As much as 40 per cent of all remittances come through informal channels

Kathmandu

Nepal is hugely dependent upon remittance; so much so, 32 per cent of our GDP comes from remittance. However, only a limited portion of remittance comes into Nepal through formal channels. Recently it was reported in major newspapers that of the total remittance sent from South Korea, 96 per cent enters through the channel of hundi. Estimates from recent years show that as much as 40 per cent of all remittances come through informal channels like hundi.

Understanding hundi

Hundi is an informal money transfer system that uses closed networks to transfer cash without actually doing a cross-border transaction. The two brokers in two different countries facilitate the money transfer through a mutual agreement. One receives cash from the remitter and the other gives the cash to the beneficiary allotted by the remitter.

According to a discussion paper published by UN, the two brokers balance their books through the movement of money by illegal means such as smuggling of currency, commodities or invoice manipulation.

Hundi exists parallel to other formal money transfer business or ‘remittance business’. One reason why it is so popular is that it is cost effective and flexible since it has no regulatory obligations, that is, reaping benefits of non-compliance. It is also efficient because it is controlled by a close-network of people, usually relatives and friends.

Because hundi is operated as an informal business, its existence can be explained through the perspective of any other informal economic activity within an economy which is primarily to evade taxes and circumvent regulations and licensing requirements.

But not as rosy as meets the eye

But having said that, the very fact that hundi is an informal and illegal business means that the people who choose to use hundi are prone to significant risk. The act of engaging in hundi is already illegal as per the law of the land and hence the transacting parties risk being apprehended. Consecutively, there is no legal protection for the victims of hundi if the operators default on their promises. Yet, a substantial number of people are using hundi.

It should not be too hard to comprehend that the share of hundi in the entire market (formal and informal) could be rendered much smaller if the formal remittance business itself were more attractive to migrant workers. Then, competition that will increase the access of such services throughout the country and also decrease the cost of remitting is the key here. It is necessary that the regulations themselves are not stringent, that they do not limit the entry into and innovations within the industry.

Decentralisation of regulatory body

Foreign Exchange Management Department (FEMD), in Nepal Rastra Bank (NRB), regulates the entire remittance industry within Nepal. This means all prospective businesses have to come to Kathmandu get registered and acquire their license. Interestingly, the primary facilitators of remittance business in Nepal, who use their own software for transactions and are regulated and licensed by FEMD, are also located exclusively in Kathmandu Valley. This might be because a prospective money transfer enterprise has to come and register in Kathmandu, and regularly submit reports on a transactional and terminal basis. It is arguable that the centralisation of remittance business has to do with the centralisation of regulatory body.

To increase the access of remittance business in different landscapes of the country, it might be pertinent to decentralise the licensing and regulatory functions of FEMD for remittance business.

Innovation in remittance business

One of the reasons hundi is more flexible than formal remittance business is that it is adaptable to technological changes. However, the formal remittance business cannot make use of such innovations, unless a guiding regulation is built around it. If formal remittance businesses could make use of the advancements in the field of technology they would be better placed to compete with the informal sector.

In Nepal, even the banking sector has not been able to fully capitalise on prospects offered by technological advancements, let alone the remittance business. These instruments are strictly regulated by the NRB in the banking sector, and in the case of remittance industry, such a regulatory framework is completely missing. Such innovations in remittance might be able to counter the hundi operations in terms of efficiency and flexibility.

Availing foreign currency to migrant workers

Stringency in regulation of remittance business is that the beneficiaries can only receive the money in Nepali currency. Availing the migrant workers and their beneficiary an option to transact in the currency of their preference can encourage the migrant workers to send money through formal channels. The reason behind this is that hundi operators have limited access to foreign currency and will not be able to compete with formal remittance business in availing remittance in foreign currency.

Moreover, there have been instances, like in Pakistan, where specific policies targeting migrant workers have worked to curb the informal money transfer businesses like hundi. Different investment opportunities targeting the migrant workers also seem to have worked in expanding the formal remittance sector.

However, due care should be given to the role of the government in regulating the industry. As Buencamino and Gorbunov put it, overly harsh and stringent government interference in the remittance process could lead migrants to send higher share of remittance through informal channels, the opposite of the initial intent.

The author is a Research Intern at Samriddhi Foundation, and can be reached at intern.sovit@samriddhi.org.  Samriddhi is an independent research and educational public policy institute based in Kathmandu. For more information, visit www.samriddhi.org