a year ago

Alternative remittance channel- its prospects

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Bangladesh is very much dependent on the external sector to support its domestic sector. External sector needs both-way transactions-- inflows and outflows.  There are different windows through which inward remittances are received. Of the current transactions, export and wage remittances are the two major sources. Inflows on account of foreign investment, loans, grants are parts of capital account transactions. It is reportedly said that export constitute around 60 per cent and wage remittances 40 per cent under current transactions. Around 50 per cent of export receipts are used for settlement of import payments, used in producing exportable goods.

Bangladesh has achieved tremendous development in import substitution industries, requiring input contents from external sources. Export proceeds, net of their import liabilities, support payments for import substitution industries. But the amount is not sufficient enough to support the needs. As such, wage remittances play a pivotal role. The central bank provides facilities to support inward remittances for repatriation through official channels. In addition to traditional banking channel, wage remittances can be repatriated through exchange houses abroad. It is reported that central bank waived the requirement of permission from them to make arrangements with exchange houses abroad. Moreover, waiver was also given for reference letter from Bangladesh embassies of relevant countries. Very recently, the central bank decided to allow mobile wallets to make arrangements with legitimate payment service operators abroad. Under the arrangement, Bangladeshis working abroad will be able to use Bangladeshi wallets like bKash, Rocket, Upay and such other wallets abroad. Bangladeshis will be able to operate these wallets abroad and can transfer money to their near and dear ones. All the initiatives adopted by central bank are to prevent unofficial repatriation of money.

It is said that hundi is a remittance channel. History indicates that hundi, a financial instrument, was developed in medieval India for use in trade and credit transactions. Hundi is used as a form of remittance instrument to transfer money from one place to another, as a form of credit instrument to borrow money and as a bill of exchange in trade transactions. As per Indian central bank, hundi is  an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order.

Hundi has a very long history in India as far back as the twelfth century. As per record, merchant Banarasi Das, born in 1586, received a hundi for 200 rupees from his father to enable him to borrow money to start trading.

During the colonial era, the British government regarded the hundi system as indigenous or traditional, but not informal. They were reluctant to interfere with it as it formed such an important part of the Indian economy and they also wished to tax the transactions taking place under the system. Official hundi forms were produced incorporating revenue stamps bearing the image of British monarchs, including Queen Victoria, and disputes between merchants often entered the court system, so in no way was the system an underground one even though it did not take place through normal banking channels

'Hawala' is another form of hundi, which is an informal method of transferring money without any physical money actually moving. It is described as a money transfer without money movement. Another definition is simply 'trust'.  Hawala is thought to come from the Arabic word for 'assignment' or 'bill of exchange' or the Hindi word for 'reference'.

Hawala is said to be used today as an alternative remittance channel that exists outside of traditional banking system. Transactions between hawala dealers are made without promissory notes because the system is heavily based on trust and the balancing of hawala dealers' books is made by reciprocal transactions.

History shows that hawala originated in South Asia during the eighth century and is used throughout the world today, particularly in countries requiring various compliance for banking transactions including high costs, as an alternative means of conducting funds transfers. Unlike the conventional method of transferring money across borders through bank transfers, money transfer in hawala is arranged by a network of hawaladars or hawala dealers.

Hawala dealers keep an informal record of all credit and debit transactions on their accounts. Debt between hawala dealers can be settled in cash, property, services or parallel transactions.

Migrant workers who frequently send remittances to their beneficiaries in their countries of origin find the hawala system advantageous. Hawala facilitates the flow of money between poor countries where formal banking is too expensive or difficult to access.

In addition to the convenience and speed of conducting hawala, the fees are usually low compared to the high rates that banks charge. To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees with better exchange rate. The system is also easy to use, as one only needs to find a trusted hawaladar to transfer money.

How howaladars execute transactions is a question. Under the arrangements, money does not cross borders; rather information is transmitted to counterparts of receipt countries. On the basis of information, counterparts make fund available to beneficiaries. Counterparts in the same way collect outward payments from remitters and send information abroad for making fund available to beneficiaries. This is as good as formal transactions, without official records. Hawala facilitates remitters to send money home. There are some questions for what purposes inward receipts, which do not cross border, are used. Insider information indicates the fund is sold later for purposes having no general permission to remit abroad such as sales proceeds of assets from home country, investment abroad at individual level, payments against import at below price, and many more.

Other than official records, hawala is executed both for inward remittances and outward payments in the same way as banking channel does. What will happen if central bank allows resident entities to work as dealers or counterparts of hawaladars abroad? The answer should be- it will eradicate unofficial movement of fund. But in true sense, volume of unofficial transactions may be reduced but it will not eradicate unofficial market once for all because of the existence of different illegal modes of transactions.

It is said that Taka is freely convertible on current account transactions, meaning that permission is not required from central bank or other relevant authorities for executing such transactions. But in practice, it is known that banks can execute only transactions stated in the central bank's rule book. Other transactions are subject to approval from the authorities. What will happen if current account transactions irrespective of the types are allowed to be remittable under hawala channel? This can help to reduce transactions under hundi channel for which there is the need for a regulatory framework for transactions through hawaladars.

Transactions under hawala as an alternative remittance service are to be reported on periodic basis. The fund with counterparts will be treated as country's deposits. Outward remittances on current account transactions will be adjusted from the deposits maintained abroad. As an alternative channel, exchange rate will be higher compared to formal market. As such, rate for outward remittances through this channel may be higher. Banks can purchase fund from deposits held abroad in case of needs for settlement of payments on account of non-essential imports and service payments.

It is learnt that there are hawala regulations in many countries for channeling remittance transactions, in compliance with FATF framework. In the same line, a licensing framework may be devised to allow resident entities to work as hawaladars for repatriation of inward wage remittances. This will definitely reduce informal remittance flow to a greater extent. Authorities should think about it.

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