Remittance is one of the key sources of foreign exchange for Bangladesh, accounting for 5.8 per cent of its GDP. The remittance inflow was approximately $18.20 billion in the 2019-20 fiscal year (FY). It is projected that remittance will hit an all-time high of $20 billion which would account for 8 per cent of GDP in the 2020-21 fiscal year, making it the eighth highest remittance-receiving country in the world.
The increase in remittance in the 2019-20 fiscal year came as a surprise despite the Covid-19-induced global economic slowdown. The travel restrictions imposed during the Covid-19 pandemic have slowdown the movement of the people across the borders resulting in the shift from the informal channel-based remittance to remittance through the formal channels. Formal channels such as banks and money transfer organisations are commonly used by expatriates or migrant workers to transfer money to Bangladesh. The use of legal channels has minimised the risks associated with a lack of trust among the members involved in informal currency exchange known as hundi.
Despite the trust and safety offered by the legal channels for money transfer, it is still not attractive. Hefty transaction cost charged by the foreign currency exchange organisations such as Western Union, PayPal, Skrill, etc and banks is the primary reason that deflated the use of legal channels. A study by the World Bank found that banks are the most expensive remittance channels, charging an average fee of 11 per cent. Post offices are the next most expensive, costing more than 7.0 per cent. On average 7.1 per cent of the amount sent was charged as fees in 2019. Transactions costs associated with money transfers have been impacting individuals, businesses, and the broader economy of the countries to which payments are made. Hence, the United Nations has set a 2030 Sustainable Development Goals' target to reduce the transaction costs of migrant remittances to less than 3 per cent from its current estimated average of 7.1 per cent. Like in the other remittance-receiving countries, Bangladesh migrant workers have been facing challenges related to high transaction costs to send money to Bangladesh.
Recently, Bangladesh government has taken series of measures to decrease the transaction costs and to encourage Bangladeshi migrant workers to send money through the formal banking channel thus boosting the country's foreign exchange reserve and capturing a share in $4.7 billion lost revenues due to the informal remittance in 2018. Measures taken by the government to promote formal remittance in Bangladesh include financial initiatives to migrant workers and technology implementation in financial systems. For example, Bangladesh government has initiated a scheme to provide 2.0 per cent of remittance as an incentive to recipients. Moreover, the government has also made arrangements with 29 exchange houses operating across the world to expedite the remittance inflow. Recently, experts suggested that the nation could receive as much as $30 billion in remittance annually if proactive steps are taken by the government and other stakeholders. Can the application of blockchain technology be one such proactive initiative?
Blockchain is one such technology that has huge potential for the remittance supply chain. It is considered the most efficient, speedy, transparent, secure, and trustworthy way of conducting international transactions. When a sender submits payment information to the remittance supply chain, a digital "block" is created and distributed to the network. Multiple computers compete to update the block and the first to successfully do so shares it with the network for verification. Verification includes confirming funds are available, sender and receiver are authentic, and the request is legitimate. Once verified, the transaction is authorized and posted to the ledger and designated parties are updated in real-time. As soon as the legitimacy of the receiver is verified and updated on a blockchain, the receiver can withdraw the money. As regulators are increasingly accepting cryptocurrencies, they can be used for remittance. Promoting the use of digital currency underlined by blockchain technology will remove the risks associated with currency fluctuations. Some of the main advantages offered by blockchain to the Bangladesh remittance sector are as follows.
COST MINIMISATION: Transaction fees are high because of several players such as the source bank, the central bank, correspondent banks, and the destination bank involved in the international transaction process. Each bank along the way charges a fee for their service. The time it takes to get the money from the source to the destination is also lengthy. Transactions may take up to a week before the money ends up in the hands of the recipient which further adds costs related to the delays. Transactions recorded on blockchain are verified by a network of computers unlike one party/bank in traditional channels. By eliminating the middleman, blockchain technology eliminates the costs associated with centralised agencies in the remittance supply chain.
EASE OF ACCESS TO MONEY: The recipient needs to have a bank account to receive the payment via formal banking channels. However, the majority of the people receiving the money may not have bank accounts. Moreover, many of the recipients have to travel long distances to get to the nearest bank branch to collect their money. As a result, many remittances are made using informal channels. Mobile wallets powered by blockchain technology is expected to change the way international payments are made. Mobile wallets installed on mobile phones offer a variety of functionalities, including the ability to access money easily without bank accounts.
EASING THE BURDEN OF MIGRANT WORKERS: Migrant workers need to take time out of the day, go to a bank, sign documents, provide various forms of ID, and create a pin only during the hours of 10 am and 5 in the afternoon. These tasks are further complicated, where getting a bank account or proper identification involves more paperwork and bureaucracy. Blockchain-based mobile wallets can be downloaded on a phone and transact at any time across any time zone.
ENSURE SECURITY: In the hundi system, a migrant worker gives money to an intermediary abroad. Intermediary contacts an agent in Bangladesh, who is then responsible for paying the equivalent amount that the migrant worker has given to the intermediary for the intended recipient in Bangladesh. The transaction between the migrant and the intermediary is sealed by a code number, which the migrant passes on to the recipient in Bangladesh. In the entire process, there isno other official document, so risks related to trust and security are involved. Issues of trust and payment are intertwined and depend on the relationship between members involved in the process. Transactions recorded on blockchain are immutable, once recorded cannot be altered, reversed, or tampered with, which makes the payment process highly secure.
TAX AVERSION AND CAPITAL FLIGHT: By developing policy guidelines on digital currency and the use of blockchain for money transfers, a government facilitated remittance supply chain would enable tracking the remittance which would assist in addressing broader issues related to tax aversion by expatriates working in Bangladesh and capital flight by Bangladeshis.
Blockchain Implementation challenges
Blockchain technology implementation comes with various challenges. Some of the critical challenges are briefly discussed below.
GOVERNMENT REGULATIONS: An information-sharing regulation that protects the companies and their stakeholders drive firms to implement a blockchain-based traceability system. On the other hand, stringent regulatory requirements may deter firms from implementing. Therefore, the regulatory framework will either have beneficial or detrimental effects on the implementation of blockchain in remittance supply chains. Currently, as there are no government regulations available, there is a strong argument that blockchain applications should follow the existing industry practices.
TECHNICAL KNOW-HOW: The gap between the supply and demand of technical experts in blockchain technology isa major challenge. Although it is relatively a new field, however, is growing at a rapid phase and creating a shortage of professionals compared to the demand. Moreover, it is not easy to attract technical experts to Bangladesh as the experts are generally unwilling to relocate to developing nations.
FINANCIAL RESOURCES: Blockchain-as-a-Service allows businesses to use cloud-based solutions to build, host, and use their blockchain apps, smart contracts, and functions on the blockchain infrastructure offered by vendors. Since the introduction of this service, the costs of developing software have decreased or became irrelevant. However, the efficiency of blockchain technology depends on automated data capturing hardware devices that require a huge investment. Besides, there are costs involved in integrating the blockchain system with the existing legacy system.
COMPATIBILITY: Current advancements in blockchain cannot handle all the functions of an organisation, thus it needs to be compatible with the existing legacy systems of all stakeholders in the remittance supply chain. Compatibility should not only be limited to existing systems but also with existing business practices and interoperability with existing software. However, as blockchain technology is continually evolving it is not easy to analyse the compatibility requirements.
COMPLEXITY: Complexity is the degree to which an innovation is perceived as difficult to understand and apply. Blockchain is a new way of processing and transferring information among supply chain members, that requires specialised skills. As there is no clear understanding or protocol on blockchain adoption, it adds complexity to the process. The use of complex cryptographic algorithms to validate and record the transactions on blocks portrays blockchain technology as a complex idea.
Given the crucial role of blockchain technology in driving the economy and Bangladesh to be a role model for growth and development for the world, it is imperative to address the challenges and facilitate blockchain implementation. Careful planning with relevant stakeholders including government, industry bodies, technology developers is demanded in developing appropriate strategies towards the deployment of blockchain technology in Bangladesh.
Professor Shams Rahman is a Professor of supply chain management, and Dr Aswini Yadlapalli is a Lecturer of supply chain management at the Department of Supply Chain and Logistics, College of Business and Law, RMIT University, Melbourne, Australia.