There is a great amount written and discussed about capital flight from Bangladesh.
The mechanism by which this happens is never made very clear.
Further, there is a great deal of discussion about the flow of remittances to Bangladesh.
There is an official picture of the balance of payments that is the basis for making economic policy.
Almost all of these discussions are wrong, distorting the picture of the economy as it actually functions.
And the purpose of this article is to explain the actual mechanisms and present a somewhat different picture of the balance of payments.
I describe the manner in which this market works by a simple example.
Mr XYZ wants to buy a house in Canada that costs the equivalent of $100,000.
He contacts one of the brokers of the Hundi market and explains his wish.
The broker tells him to provide Tk90 lakh.
This includes the fees and everything that the broker will earn.
After handing over the Tk90 lakh, Mr XYZ finds $100,000 in his account in Singapore, which he transfers to Canada.
Where has this money come from?
The group participating in the Hundi market obtains dollars by buying them from Bangladeshis working in the Middle East.
The Bangladesh worker in KSA, Mr ABC has saved $5,000 and wants to send it to his mother in Rangpur.
He has two paths: He can take the money to a bank or finance company and send it to his mother.
The bank sends the money to the foreign exchange account of the bank in Bangladesh.
The bank calculates the Taka equivalent; if the exchange rate is Tk85 per dollar, this amounts to Tk4.25 lakh.
The bank informs the mother that the money can be collected at the branch of the bank nearest to the mother’s residence.
She then travels to the bank and goes through the formalities and receives the money.
The second path for Mr ABC is to go to the hundi market in Saudi Arabia.
The hundi market operator will obtain the address of the mother and will usually offer a better exchange rate say Tk86 per dollar and no fees.
Some of the Taka given to the Hundi broker by Mr XYZ will be delivered to the mother of Mr ABC.
Usually the hundi will deliver the money directly to the home of the mother who will not have to travel to the bank branch.
And go through all the paperwork to get her funds.
It should be obvious that by adjusting the exchange rate offered to the worker in Saudi Arabia the hundi system can attract whatever money it needs.
The government gives an extra 2.5% incentive to use the banking system; the hundi system just matches this.
The commercial bank in Bangladesh often does not treat low income old women very well and the mother may wait all day to get her funds.
With the amounts used in this example the hundi earns almost 5% on the transaction.
Notice that no money crosses the borders of Bangladesh.
There are no bank records of any transactions; Mr XYZ’s foreign bank may ask where the money is coming from but probably not, unless the amount is very large.
The authorities in America or Canada or Singapore do not see an illegal transaction anywhere.
Everyone knows how this hundi market works.
Another important aspect is that the hundi operators get the money to the recipients in a simpler, more pleasant way than do the banks.
It should be noted that mobile financial systems such as bKash have nothing to do with the hundi market.
The hundi market may use the mobile financial systems to move money inside Bangladesh to the recipient, which is better for all involved.
But now the MFS is a substitute for the delivery girl on a motorbike, not an inherent part of the hundi system.
We also note that there are many participants in the hundi market, it is efficient and competitive.
The hundi system has developed because the central bank in Bangladesh has put in place controls over capital flows.
If you live in Japan and want to send $100,000 to buy a house in Canada this is a routine transaction.
But in Bangladesh the central bank controls and usually forbids outgoing foreign exchange transactions other than paying for foreign goods and services.
There are recent changes in regulations to permit purchase of assets abroad in connection with Bangladesh industry, but capital controls remain very stringent.