believed to be cheaper than FFTS.

There are instances where remitters opt for IFTS due to comfort and familiarity. Language and procedural obstacles makes remitters wary of using FFTS. Also, unpolished migrant workers are often discriminated because of class divisions. Formal institutions have an elitist attitude, and view servicing lower class workers as below their prestige, thus forcing them to use IFTS.

To counter IFTS, the Bangladesh Bank has taken certain measures to encourage expatriates to remit funds through formal channels such as: expediting remittances for fast delivery, setting up foreign exchange clearance houses abroad, implementing Anti-Money Laundering (AML) guidelines, etc. However, much more needs to be done to ease the process of remittance inflow in Bangladesh.

Awareness must be promoted among Bangladeshi migrants about the fiscal incentives for using FFTS through programmes on cost, prices, foreign exchange regulation, AML, and remittance-linked new banking products. The Bangladesh Bank must also address the genuine problems with its foreign exchange regulations, which hinder the smooth delivery of migrant remittance. Also, commercial banks should be asked to take measures for improving the quality of remittance services for Bangladeshi migrant workers.

Since commercial banks may not be able to serve the needs of clients in remote rural areas, they could be linked with the already successful smaller, down-market Microfinance Institutions (MFIs) to deliver local currency remittances to their beneficiaries. Such institutions should also be encouraged to devote their attention to estimating and replacing unauthorised channels of remittances.

Furthermore, since remittances are a volume-based business, establishing a banking system which can efficiently process large volumes of transactions of low amounts, at low marginal costs is crucial. International best practices relating to FFTS need to be adopted by the Bangladesh Bank for attracting safe and secured remittances at lower cost.

Although IFTS has proved difficult to regulate, proper enforcement of more stringent laws and regulations on IFTS can deter illegitimate IFTS activity, as remitters will perceive a greater risk in using an informal channel. However, caution needs to be maintained while doing so, and such regulations should not increase the compliance burden on remitters. Also, balance needs to be maintained in the regulations, in order to liberalise the market and force FFTS to compete with IFTS, creating a self-regulating market based on competition.

Non-resident Bangladeshis needs to be incentivised to use FFTS by offering competitive exchange rates, introducing attractive bank loan schemes for returning migrants who use FFTS, removing Outward Bill Collection charges on remittances, offering attractive investment opportunity for remitters using FFTS, etc.

Banking the unbanked is crucial to any effort designed to result in shifting from informal to formal mechanisms. The government should analyse and address the perceived burdens considered by remitters as well as beneficiaries, while choosing formal channels for remittance.

The writers are with CUTS International.

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