A remittance corridorIt is high time the government became serious about adverse impacts of hundi on the national economy
Dhananjay Kumar Shah
Hundi is an informal remittance transfer system that the central bank of Nepal does not recognise. The use of hundi is a matter of concern to the governments, policy makers, financial institutions and stakeholders. It also poses a big challenge to the national economy because the recipient country of the remittance does not receive direct hard foreign currency. On a deeper analysis of hundi remittance behaviour, hundi operation might have connections with tax evasion, money laundering and terrorist financing.
One direct repercussion of hundi is financial. Since hundi is money transfer without money movement, it has serious impacts on the national economy of Nepal. The hundi way of remittance transfer negatively affects the foreign currency reserve, productive investments and governance. This is alarming for Nepal, where remittance covers nearly 30 percent of the national GDP. More importantly, remittance significantly contributes to poverty reduction, household savings, adjustment of perennial trade deficit and national investments in Nepal. Its role has been vital for financing the implementation of federal structures in the provinces after the three-tier elections. Under such circumstances, it is important to encourage formal remittance channels and to discourage hundi remittance behaviour.
Courting the black market
A recent research as part of postgraduate dissertation conducted by this author on hundi remittance behaviour in the Korea-Nepal remittance corridor suggests that less than 20 percent of the low-skilled Nepali workers working under the Employment Permit System (EPS) of Korea use formal remittance channels, whereas over 80 percent opt for hundi. The surveyed workers responded that they preferred hundi despite its illegality because of low transfer costs, cultural convenience, fast delivery and other related factors of convenience. Alarmingly, this finding reckons that the Nepal Rastra Bank is not able to receive direct foreign currency that amounts to roughly $0.384 billion in one year from some 40,000 Nepali EPS workers in Korea.
Another side effect of hundi is the rise of black market, tax evasion and money laundering. There are speculations that hundi operation involves tax evaders, money launderers and merchants of remittance receiving and remittance sending countries, as well as third countries. In Nepal, the recent news stories bespeak of tax underinvoicing, tax evasion, fraud billing, custom irregularities and such other serious financial crimes. It is speculated that hundi may be instrumental in this nexus of financial wrongdoings.
The governments of Nepal and Korea should crack down on illegal remittance channels like the hundi racket and should incentivise official remittance transaction channels such as banks, money transfer operators, and remittance service operators. Reducing remittance transaction costs, policies to encourage private sector involvement in the remittance transfer, use of Nepal postal offices in the remittance transfer mechanism, and strengthening the role of Ministry of Employment and Labour and the diplomatic mission abroad are all ways to curb the use of hundi.
The role of the Nepal Rastra Bank is extremely important in discouraging the use of hundi. The government of Nepal must address the transfer cost problem through negotiations between the two central banks—Nepal Rastra Bank and Bank of Korea—to compromise on the remittance transaction fee. For this, it can provide subsidies/allowances/incentives to encourage Nepali migrant workers to use banking channels by reducing the transfer cost in line with SDG Goal 10.c (By 2030, the UN has set a target of reducing transfer costs to 3 percent of the remitted amount and of eliminating over 5 percent transfer costs in any corridor).
Second, the government of Nepal must enact laws and install a rigorous implementation mechanism which prohibits remittance transfers via hundi. Both governments should crack down on the hundi racket. To achieve this goal, there is a need for sound coordination among different stakeholders: the central banks of Nepal and Korea, Nepal and Korea police, EPS Departments, financial institutions as well as remittance service providers. It is also crucial to encourage private sector to reach customers in remote areas where banking services are limited.
Third, initiating an innovative approach for remittance transfer in the Korea-Nepal remittance corridor would be a panacea for doing away with hundi. Since Korea is the global leader of information, communication and technology (ICT) development, an ICT-based remittance transfer mechanism could be feasible. To meet this goal, Nepal’s postal offices should have ICT-based services. The infrastructure
for postal services are already established in the rural and remote districts and villages of Nepal and Nepal Post has its own postal saving bank. Therefore, the postal infrastructures and saving banks could be streamlined with remittance service operations.
Furthermore, it is extremely imperative to strengthen the role of the Ministry of Labour and Employment, and Nepali diplomatic missions abroad in spreading awareness about good aspects of formal banking channels and ill effects of hundi. Their role is also critical to encourage remitters and their beneficiaries to open up banks accounts for financial inclusion.
It is high time the government of Nepal became serious about the adverse impacts of hundi on the national economy, the national security and Nepal’s international image. Concrete government measures in collaboration with Korean authorities and the private sector can successfully encourage Nepali workers to switch from hundi to formal remittance channels.