Boosting Foreign Remittances in Bangladesh: New Ideas and Strategies


Boosting Foreign Remittances in Bangladesh: New Ideas and

Boosting Foreign Remittances in Bangladesh


Over the years, Bangladesh has witnessed significant shifts in its foreign exchange rate mechanisms. Initially, in 2003, the Bangladesh Bank adopted a fixed exchange rate system, only to later transition to a more flexible floating exchange rate system. While the floating system offers adaptability, the government continues to wield considerable influence in ensuring stability, particularly with regard to the US Dollar. This steadfast involvement is a strategic move to safeguard the national economy from excessive volatility in the global currency market. Collaboratively, the Bangladesh Association of Foreign Exchange Dealers (BAFEDA) and the Association of Bankers, Bangladesh (ABB) actively participate in the determination and stabilization of the exchange rate for the US Dollar, underscoring the concerted effort to strike a balance between flexibility and stability.

In a bid to foster economic growth and fortify foreign currency reserves, the government has implemented a noteworthy strategy by offering an additional 2.50% incentive or cash assistance aligned with the officially determined exchange rate. Despite the allure of these incentives, there remains a persistent challenge – expatriates have not been sufficiently incentivized to utilize legal channels or banking facilities for remitting their funds. This phenomenon has created a paradox where, despite the attractiveness of the incentives, the anticipated surge in foreign currency reserves has not materialized. Consequently, even though the exchange rate remains favorable, the intended boost to the nation’s reserves has yet to be realized.

The disconnect between the incentivized exchange rate and the actual influx of foreign currency through legal channels poses a critical challenge for Bangladesh. It underscores the importance of not only designing attractive incentive schemes but also addressing the underlying factors that deter expatriates from utilizing official channels for remittances. As the nation navigates its economic landscape, finding solutions to bridge this gap is imperative to unlocking the full potential of the foreign exchange market and fortifying the country’s financial resilience in the face of global economic fluctuations.

The Importance of Remittances in Bangladesh’s Economic
Development :

Remittances from expatriates stand as a cornerstone in the economic development of Bangladesh, playing a pivotal role in shaping the nation’s financial landscape. Serving as a substantial source of legitimate income, these inflows contribute significantly to the country’s economic stability and growth. Recognizing the critical role remittances play, the government took a proactive step in October 2023 by introducing a 5% incentive or cash assistance on the exchange rate for remittances. This strategic move aimed to incentivize expatriates to channel their funds through legal avenues, ultimately bolstering the country’s foreign exchange reserves.

Beyond the immediate economic impact, this incentive proved instrumental in curbing money laundering activities. By encouraging the use of official channels, the government sought to create a transparent and accountable remittance system that aligns with international standards. Additionally, the incentive paved the way for the creation of new opportunities for employment abroad, fostering a symbiotic relationship between expatriates and the nation’s economic prosperity.

Despite the evident success in bolstering foreign currency reserves and addressing money laundering concerns, the impact of this incentive appears less pronounced when examining its influence on remittances through the banking channel. While the government’s initiative targeted expatriates, the complexity of the banking system, bureaucratic hurdles, and the perceived convenience of informal channels may be contributing factors hindering the intended increase in remittances through official banking channels. Recognizing and addressing these challenges becomes imperative to fully leverage the potential benefits of the incentive and maximize the positive impact of remittances on Bangladesh’s economic development.

The Impact of the 5% Incentive on Remittances:

The government of Bangladesh’s decision to introduce a 5%
incentive on remittances in 2023 is a well-thought-out strategy aimed at
addressing various economic and social challenges while simultaneously benefiting
the country’s overall financial landscape. Remittances play a pivotal role in
the Bangladeshi economy, as they are one of the largest sources of foreign
currency inflow. The government’s move to offer this financial incentive is
driven by several key objectives.

First and foremost, the 5% incentive seeks to formalize and
channel remittances through official banking channels. Informal methods of
remitting money, such as hawala or other unregulated means, have been prevalent
for many years. By providing this incentive, the government hopes to entice
expatriate workers and senders to opt for legitimate banking channels, thereby
reducing the reliance on informal, unrecorded, and potentially risky avenues.
This shift towards formalization enhances the transparency of remittance
transactions, which is vital for regulatory oversight, tracking the volume of
remittances, and ensuring that funds reach their intended recipients.

Furthermore, the 5% incentive serves as a financial boost
for those sending money back to Bangladesh. It effectively increases the value
of remittances, which can be particularly significant for families and
individuals who rely on these funds for their livelihoods and financial
stability. In a sense, it functions as a form of financial support for the
Bangladeshi diaspora, recognizing their contribution to the nation’s economy
and providing an added incentive for them to continue sending money through
official channels. This can result in not only economic stability for the
recipients but also greater trust and reliance on the formal financial system.

In addition, the 5% incentive can lead to more significant
foreign currency reserves, which are essential for a country’s economic
stability. These reserves can be employed to manage exchange rates, ensure
international trade and payment obligations, and act as a buffer against
external economic shocks. A robust reserve of foreign currency enhances
Bangladesh’s overall economic security and its ability to withstand global
economic fluctuations.

The government’s decision to offer a 5% incentive on
remittances in 2023 is a strategic move that aims to formalize remittance
flows, promote financial inclusion, and enhance the overall economic stability
of Bangladesh. By providing this incentive, the government is not only
encouraging expatriates to use legitimate banking channels for sending money
but also offering financial relief to the recipients, ultimately strengthening
the nation’s financial landscape and economic well-being.

The Challenges of Encouraging Banking Channels for

Despite the success of incentives in boosting remittances through official channels, the challenge lies in replicating this success within banking channels. Expatriates, despite the attractive incentives, continue to favor informal channels like hundi or hawala when sending money to Bangladesh. Several factors contribute to this persistent preference.

One key factor is the perceived convenience associated with informal channels. Expatriates often find hundi and hawala to be faster and more straightforward compared to the bureaucratic processes involved in banking transactions. The informal channels operate on a trust-based system and may offer more personalized and flexible services, making them an attractive choice for individuals seeking simplicity and efficiency in transferring funds.

Another significant reason for the prevalence of informal channels is the historical trust and familiarity built over time. Expatriates may have longstanding relationships with hundi or hawala operators, fostering a sense of reliability that transcends the appeal of formal banking institutions. The informal channels often operate within tight-knit communities, creating a network of trust that is challenging for formal banking systems to replicate swiftly.

Additionally, expatriates may encounter hurdles such as stringent documentation requirements, transaction fees, and currency conversion complexities when using banking channels. These challenges, perceived or real, act as deterrents, steering individuals towards the familiarity and perceived ease of informal alternatives. Overcoming these obstacles requires a comprehensive approach that addresses not only the financial incentives but also streamlines the banking processes, minimizes fees, and enhances the overall convenience of using formal channels.

In conclusion, while incentives have successfully increased remittances through official channels, unlocking the potential of banking channels demands a nuanced understanding of the expatriates’ preferences and the elimination of barriers hindering their adoption. Striking a balance between convenience, trust, and financial benefits is essential to encourage a shift towards formal banking channels for remittances and maximize the positive impact on Bangladesh’s economic development. Here below the some proposed as follows as: 

1. Established Informal Channels: 

The prevalence of informal
channels for remittances has deep roots, spanning several years, establishing
them as trusted and easily accessible methods for sending money. These
channels, such as hundi or hawala, have become ingrained in the expatriate
community’s practices, fostering a sense of familiarity and reliability. Over
time, a network of trust has evolved around these informal systems, making
individuals hesitant to switch to formal banking channels, even in the face of
lucrative incentives. Breaking this ingrained habit requires not only financial
incentives but also efforts to build trust in formal banking systems,
emphasizing security and convenience.

2. Complexity and Documentation: 

Formal banking channels,
while providing security, often pose a challenge due to their intricate
documentation and verification processes. The bureaucratic hurdles involved can
be burdensome for both senders and recipients. This complexity acts as a
deterrent, prompting individuals to opt for the simplicity and expediency
offered by informal channels. Streamlining these processes, reducing
documentation requirements, and improving the overall efficiency of formal
banking transactions are crucial steps in making them more attractive

3. Exchange Rate Variation: 

One significant allure of
informal channels lies in their occasional ability to offer better exchange
rates than formal banking institutions. The unpredictability of exchange rates
in formal channels can drive individuals towards informal options, seeking to
maximize the value of their remittances. Addressing this challenge requires not
only competitive exchange rates from formal channels but also effective
communication to dispel any misconceptions about the consistency of rates

4. Lack of Awareness:

 Despite the government’s efforts to
incentivize the use of formal banking channels, a considerable number of
expatriates remain unaware of these initiatives. The lack of awareness hampers
the effectiveness of the incentives, as individuals continue to choose informal
channels due to a lack of knowledge about the benefits offered by formal
banking systems. Increasing awareness through targeted campaigns and community
outreach is essential to bridge this informational gap and encourage a more
informed choice among expatriates.

In conclusion, the challenges associated with encouraging
the use of formal banking channels for remittances are multifaceted. Tackling
these challenges necessitates a holistic approach that not only addresses
financial incentives but also streamlines processes, improves awareness, and
builds trust in the reliability of formal channels. Overcoming these hurdles is
imperative to fully leverage the potential economic benefits that remittances
can bring to Bangladesh.

Proposed Solutions for Promoting Banking Channels for

1. Simplify Documentation:

To address the challenges posed by complex documentation
processes, banks need to embark on a comprehensive initiative to simplify the
paperwork and verification procedures associated with remittance transactions.
Reducing bureaucratic hurdles and streamlining the verification process would
alleviate the burden on both senders and recipients. This could involve
adopting digital solutions, such as online document submission and verification,
to enhance efficiency and expedite the overall process. Collaborating with
regulatory bodies to establish standardized, simplified documentation
requirements would contribute to making formal channels more user-friendly and
appealing to a broader segment of the expatriate population.

2. Improve Exchange Rates:

Enhancing the competitiveness of exchange rates is crucial
to attracting expatriates towards formal banking channels. Collaboration
between banks and relevant authorities, such as the Bangladesh Bank, is
essential to devise strategies that ensure more favorable exchange rates. This
may involve establishing transparent mechanisms for rate determination,
reducing transaction fees, and exploring avenues for negotiation with
international financial institutions. By offering expatriates more competitive
rates, formal channels can effectively counter the perceived advantage of
informal systems, encouraging a shift towards the use of banking institutions
for remittances.

3. Increase Awareness:

A concerted effort between the government and banks is
imperative to increase awareness among expatriates regarding the advantages of
using formal banking channels for remittances. Implementing comprehensive
advertising campaigns, informative initiatives, and community outreach programs
can effectively communicate the benefits, including incentives, security, and
convenience, associated with formal channels. Leveraging digital platforms and
social media can also play a pivotal role in disseminating information to the
expatriate community. Collaborative efforts can help bridge the informational
gap and empower individuals to make informed choices, fostering a gradual shift
towards the use of formal banking channels.

In conclusion, these proposed solutions offer a multifaceted
approach to overcoming the challenges associated with promoting banking
channels for remittances. By simplifying documentation, improving exchange
rates, and increasing awareness, banks and the government can create an
environment that not only meets the financial needs of expatriates but also
contributes to the overall economic development of Bangladesh.

 Strengthen Regulatory Measures: 

The government should
continue to enhance regulatory measures to prevent illegal money transfers and
money laundering, making informal channels less appealing.

Remittances from expatriates are crucial for Bangladesh’s
economic development. The government’s introduction of incentives for formal
remittance channels has had a positive impact on increasing foreign exchange
reserves. However, challenges still exist in promoting banking channels for
remittances. To further encourage the use of banking channels, simplifying
documentation, offering competitive exchange rates, increasing awareness, and
strengthening regulatory measures are necessary steps. These efforts can help
boost the country’s foreign currency reserves and contribute to the overall
economic development of Bangladesh.

In August 2021, Bangladesh celebrated a significant
milestone as its foreign currency reserves surged to an all-time high of 4,800
billion dollars. This achievement was lauded by the government and marked a
positive economic development. The rising reserves were seen as a reflection of
growing investor confidence in Bangladesh’s economic prospects and the
country’s ability to manage its foreign exchange resources effectively. The
government’s fiscal management policies and external trade strategies were
largely seen as contributing factors to this robust reserve increase.

Fast forward to August 2023, and the scenario has changed
significantly. Bangladesh’s foreign currency reserves have taken a hit,
declining to 2,926 billion dollars. This sharp reduction in reserves has
sparked concerns and discussions within the economic circles of the nation.
Notably, this level is even lower than the recommended threshold of 2,326
billion dollars set by the International Monetary Fund (IMF).

A substantial portion of Bangladesh’s foreign currency
inflow is derived from remittances sent by expatriates. According to data from
the Bureau of Manpower, Employment, and Training (BMET), Bangladesh has a
substantial number of citizens working abroad, which stood at approximately
15.87 million until June. Despite the increasing number of expatriate workers,
the inflow of remittances has not grown proportionately. This discrepancy can
be attributed to the prevalence of unofficial remittance channels, such as
hundi, which offers a more attractive exchange rate compared to formal banking

In the context of remittances, recent trends are worrisome.
In August, the country received approximately 1.6 billion dollars in
remittances, which was notably lower than the 1.97 billion dollars received the
previous month and significantly below the 2.04 billion dollars received in
August of the previous year. These figures highlight the challenges faced by
the government in managing remittance flows efficiently and through official

Apart from the hundi system, there are concerns regarding
both over-invoicing and under-invoicing, wherein expatriates are using various
methods to send money abroad illegally. This results in a significant loss of
revenue for the government. While the government offers a 2.50% cash incentive
to encourage the use of legal remittance channels, the drain on foreign
currency reserves continues.

On average, Bangladesh receives nearly 200 billion dollars
in remittances through legal channels each month. However, it is believed that
expatriates are sending several times more money through hundi at a similar
exchange rate, leading to a substantial outflow of foreign currency. This
situation not only puts pressure on the country’s foreign currency reserves but
also poses risks related to exchange rate fluctuations and inflation.

As the government grapples with these challenges, finding
the right balance between incentivizing the use of formal remittance channels
and managing foreign exchange reserves effectively becomes a complex task. The
decline in reserves, despite a robust cash incentive, raises questions about
the broader economic landscape and the need for a holistic approach to address
these issues.

In the current circumstances, as an alternative, the
government could consider a path where, instead of offering cash incentives on
foreign remittances, they provide non-cash incentives at a higher rate, say
2.50% cash incentive for cash remittances and an additional 5%, 10%, or even
higher rate for non-cash incentives for remittances. The non-cash incentives
should be structured in a way that they can only be utilized by the expatriates
themselves, and not used by intermediaries or middlemen for unofficial channels
like hundi. Setting a competitive rate for non-cash incentives would discourage
individuals from sending money through unofficial channels like hundi.

This non-cash incentive system could be implemented for
various purposes, where the use of the credit points could be based on the
unique registration/identity number provided to the expatriates:

1. Expatriates who have purchased land/property in their
name and pay government fees during registration could redeem their credit

2. In the case of contributing to the government’s ongoing
public pension scheme, expatriates could utilize their credit points.

3. Expatriates availing loans from banks for buying property
in the country, based on their credit points, may receive special interest
rates from the government.

4. After a period of VAT, tax, income tax, and other
government fee payments, the expatriates’ credit points can be redeemed.

5. In the event of investment in government bonds or other
instruments related to saving and investment, expatriates could redeem their
credit points.

6. If an expatriate purchases a vehicle in their name, the
cost of registration could be paid through their credit points.

7. For school/college/university admissions, the government
could introduce a special quota for children of expatriate workers based on
their credit points. Also, expatriates may use their credit points for
scholarships for their children’s education.

  Beyond these economic benefits, this alternative proposal
can also serve as a basis for VIP, CIP, or other social privileges based on the
expatriates’ credit points. While the introduction of the non-cash incentive
system might slightly increase the government’s burden compared to cash
incentives, it offers potential for additional revenue through various
transactions, and it encourages expatriates to use legal channels for
remittances, thus contributing to the nation’s foreign exchange reserve.
Furthermore, if effectively implemented, this system could promote responsible
financial practices among expatriates and enhance their overall financial
well-being, potentially mitigating the risk of market distortions or currency
market volatility. In summary, despite the potential additional costs of
non-cash incentives, their successful implementation could ultimately lead to
increased government revenue, promote legal remittances, and improve the
financial well-being of expatriates.

The exchange rate of foreign currencies in
Bangladesh has seen a significant transformation over the years, transitioning
from a fixed rate system to a floating exchange rate. While the floating
exchange rate system allows for more flexibility and responsiveness to market
dynamics, the government has continued to play a crucial role in maintaining
stability, particularly concerning the US Dollar. This intervention is driven
by the need to ensure economic stability and avoid abrupt fluctuations that
could have adverse effects on the country’s economy. The cooperation between
the Bangladesh Association of Foreign Exchange Dealers (BAFEDA) and the
Association of Bankers, Bangladesh (ABB) has been instrumental in achieving
this balance.

 Furthermore, the government’s efforts to encourage economic
development and augment foreign currency reserves through the provision of an
additional 2.50% incentive on the officially determined exchange rate have not
yielded the desired results. Despite the attractive incentives, expatriates
have not been significantly inclined to utilize legal or banking channels for
remitting their funds. This reluctance to engage with formal channels has
limited the growth of foreign currency reserves, even as the exchange rate
remains favorable. 


In conclusion, the multifaceted challenges associated with promoting formal banking channels for remittances necessitate a dynamic and adaptive strategy from the government and financial authorities in Bangladesh. Recognizing the deeply rooted preference for informal channels, there is a pressing need to continually assess and refine policies to incentivize expatriates to choose legal avenues for their remittance transactions. Simplifying documentation processes, offering competitive exchange rates, and increasing awareness through collaborative initiatives are vital components of this strategy.

Moreover, fostering a transparent and efficient foreign exchange market stands as a linchpin in the broader effort to enhance stability and cultivate trust in the official exchange rate determination. Transparent mechanisms for rate determination, coupled with reduced transaction fees, can significantly contribute to making formal channels more appealing. By proactively addressing these issues, authorities can create an environment where the benefits of using formal channels outweigh those of informal alternatives.

Ultimately, the path forward requires a balanced approach that takes into account market dynamics while maintaining robust regulatory oversight. Striking this equilibrium is pivotal not only for achieving exchange rate stability but also for fostering sustained economic growth in Bangladesh. As the landscape of global finance evolves, the commitment to adapt policies and encourage the use of formal banking channels for remittances will be integral to realizing the full economic potential of these inflows and securing the financial resilience of the nation.



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