DETERMINANTS BEHIND THE USE OF

INFORMAL CHANNELS FOR REMITTING MONEY

FROM OVERSEAS BY THE WAGE EARNERS OF

BANGLADESH

Presented by

A.S.M. Sharif Mahmud

st112285

Asian Institute of TechnologyAsian Institute of Technology

Examination Committee:

Dr. Sundar Venkatesh (Chairperson)

Dr. Juthathip Jongwanich (Member)

Dr. Yuosre Badir (Member)

CONTENTS OF PRESENTATION

�Rational and objectives of the project.

�Facts regarding manpower export and remittance

�Reasons behind use of informal channels

�Loopholes of formal channels

�Data Analysis and Result

�Recommendations to channelize the remittance to

official channels

RATIONALE OF THE STUDY

� Wage earners remittance is the second largest source of foreign exchange supply.

� Export earning of Bangladesh is less than the import payment.

� Wage earners remittance meet the trade gap to a large extent.

� Unofficial remittance comprises of 40% of total official remittance. (Ray.S, 2007)

� If this unofficial remittance could be channelized then the remaining trade gapcould be reduced further. It would ultimately reduce our dependency on foreigncurrency loans.

� To reduce the propensity of unofficial remittance it is very important to find outthe reasons that lead many wage earners to use informal channels to remitmoney home.

� Addressing each of the factors ought to be part of overall strategy to reduce thepropensity of unofficial channels while increase remittance through officialchannels.

OBJECTIVES OF THE RESEARCH

� To have a clear understanding about the money

transfer mechanism both formal channel and

informal channel.

� To find out the loopholes in the formal channels

� To find out why people use informal channels to remit

money home

� To identify top most important factors which need to

be addressed first

� To make some policy recommendation to divert the

flow of remittance from informal to formal channel

COUNTRY WISE OVERSEAS EMPLOYMENT OF

BANGLADESH

Source: Bureau of manpower export and training

TRENDS OF MANPOWER EXPORT TO MAJOR REMITTER

COUNTRIES

0

50000

100000

150000

200000

250000

2000 2002 2004 2006 2008 2010 2012

KSA

0

100000

200000

300000

400000

500000

2000 2002 2004 2006 2008 2010 2012

UAE

2000 2002 2004 2006 2008 2010 20122000 2002 2004 2006 2008 2010 2012

-50000

0

50000

100000

150000

200000

250000

300000

2000 2002 2004 2006 2008 2010 2012

Malaysia

-10000

0

10000

20000

30000

40000

50000

2000 2002 2004 2006 2008 2010 2012

Kuwait

TRENDS OF MANPOWER EXPORT TO MAJOR COUNTRIES

� Manpower export to KSA drops significantly from

2007 to 2009. This is due to reluctance of KSA to

take manpower from Bangladesh.

� Due to some reason the image of Bangladeshi � Due to some reason the image of Bangladeshi

workers is impaired in KSA.

� Malaysia and Kuwait also follow the similar

pattern.

� Only UAE shows a positive trend. But most wage

earners from Bangladesh go to UAE as labor.

MANPOWER EXPORT ACCORDING TO SKILL

0

5000

10000

15000

20000

Professional

0

50000

100000

150000

200000

250000

300000

350000

Skilled

0

50000

100000

150000

200000

Semi Skilled

0

100000

200000

300000

400000

500000

Unskilled

MANPOWER EXPORT ACCORDING TO

SKILL

� Professional personnel usually go USA, Canada, Australiapermanently.

� Recent economic recession caused unemployment in thedeveloped countries.

� At the same time immigration procedure become harder which� At the same time immigration procedure become harder whichcause reduction in manpower export to developed countries.

� From 2007 to 2010 skilled and semi skilled manpower export fallsdramatically .

� The middle east countries are the main destination of skilled andsemiskilled manpower of Bangladesh.

� Political unrest in many countries of Middle east as well aseconomic recession may be the main reason behind the reductionof manpower export to those countries

COUNTRY WISE REMITTANCE PROPORTION

25.00%

30.00%

35.00%

Remittance Proportion According to Countries

0.00%

5.00%

10.00%

15.00%

20.00%

2008-09

2009-10

2010-11

COUNTRY WISE REMITTANCE PROPORTION

� Almost 30% of total official remittances come from Kingdom of Saudi Arabia

� UAE contribute 17% of total official remittance.

� 16% of total official remittances comes form USA though the number of

manpower in USA is very insignificantmanpower in USA is very insignificant

� The average income in USA is very high compare to income in Middle east and

KSA.

� Kuwait, Malaysia, Singapore, Italy are also important countries for Bangladesh as

remittance from those countries are also significant.

� Data of the last three years show that the contribution of those countries

towards remittance is more or less same.

TRENDS OF REMITTANCE FROM

MAJOR COUNTRIES

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

8000.00

KSA

500

1000

1500

2000

2500

UAE

0.00

1000.00

2000.00

2000 2002 2004 2006 2008 2010 2012

0

500

2000 2002 2004 2006 2008 2010 2012

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

2000 2002 2004 2006 2008 2010 2012

Malaysia

0.00

500.00

1000.00

1500.00

2000.00

2500.00

2000 2002 2004 2006 2008 2010 2012

Kuwait

MANPOWER EXPORT VS

REMITTANCE

700

800

900

1000

10000

12000

14000

Trend Comparison-Manpower export and Remittance

0

100

200

300

400

500

600

0

2000

4000

6000

8000

2000 2002 2004 2006 2008 2010 2012

Re

mit

tan

ce

Remittance (Million USD) Manpower (,000)

MAGNITUDE OF REMITTANCE THROUGH INFORMAL CHANNEL

� In 2011 total wage earners remittance stands at 11.65 billion USD which is about 10% of GDP.

� In the same year remittance amounting about 5.00 billion USD come through informal channels. (considering 40% of official remittance)

� Total informal remittance is about 4.5% of GDP of Bangladesh.

� Though manpower export is disturbed but the formal remittances shows a steady trend over periods.

� In 2011 our Export is 207 billion USD, Import 337 billion USD while official remittance is 117 billion USD.

� Our trade gap is 130 billion USD. If all the formal remittance is used to pay the import dues , then the rest 13 billion USD (130-117) is the deficit. This deficit could be covered to some extent if the informal remittances could be channelized.

DETERMINANTS OF REMITTANCE

� The stock of migrant population

� Nature and size of demand for the Bangladeshi Migrant worker in

the overseas market

� Competition from the migrants of other countries.Competition from the migrants of other countries.

� National Labor laws and economic condition

� Income potential in the host countries

� Job credential issues that downgrade migrant wages

� The migrants’ propensity to remit

� Efficiency of the remitting channels.

BASIC MODEL OF MIGRANT REMITTANCE

Source: Ray, S. (2007)

CHANNELS USED IN

REMITTANCE

Formal Channel

� Banks

Informal Channel

� Hundi� Banks

� Exchange Houses

� Travelers' Cheque

� Telegraphic Transfer

� Automatic teller machine

� Electronic Transfer

� Hundi

� Home bound friends and

relatives

� Personally hand carried

cash without declaration

TRANSACTION PROCESS THROUGH HUNDI

� Involvement of four parties

� One remitter, two remittance service provider and arecipient.

� When a remitting party wants to send money for examplefrom Riyadh to Dhaka, he makes a payment in Riel orfrom Riyadh to Dhaka, he makes a payment in Riel oranother convertible currency to a remittance agent ormiddleman in Riyadh.

� The service provider contacts a partner service provider inDhaka and relays necessary information.

� The partner service provider thus arrange payments in localcurrency to remitter’s family or other beneficiary on theproduction of pre agreed reference.

D IFFERENT COUNTRY D IFFERENT NAME

BUT

MECHANISM IS ALMOST SIMILAR

REASONS FOR USING INFORMAL

CHANNELS

� Exchange rate

� Urgency of remittance

� Freedom to remit without time constraints

� High speed of remittance� High speed of remittance

� Lower cost.

� Avoidance of local tax

� Illiterate/ Semi literate people etc.

� Availability of channels

� Legal access to the banking system

REASONS FOR USING FORMAL

CHANNELS

� Legitimate way of transferring money

� Wage earners can show their income properly

� Money is deposited directly in the bank account of home

country thus ensure safety and security.country thus ensure safety and security.

� Wage earners can buy wage earners development bond if

they send money through formal channels.

� Illegal money is used for illegal activities like terrorism,

under invoicing , over invoicing etc.

LOOPHOLES OF FORMAL CHANNELS

� Obligation to have a bank account (most time)

� Complex procedure

� Longer time requirement

� Hassle by bank officials

� Non availability of banks in remote areas.

� Noncompetitive exchange rate offering compare to that of

informal channels

SURVEY

PURPOSE OF THE SURVEY

� The purpose of the survey is to find out the mostimportant factors that lead the wage earners to sendmoney through informal channels.

� The survey has limitations also.

� The survey is based on Thailand which is not a ideal� The survey is based on Thailand which is not a idealcountry for wage earners to represent all the factors.

� Recommendations are based on the findings inThailand. It might vary with the wage earners live inKSA, Malaysia or other countries.

� The sample size was also small which may notrepresent the whole population

DATA COLLECTION

� Primary data was collected from a small survey on Bangladeshiexpatriates living in Thailand

� Sample size was 20 of which 15 male and 5 female

� Age range from 22 years to 45 years

� Samples were collected within the group who use informalchannels to remit money.channels to remit money.

� A close end questionnaire mentioning 13 factors behind use ofinformal channels was used for survey.

� Respondents were asked to rank the factors from 1 to 13 where 1is most important and 13 is least important factor.

� Average value of the ranking was used to analysis the data.

� The 13 factors were identified by going through various booksjournals, research papers and also from personal experience.

DESCRIPTION OF THE FACTORS

Serial No. Factor Name Description

1 Exchange Rate Conversion rate of local currency against per unit of foreign

currency

2 Urgency Very urgent to remit money home

3 Speed How long it will take time to send money home

4 Transaction time Office hour of remittance service provider

5 Cost Fees, commissions etc. associated with remittance

6 Convenience Convenience of the remitter as well as the recipient 6 Convenience Convenience of the remitter as well as the recipient

regarding sending and collection of money

7 Trust Whether the people are trustworthy or not

8 Availability Whether the channels are available to the wage earners as

well as the recipient in home countries

9 Reliability Whether the channels are reliable or not

10 Complexity Unable to understand the remittance procedure of the

formal channels

11 Illiteracy Lack of basic education

12 Illegal Worker Working without valid visa or work permit

13 Anonymity Whether the sender want to disclose his or her identity

DATA ANALYSIS

10

12

14

Mean value of the ranking by the total sample

(smaller number greater importance)

0

2

4

6

8

RESPONDENTS’ PREFERENCES OF FACTORS ACCORDING TO AGE

LIMIT

0

2

4

6

8

10

12

14

Ranking of factors according to sample age below 30 (25% of total sample)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Ranking of factors according to sample age above 30 (75% of total sample)

Most important: Transaction time, Exchange rate ,Speed, Urgency

PREFERENCE OF RESPONDENTS ACCORDING TO GENDER

0

2

4

6

8

10

12

14

Ranking of factors according to male respondents

0

2

4

6

8

10

12

14

Ranking of factors according to female respondents

Most important factor: Urgency, Transaction time, Speed, Ex rate

RANKING OF FACTORS ACCORDING TO EDUCATION

02468

101214

Ranking of the factors according to respondents

having Bachelor degree

0

2

4

6

8

10

12

14

Ranking of the factors according to respondents

having HSC degree

0

2

4

6

8

10

12

14

Ranking of the factors according to respondents

having SSC degree

Most important factors: Transaction time, Speed, Urgency, Ex rate

PREFERENCE OF RESPONDENTS ACCORDING TO

EMPLOYMENT

0

2

4

6

8

10

12

14

Ranking of factors according to respondents working

as a company staff

0

2

4

6

8

10

12

14

Ranking of factors according to respondents

working as hotel manager

0

2

4

6

8

10

12

14

Ranking of factors according to respondents working money

changer office

RESULT

� The samples, on an average, thinks that the most important

factors should be urgency of remittance, speed of

remittance, exchange rate offered by the channels and

transaction time of the remittance service providers.

On the other hand average sample think anonymity,� On the other hand average sample think anonymity,

illiteracy, illegal worker and complexity are the least

important factors to consider regarding sending money home

through informal channels.

� Segregation of data according to demography of the sample

such as age, gender, education and employment shows the

similar result regarding the ranking.

RECOMMENDATIONS

� Addressing the most important factors ought to be part of overallstrategy to reduce the propensity of unofficial channels whileincrease remittance through official channels.

Exchange Rate

� Black market premium on Exchange rate could be reduced through� Black market premium on Exchange rate could be reduced throughbetter rules and regulations. The demand of unofficial foreignexchange is high in Bangladesh due to under invoicing practice ofthe importer. If central bank as well as the ministry of tradestrengthen their supervision to reduce such illegal practice then thedemand for informal foreign exchange could be reduced.

Transaction time

� Incorporation of chain store like Singerbd, Walton etc. as aremittance service provider to get the extended time beyond thebanking transaction time. These shops remained open upto 10 pmand have distribution channels all over Bangladesh.

RECOMMENDATION (CONTD….)

Speed:

� Speed could be ensured through technological advancement ofthe remittance channels.

� Establishing ATM booth in remote areas could increase thespeed of remittance.

� Remittance through mobile network could be encouraged moreto get remittance with more speed.

Urgency:

� Hundi channels often provide credit facility to the recipient ofthe remittance in case of urgency. To reduce the dependency oninformal channels the credit facility to the rural people must beincrease.

THANK YOUTHANK YOU