How Tight Outbound Controls Can Backfire: Fueling Hawala and Weakening Inbound Remittances

Bangladesh's strict currency control regulations, designed to safeguard foreign exchange reserves and stabilize the economy, often result in unintended consequences. While these policies aim to curb money outflows, they can inadvertently disrupt legitimate outbound payments, causing delays and driving individuals and businesses to seek alternative, informal channels like hawala. This shift not only undermines the effectiveness of official financial systems but also limits the inflow of remittances, weakening the overall economy.

As one of the world’s top remittance-receiving nations, Bangladesh is expected to receive over USD 30 billion in remittances by 2025. These inflows are vital for the country’s foreign reserves and millions of households. However, along with these inflows, there are legitimate outbound payment needs for trade, education, healthcare, travel, and digital services. When the formal system obstructs these flows, money often shifts to hawala, which directly counters the remittances coming through banks.

Public information on outbound remittance data is limited. However, market insights suggest that approximately USD 3–5 billion in outbound remittances (excluding trade payments) leave Bangladesh each year. In 2023, however, Bangladesh Bank reported only USD 211 million of these transfers flowing through formal banking channels, indicating that nearly 96% of outbound remittances were processed through informal networks like hundi/hawala. If left unaddressed, this disparity will continue to erode the formal economy.

Outbound Flow Estimates & Channels:

This article explores the impact of strict outbound flow restrictions on inbound remittances, focusing on Bangladesh's case. It examines how easing these restrictions, streamlining payment processes, and adopting digital solutions could foster economic growth, strengthen financial systems, and attract greater global investment. By shifting toward a more balanced approach, Bangladesh can leverage its remittance potential more effectively while facilitating smoother cross-border payments for businesses and individuals alike.

Why Outbound Payments Matter

Individuals and small businesses in Bangladesh have legitimate reasons to send money abroad, including:

1. Small Trade and Business Payments: SMEs and individual traders often import goods directly from suppliers in markets like China, Malaysia, and Indonesia. In FY 2024–25, imports reached USD 64.4 billion, with small trade payments making up an increasing share. Without efficient banking channels, many turn to informal systems to keep operations running.
2. Digital Services and Software: Local IT companies and freelancers regularly purchase software, cloud tools, online courses, and other digital services from international providers. Without smooth outbound payments, these businesses struggle to stay competitive.
3. Tuition Payments: In 2024, around 60,000 Bangladeshi students went abroad for higher education, more than double the 26,112 recorded in 2014. With an estimated 106,000 students currently studying abroad, outbound tuition payments have reached about USD 2 billion.
4. Healthcare: According to the Daily Star (Dec 2024), approximately 350,000 Bangladeshis travel abroad annually for medical treatment, primarily to India, Thailand, and Singapore. These healthcare-related outbound flows amount to roughly USD 3 billion each year.
5. Travel (Including Hajj & Umrah): Each year, 2 million Bangladeshis travel abroad for tourism, spending more than USD 1 billion. Additionally, 100,000 travel for Umrah and 90,000 for Hajj. Religious travel alone contributes USD 600 million in outbound payments.
6. Remittance from Expatriates in Bangladesh: With approximately 150,000 expatriates working in Bangladesh, outbound salary and savings transfers amount to about USD 1 billion annually.

Although these categories are recognized by Bangladesh Bank, inefficiencies, excessive paperwork, and limitations imposed by legacy correspondent banking arrangements often make formal channels unattractive. Consequently, businesses frequently turn to informal networks such as hawala.

Why Efficient Outbound Payments Are Crucial

Easing legitimate outbound transfers would yield several benefits:

• For SMEs and Traders: A small textile factory importing fabric from China could make payments smoothly through banking channels, avoiding hawala. This transparency builds trust with suppliers and ensures compliance. Without efficient official channels, businesses often resort to informal networks for quicker transactions.
• For Freelancers and IT Firms: Instant payments for software or cloud services enhance productivity, competitiveness, and revenue generation. Without efficient payment systems, freelancers often rely on third parties with international accounts, further fueling the informal market.
• For Individuals: Students, patients, and travelers could make payments without facing delays or overpaying in the open market. For instance, parents may need to urgently send tuition or living expenses to universities abroad, and patients may need to pay for medical treatments.

Ultimately, every outbound transaction conducted through official channels is one less for hawala networks, making it harder for them to operate.

How Tight Outbound Controls Can Unintentionally Boost Hawala and Affect Inbound Remittances

Regulators often impose strict controls on outbound payments to preserve foreign currency reserves, which are crucial for paying for urgent imports like fuel, food, and medicine. While this strategy may seem logical in the short term, it creates a chain effect that harms the economy over time. Think of Bangladesh’s cross-border financial flows as two interconnected buckets—one for Taka inside Bangladesh and one for foreign currency outside. When outbound payments through legal banking channels are restricted:

1. Outbound Demand Shifts to Hawala Networks: The unmet demand for outbound payments doesn’t disappear; it simply shifts to informal channels like hawala. Students, businesses, and families still need to send money abroad. When banking channels are slow or limited, they turn to hawala.
2. Foreign Exchange Market Distortion: Hawala creates artificial demand for foreign currency in the open market while increasing demand for Taka abroad. This creates pressure on both the local currency and the foreign exchange market.
3. Inbound Remittances Get "Netted Off": Hawala operators balance their books by matching outbound and inbound transfers, leading to a "net-off" effect. As a result, some inbound remittances that should flow through formal channels are instead settled off the books.
4. Banking System Loses Credibility and Reserves Stay Weak: Even if foreign reserves seem protected in the short term, reduced formal inflows mean the country ultimately loses more than it saves.

The Bottom Line: Strict outbound controls can reduce formal inbound remittances because hawala "nets off" the two-way flow of money.

What Easing Outbound Payments Could Look Like

1. Create a Simple “Personal Outward Remittance” System: Allow residents to send a modest annual amount (for education, medical expenses, small family support, subscriptions) fully digitally, using e-KYC, e-documents, and internal banking portals.
2. Simplify Documentation: Bangladesh Bank already lists permissible categories. A one-page checklist per use case (e.g., tuition fees, hospital deposits) could streamline the process, accepting digital invoices and allowing post-verification for smaller amounts to ensure urgent payments aren’t delayed.
3. Transparent Pricing: Require banks to disclose fees and exchange rate margins upfront, aligning with G20 targets for fair and affordable remittances.
4. Expand Beyond SWIFT: Allow banks to connect with regulated global fintech networks such as Euronet’s “Dandelion Payments”, enabling faster settlement times, lower transaction costs, and greater transparency and compliance. SWIFT is crucial for big, complex payments, but retail-size transfers often move faster and cheaper through purpose-built networks that connect to bank accounts, cards and wallets with end-to-end tracking. By diversifying beyond SWIFT, Bangladesh can modernize its payment infrastructure and keep pace with global trade.
5. Join Regional Cross-Border Payment Networks: Many countries, under government-to-government collaborations, have integrated their national payment systems. For instance, countries like Singapore, Malaysia, Thailand, India, and Indonesia have developed “Nexus,” a centralized payment system to enhance efficiency in cross border payments outside of SWIFT system. Bangladesh could explore similar initiatives for improved cross-border payments in prefered corridors.

Lessons from Other Countries

Countries with similar foreign exchange policies have already benefited from easing outbound flows:

• India: The Liberalized Remittance Scheme (LRS) allows Indians to send up to USD 250,000 annually for education, travel, business, or investments, reducing the pressure on informal channels.
• Thailand: Thailand has gradually liberalized outbound remittances for both individuals and corporates, making payments cheaper and faster, which supports SMEs and exporters.

What Success Would Look Like

When governments ease and digitize legitimate outbound payments, three positive outcomes occur at once:

• People return to formal banking: It becomes easier and safer than using hawala.
• More inbound remittances through banks: Less “netting off” as hawala loses its outward leg. It becomes harder for it to source dollars/taka and to match cross-flows
• Lower open-market pressure: As legal outbound payments rise, demand in the open market decreases.

• Better data for policy-making: Clean data allows Bangladesh Bank to fine-tune foreign exchange liquidity, incentives, and compliance. Besides, Regulators see the flows, which improves risk control and macro planning.

• Lower costs over time: Competition between banks and fintech companies drives fees closer to the G20 target (≤3%). Global bodies push in the same direction—because cheaper, faster, clearer payments shift people toward formal rails.

The Bigger Picture

1. Inbound Remittance and Reserve Growth: Bangladesh currently receives around USD 30 billion in annual remittances. With an open and trusted system, this could grow by 50%, reaching USD 45 billion by 2025.

1. Growing Bangladesh’s Cross-Border Payment Industry: Strengthening outbound payment channels fosters innovation, reduces costs, and enhances customer experience. This positions Bangladesh as a competitive player in the region and attracts global fintech investment, boosting public-private sector collaborations.

Moreover, growing both inbound and outbound cross border payment industry in Bangladesh will allow local and international fintech to partner with banks for seamless payment solutions. This development will enhance regional financial integration, boost remittances, and stimulate economic growth, positioning Bangladesh as a significant partner in regional and global payment industry.

Conclusion: A Smart Liberalization Strategy

People don’t choose hawala because they prefer informality; they turn to it when the formal system is difficult, slow, or expensive. If Bangladesh can make the Banking path easier, faster, and more affordable, individuals and businesses will naturally prefer to use banks. This means creating clear regulations, simplifying digital paperwork, integrating modern payment networks alongside SWIFT, and ensuring transparent pricing. By doing so, Bangladesh can boost formal financial transactions, allowing money to flow through banks even as people legally send payments abroad.

Rather than seeing outbound payments as a "drain" on reserves, Bangladesh should recognize them as part of a two-way financial flow. By simplifying and digitizing legal outbound transfers, the country can:

• Reduce reliance on hawala networks,
• Increase inbound remittances through official banking channels,
• Strengthen reserves sustainably,
• Empower SMEs, freelancers, and individuals to expand globally,
• Stimulate growth in the cross-border payments industry.

This approach will create a healthier, more transparent financial system that supports long-term economic growth and stability.