Why remittances come through informal channels? A sensitive socio- political- economic concern

Bangladesh is one of the world's top recipients of remittances, which have been more than three times the volume of Official Development Assistance (ODA) for more than a decade. 

Expats regularly send remittance home, which serves as a significant source of income for their families as well as a significant source of income for many countries, including Bangladesh.

According to the World Bank, remittances to Bangladesh in 2020 were total $18.2 billion, accounting for 5.3% of the country's GDP. Despite the importance of remittances, a considerable amount of these payments are transferred through informal means rather than conventional banking channels. Formal channels are legal money transfer services that provide convenience and speed but may charge significant costs. Informal channels, such as the hawala system, operate discreetly through unrecorded routes and rely on acquaintances, travelers, or agents. Policymakers face a problem in increasing remittances through formal banking channels while also integrating remitters lawfully and effectively into the country's development process.

Owing to a decrease in remittance inflow, Bangladesh's persistent dollar problem in the financial market is hurting firms' capacity to settle letter of credit payments, while gasoline, gas, and power shortages are increasing the country's loss of foreign exchange reserves. The government and central bank have implemented initiatives to improve remittance inflows through official channels; however informal channels remain popular due to volatility in the foreign exchange market. Eventually, Bangladesh's economy is facing substantial challenges as a result of balance-of-payments pressures.

According to Bangladesh Bank data, remittance inflows to Bangladesh fell to $1.56 billion in February 2023 from $1.95 billion the previous month. However, it was greater than the previous year's same month when expatriates sent $1.50 billion in February 2022. According to bankers, the shorter month may have impacted inflows, as well as global economic uncertainty, which may have impacted employment markets abroad. Informal routes for transferring remittances have grown in popularity as the country's foreign exchange market has become more volatile, with better exchange rates given than legitimate channels, they claim. Using hundi, an unlawful channel, is a major cause of the financial market's continuous dollar issue, impacting businesses' ability to settle letter of credit.

Numerous Bangladeshi expatriates still prefer informal methods since they demand less time and formality. International remittances are now less expensive and time-consuming because to the development of new technology, especially mobile technology, but rules still do not completely support its usage. The shifting of remittances from formal to informal routes, however, is a major worry. According to studies, between 35% and 75% of official remittances in developing nations like Bangladesh are remitted through unofficial means. The competition between legal and illegitimate avenues for remittance is one of the main problems with these diversions. When there is a large difference in the dollar exchange rates of legal and illicit methods of sending remittances, it was noticed that expatriates are not interested in formal channels.

Several factors contribute to this diversion, including the significant spread between the interbank and kerb market currency rates, high remittance transfer fees, a lack of financial market infrastructure, and migrant characteristics. Because of the huge exchange rate differential, cheap remittance transfer costs, and less developed financial market infrastructure, the informal channel provides greater incentives. Furthermore, the majority of low-skilled migrant workers transfer money to their families in tiny amounts and are hesitant to comply with the essential documentation required by the legal channels.

One reason for this is the high expense of transmitting money through conventional channels. According to a 2020 World Bank research, the average cost of moving money from G20 countries to Bangladesh was 6.9%, which was more than the global average of 6.5%. This can be a substantial hurdle for low-income migrant workers who want to send money home to their relatives.

Another problem is that many migrant workers do not have access to or trust official financial methods. For example, they may not have a bank account or be able to furnish the appropriate identification documents. Furthermore, some migrant workers may be hesitant to use formal channels due to worries about privacy and security.

The lack of technical understanding among expatriates in the Middle East is also cited as a reason for the country's poor remittance flow through legal channels. Raising their awareness of digital financial services may result in more remittances flowing through legal channels.

Financially savvy expatriates frequently use official remittance methods including banks, mobile wallets, and money transfer services to send money home. The more expensive and frequently preferred option for large sums is traditional banking institutions. Since these conventional methods of money transmission operate outside of official banking channels, many migrant workers use them. Examples include hundi and hawala. Even though these networks are frequently less expensive and easier to use than official channels, they come with hazards like the possibility of fraud and money laundering.

Many Bangladeshi expats also believe that remittances sent to Bangladesh are unlawfully redirected to first-world countries such as the United States and Canada by corrupt politicians and bureaucracy. These expats believe that their hard-earned money is being sucked off by those in authority who have little respect for the rule of law or the welfare of their fellow residents. As a result, people are cautious to send remittances through regular channels, fearing that their money may not be used for its intended purpose.

Furthermore, when they visit Bangladesh, many Bangladeshi expats believe they do not receive appropriate services in exchange for their remittances. They believe that their contributions to the country's economy are undervalued and that they are frequently viewed as outside laborers rather than respected members of society. This lack of acknowledgment and appreciation strengthens their unwillingness to pay remittances through formal methods. As a result, it is critical for the government to address these issues by providing clear and effective remittance transfer methods, as well as ensuring that Bangladeshi expats are treated with respect and acknowledgment when visiting their home.

The drop in remittances emphasizes the importance of redirecting remittances through legitimate channels. The government has taken some steps, such as offering cash incentives and relaxing documentation requirements. However, the effectiveness of these policies requires comprehensive examination, and improving financial market infrastructure should be stressed more efficiently.

Various public sector infrastructures, such as the central bank, state-owned financial institutions, government programs, and postal networks, can also be leveraged more effectively to reroute remittances to legitimate channels. Reducing the exchange rate differential between official and informal markets, as well as cutting excessive remittance transfer fees in the formal channel, can help to direct remittances toward the formal channel.

The Bangladesh government has taken initiatives to promote the use of official channels for remittances, including lowering transaction costs and putting policies in place to make banking services more easily accessible. More work is needed to address the core issues that lead migrants to use deceptive methods. This involves raising banking service accessibility, lowering the cost of moving money through official channels, and enhancing financial knowledge.

Overall, remittances contribute significantly to Bangladesh's GDP, yet many of these transactions take place through informal channels rather than established banking systems. This presents a problem for authorities seeking to effectively and lawfully incorporate remitters into the economy. The recent drop in remittance flows has become a major source of concern for Bangladesh, threatening livelihoods and economic progress. While the government is encouraging migrants to use legal channels, more has to be done to address the underlying causes that motivate migrants to use informal channels. Policymakers must use contemporary technologies to ensure safe and cost-effective remittance transactions while also combating financial crimes such as money laundering and illicit fund transfers.

Photo: Courtesy

The writer is an Associate Professor and Chairman of the School of Business at Presidency University.