Consequences of hundi
Hundi is a type of informal remittance transfer channel. Mostly South Asian migrant workers use this channel, which is illegal in Nepal, to send money home. Passas (1999) coined the term Informal Value Transfer System (IVTS) and defined the IVTS as networks of people facilitating transfer of funds or value without leaving a trail of entire transactions that take place outside traditionally regulated financial channels. Hundi is primarily a type of IVTS or Informal Transfer System (IFT). Hundi is also at times interchangeable with “hawala”, which means transfer in Arabic. Peters (2009) asserts that hawala is crucial to the legal economies of millions of people with no access to bank accounts.
According to Reserve Bank of India, hundi refers to financial instruments evolved on the Indian sub-continent, Middle East, South Asia used in trade and credit transactions. They were employed as “remittance instruments” (to transfer funds from one place to another), “credit instruments” (to borrow money [IOUs]), “trade transactions” (as bills of exchange).
Hundi basically rooted in the Hindu societies of Nepal and India is also referred to as an alternative remittance system, informal money transfer system depending on the region; for example: fei chi’ en (China), padala (The Philippines), chit (Thailand), and underground exchange. Over the years, hundi, once recognised as the traditional way of remittance back in the British Raj in India, has now become controversial, usually an unofficial medium of remittance since it skips the banking channels and is not in tandem with the regulations of the central banks of many world governments. Nepal Rastra Bank does not recognise hundi as a remittance transfer channel.
However, hundi is still in practice in Korea-Nepal remittance corridor. Many economists have questioned its operationalisation in terms of validity, legality and reliability. Jost and Sandhu (2000) defined hawala as “money transfer without money movement. This definition importantly highlights one feature of hundi that money is not seen moving and the process is rather invisible. In fact, hundi funds result in less productive investments, encourage tax evasion and negatively affect governance and exchange reserves.
Some critics also relate hundi to terrorism financing, more questionably after the 2001 terrorist attack in the United States. Watters (2013) argues that hawala or hundi provides anonymity that makes the money transfer system “susceptible to abuse by criminals trying to hide drug money and other illicit funds.”