REMITTANCE FLOW IN BANGLADESH AND SUGGESTED REFORMS
Bangladesh Studies Assignment 02
Prepared for: Mr. Sheikh Morshed Jahan Associate Professor
Prepared by: Saif Hasan (ZR-21) Ishtiaq Rabiul Islam (ZR-25) Mrinmoya Kanti Das (ZR-36) Nafiz Alam Khan (ZR-47)
th
BBA 18 Batch IBA, University of Dhaka February 29, 2012
Context: Remittance is the transfer of money by a foreign worker back to his/her home country. It is important because it is the second largest cash-inflow in the case of many developing countries, eclipsing even foreign aid.
Over the past 40 years labor migration from Bangladesh has registered a steady increase, mostly to 13 countries. In the past the bulk of the migrants consisted of professional and skilled labor. However, the recent trend is more towards semi-skilled and unskilled labor migration. Major outflow of Bangladeshi labor generated significant financial flow to the country in the form of remittance. However, due to increase in the flow of unskilled and semi-skilled labor, remittance is increasing at a much lower rate than the labor flow. Remittance is crucial for Bangladesh’s economy. It constitutes
almost one-third of the foreign exchange earnings.
The labor market for Bangladeshi migrants, however, is not static. For example, during the 1970s Saudi Arabia, Iraq, Iran and the Libyan Arab Jamahiriya were some of the major destination countries. While Saudi Arabia has remained the top destination, Malaysia and the UAE also became important receivers. Malaysia used to be the second largest employer of Bangladeshi workers. However, since the Asian financial crisis of 1997, the number of Bangladeshi migrants to Malaysia has decreased and the UAE has taken the place. By October 2008, the UAE and Malaysia remain as the second and third important destinations of Bangladeshi migrants occupying 20.58 percent and 10.85 percent migrants, respectively. That is, Saudi Arabia alone constitutes more than one-third share of overseas employment. Again Saudi Arabia and the U.A.E., both are the destinations of more than half of the exported manpower of Bangladesh. Other important destinations of Bangladeshi migrants are the U.K., Kuwait, the U.S.A., etc.
The contribution of remittance to Gross Domestic Products (GDP) has grown from a meager 1 per cent in 1977-1978 to 5.2 per cent in 1982-1983. But during the 1990s, the ratio hovered around 4 per cent. It reached to 5.26 per cent in 2001-2002 and by showing an increasing trend it reached to 10.02 per cent in 2007-2008. The amount of remittances in terms of export earnings has also been increased. In fiscal year 19981999, remittances as percent of export stood at 32.04 percent, which has increased to 56.09 percent in 2007-2008. But, if the unofficial flow of remittances is taken into account, its contribution to GDP and export earnings would certainly be much higher. One of the unofficial remittance flow instrument is Hundi. 40% of the inward remittance can be attributed to Hundi. Hundi is a legal financial instrument that evolved on the mainly Indian sub-continent. Technically, Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in that order. Being a part of an informal system, Hundis now have no legal status. They were mostly used as checks. The problem with Hundi is that it actually takes away remittance inflow from the Government as it has no tax implications. So, when 40% of total remittance flows in by Hundi, Government loses a substantial amount. Whatever way the remittance flows into the country, it is used primarily for sustenance. The recipient families are mostly rural based and they need that money to buy food, clothes and develop housing or agricultural land. But there is a large group of people who just use any excess money as deposits in the banks and use interest as their profit. While it certainly is viable from a personal perspective, it contributes nothing to the overall economy. As a developing country, we need to grow our industries as much as we can and encourage entrepreneurship all over the country. The first step to creating a better environment for enterprise comes from acting on the grass root level. And that is where remittance comes in. Remittance flows can is large enough to be used as capital for a small enterprise. There are examples of remittance being used as capital for an entrepreneurship such as small shops or vegetable gardens which run from the remittance money. But it is not enough. So, we need to ensure that remittance comes into the country through proper channels and be used in a creative way to maximize the potential that it holds.
Objective: Better utilization of remittance considering the development opportunities of Bangladesh.
Scope: This study concerns itself with the remittance receiving rural families having surplus wealth and not employing it into the development of the country.
Limitations:
Time
Resource
Data availability
Methodology: We have studied a variety of journals, conducted a few interviews with NRBs (nonresident Bangladeshi) and looked at a few cases. From these, we have constructed our own suggestions that we think can help Bangladesh use the remittance more effectively.
Recommended Alternatives: We have two alternatives for recommendation. One would be the improvement of national channels and the second would be to link micro-enterprises with remittance. Now we will discuss both alternatives along with their implementation ideas. Increasing the efficiency of national channels: As stated before, a lot of remittance comes in the informal way. This is due to the lacking of the national channels that is already in place. If we can improve the efficiency of these national channels, overall the Government’s share in the overall remittance flow would increase. So, here are a few steps to consider while implementing such an idea-
Improving Online Banking: Banking service within the country should be improved; on-line banking system should be introduced with support from the T&T Board by installing fiber optics lines. There exist an on- line connection between Singapore and the Philippines. Such links ensure quick transfer of money. Prime Bank official stated that though they have computerized their system 10-15% time the system remains down owing to weak power and telecommunication infrastructure. Speeding up the overall system: Reduce the paperwork associated with remittance transfer. Bangladesh Bank may arrange setting up a decentralized clearing system or the sub-chest system. This would facilitate quick clearance of drafts, thereby increasing the efficiency of banking system and increased client satisfaction. Expanding Banking Network: Some people who send remittance are from very remote areas of the country. They may not have access to banking services. So, the banks should establish remittancespecific branches to reach these areas
Linking the Remittances to Micro-enterprise: Micro-enterprise can be the deciding factor while building up local industries in a country such as ours. By connecting the remittance with possible microfinance opportunities, we can create a better environment for both the current and future small entrepreneurs. These small enterprises can pave the way for a bigger and better industrial sector. A few steps that can be taken in this direction are-
Government Sanctioned Special Bonds: The government may consider floating bonds in foreign currency such as US dollars to attract migrants’ savings. Such bonds will provide security against devaluation that
many savers are weary about Taka bonds. The government may also consider launching a special mutual fund for migrant workers. It may provide the initial capital and offer shares to wage earners for further capitalization.
Entrepreneurship Fund Creation: A fund may be created from the remittances sent by the Bangladeshi migrant workers. This fund can be used to lend money to entrepreneurs at the same conversion rate. Under such a scheme small remittances may contribute to a large pool of funds that may be accessed by people with entrepreneurial ability.
MFI-Bank Linking: MFIs (Micro-Finance Institution) like Grameen and BRAC have shown interest in channeling the remittances for entrepreneurial endeavors. But Government imposed laws are restricting that effort. So, if the banks that are allowed to deal with the transfer to remittances are linked to MFIs so that MFIs can utilize that resource without many formalities for the development.
Evaluation Criteria: We are going to evaluate the alternatives on the basis of economic development potential and feasibility of the decision implementation. By economic development potential, we are referring to the extent of what the decision will offer to the economic growth of the country. As our venture concerns with the public interest, welfare maximization is our primary goal. Feasibility of the any project depends on the resources. Efficient use of available resource should be our second criterion.
Analysis of Alternatives: Now, we will try to analyze the alternatives that we have stated before. We will try to go through each alternative and describe them in a way that considers its scale and feasibility, followed by a trade-off matrix to get a more direct comparison between the two.
Increasing the Efficiency of National Channels: Remittance transfer has mainly two systems – official and unofficial. We should look into why people are adopting unofficial means over the official ones. The main goal for this decision is to minimize the Hundi usage. As we know that, we cannot completely eradicate it. People use Hundi for its simplicity and speed. If we can bring these features to our existing official systems, people will be less inclined to break the law. This will increase our remittance by a huge margin. Another plus point of this alternative is that Hundi money is considered black money, which cannot be invested. So by reducing the Hundi usage, we are also passively increasing investible white money, which in turn contributes to the economic growth of our country. This decision is feasible enough for the Government to consider since it requires reformation of infrastructure of banks which will not require large scale capital investment. Linking the Remittance to Micro-Enterprise: One of the main reasons the remittance-receiving families are not curious to invest in enterprise is the high rate of interest they get from Wage Earner’s Develo pment Bond. A 12% risk free interest is very hard to compete with. We need to provide people with further incentive in order to draw in investments. Government can sanction high interest special floating bonds will provide security that risk-averse families will surely appreciate. These bonds can be compiled into a substantial amount to be invested in enterprise undertakings. Entrepreneurship funding follows a different method to the same goal. Since MFIs like BRAC and Grameen are restricted from dealing with remittance directly by the laws imposed, either the laws should be reformed or links should be established between the people and MFIs by the banks which manage remittance. This will definitely encourage people to invest their money without the hassles of operating a business directly and true entrepreneurs will get their much needed capital . And obviously, MFIs’ ease of access to remittance will let MFIs contribute to the overall economic development.
Trade-off Matrix:
Alternatives
Pros
Cons
Increasing the
1) Reduce Hundi money
1) Widespread infrastructure
Efficiency of National
and increase taxable
change may prove difficult
Channels
money 2) Expanding network may not 2) If the banks expand their network to the remote
be rewarding enough for the banks
areas, employment opportunities will be created
Linking the Remittance
1) Substantially increase
1) The plan may not be able to
to Micro-Enterprise
enterprise
compete with the wage earners development bond’s high risk
2) Entrepreneurs at grass
free interest
root level will get opportunity to invest
2) MFIs might exploit this advantage
The Decision: After looking at the pros and cons for both ideas, we assume that the focus on improving the national channels would be the more appropriate one, simply because there are less stakeholders involved. MFIs being a major part of the second alternative are what will increase the cost of the project substantially. So, for starters the national channel improvement project would be our recommendation.
Stakeholders: The stakeholders in this case are the families associated with remittance flow, the banks concerned and the Government itself. The families will want maximum utilization of their hard-earned money. On the other hand, the Government will want a share of the foreign workers’ money due to giving them certain privileges. The banks, being the
intermediaries will want a share as well. A middle ground has to be achieved if the idea is to work. If the Government can work in coalition with the banks to provide the services to the involved families, the sum they stand to gain far outweighs the compromises they will have to make. If Hundi money is reduced by even 10% the incoming money will be more than substantial. So, that is definitely something to consider.
Monitoring and Feedback: Processes involving wide-scale changes like remittance flow will require time for monitoring. So, the monitoring period may well cross a year to see if remittance flow actually does increase. Depending on the feedback, we can try to take a more direct approach towards the Hundi system if the remittance flow increases substantially enough.
Bibliography: PDFs Cases
Appendix: Questionnaire for NRBs The following questionnaire will be used only for academic purposes by the students of BBA Bat ch-18 from Institute of Business Administration, University of Dhaka. Please fill it out to the best of your ability. 1.
What is your current country of residence?
A: 2.
How long have you been there?
A: 3.
What would be your/your family’s current income?
A: 4.
How much of the income do you send back home to Bangladesh (if any)?
A: 5.
How is your money being used in Bangladesh?
A: 6.
What channel(s)/method(s) do you use for transferring the money to Bangladesh?
A: 7.
Are you satisfied with the money transferring service that you use? Please explain why or why not?
A: 8.
If you have neighbors from Bangladesh in your residence area, do they also use the same means of
money transferring? If not, what do they use? A: 9.
Can you suggest any improvements to be made in the money transferring services available from your
residing country to Bangladesh (Government owned or otherwise)? A: 10.
Would you be interested in opening any small enterprise in B angladesh with the money that you
send home? Or would you rather have t he money being used as it is currently? A:
THANK YOU FOR YOUR TIME AND PATIENCE
