Nepal | April 06, 2020

Hundi in South Korea: Nepalis’ remittance channel

Dhananjay Shah

It is high time the Government of Nepal, the Republic of Korea and the stakeholders took steps to curb this problem and to make formal channels hassle-free, quick, transparent, cost-effective and competitive

South Korea hundi. Illustration: Ratna Sagar Shrestha/THT

Hundi is a popular remittance transfer channel among Nepali migrant workers under Employment Permit System in the Republic of Korea. Various reports show that most of the migrant Nepali workers, mainly from Korea, send money to their families through hundi. In Korea, some reliable studies indicate that more than 80 percent of Nepali migrant workers use hundi to remit money. Nepali EPS workers find that hundi way of remittance transfer is faster than banks and offer remittance services at lower costs. In spite of the risk of money being robbed or cheated, they tend to use hundi because of the Korean language barriers and flexible accessibility — even on weekends, according to the ILO reports.

In October, 2016, ten foreigners including Nepali and Chinese hundi agents had been caught in Korea by Gyeonggi Nambu Provincial Police Agency. They were found allegedly operating a “hundi business” by transferring some $44.4 million over five years from Korea to Nepal. The hundi agents allegedly received requests from about 3,500 Nepalese workers to remit money to the workers’ families in Nepal. The Republic of Korea offers the highest pays and perks to Nepali migrant workers. Foreign workers are treated equally like native Koreans as per the National Labor Relations Acts. The Government of Nepal and the Republic of Korea have made a joint MoU through the Employment Permit System (EPS). In total, more than 30,000 Nepali migrant workers are legally engaged in employment in Korea.

Of the total migrant workers in Korea, over 22,748 are unskilled (under E9 visa category), and 424 semiskilled or skilled (under E7 visa category) engaged in 44,000 SMEs, according to the Nepal Embassy Seoul report of 2014.

Remittances assist in augmenting national income by providing foreign exchange and raising national savings and investment as well as by providing hard currency to finance essential imports hence curtailing any Bottom of Pyramid (BOP) crisis. Remittances have been crucial in development financing. Although remittances make up over a quarter of Gross Domestic Product (GDP) and exceed all other external sources of foreign capital in Nepal, only 10 per cent of these remittances have been used for savings, household property, and education, according to the Central Bureau of Statistics. International employment has rendered alternative livelihood opportunities, and remittances have significantly contributed to augment household incomes as the report of Ministry of Labor and Employment 2016 suggests.

Over the years, hundi once recognized as the traditional way of remittance back in the British Raj in India has now been a 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. In fact, hundi funds result in less or no productive investments, encourage tax evasion, and negatively affect governance and exchange reserves. Some critics also relate hundi to terrorism financing after the 2001 terrorist attack in the United States. On the whole, hundi has earned notoriety set against the backdrop of modern banking.

In the context of Korea, the informal channels which are illegal by law are popular among the Nepali migrant workers according to the ILO report prepared by Kang and Lee in 2014. Nepal Rastra Bank’s economic analyst Bhubanesh Pant in his journal article in 2011 claims that “most of the money transferred by migrant workers does not come through formal banking channels but instead they send money through informal channels such as hundi and relatives.”  The money remitted through hundi or an informal channel creates a problem of figuring out the exact volume of foreign exchange of a country’s earnings and it ultimately impacts foreign exchange policy of the country.

Most importantly, the informal remittance channels like hundi and hawala system prevent the government from receiving tax revenue that accrues when it is remitted through formal channels.

As per the migrants’ responses, the cost of transferring money, time and place, paperwork and Korean language are major factors and barriers in a migrant’s decision to choose remittance channel. Migrants are most likely to prefer to remit at a lower price compared to the high costs. The high transfer costs discourage the migrant workers to choose the formal channels.

The scholars and stakeholders have been pressurizing the banks and the remittance recipient countries to ease the formal channel making it less costly and competitive. The parliament hearing committees, media, the task force review and ILO reports on the EPS gravely highlight this issue.

In the fiscal year 2016/2017 budget, the government of Nepal has pledged to make the remittance channels less costly and convenient to migrant workers. Similarly, Nepal Rastra Bank has adopted some policies in this direction. However, the implementation is still awaiting and the hundi is blooming in Korea vis-a-vis Nepali migrant workers.

It is high time the Government of Nepal, the Republic of Korea and the stakeholders took steps to curb this problem.

Shah is pursuing Master’s Program in Korean Experience of Economic Development and

Economic Cooperation at Kyung Hee University, South Korea

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