Hundi, an informal value transfer system for sending cash domestically or internationally, is widely adopted by Myanmar citizens and offshore migrant workers to send money.

The centuries-old hundi system, which originated in India, is built on trust and rapport. It usually involves “an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order,” according to the Reserve Bank of India. It acts not only as a remittance instrument to transfer funds from one place to the other, but also as a credit instrument for loans and trade transactions.

“If I send AUD 100 from Sydney to Yangon, I would go to a Burmese shop, give the dealer the cash, the name and phone number of the recipient, and a mutual password that we share,” explained Sean Turnell, a professor of economics at Macquarie University in Sydney and an economic adviser to the Myanmar government. “The Sydney dealer will then call the dealer in Yangon, who is probably a family member, and ask for the equivalent amount in kyat. The Burmese dealer will ring the recipient in Myanmar, ask for the password and facilitate the transfer.”

Indeed, no money leaves or enters Australia at all, meaning that the transfer does not breach any laws related to capital outflows and is untraceable in formal financial channels. Although it has long been associated with terrorism financing and money laundering, as hundi networks offer anonymity that allow criminals to hide drug money or other illicit transactions, Turnell told Frontier Myanmar that the system is mostly “benign” in Myanmar. It’s a widely accepted mode of transferring value, and its common adoption is at odds with new fintech platforms that are cropping up in the country.

A hundi business is often started by a family that is already involved in import and export, and then is expanded to include friends and acquaintances to provide broader coverage. Turnell also noticed that the community is usually run by women who have to keep transaction fees low amid fierce competition. “If the dealer ever breaches the trust or takes the money away, he or she will be ostracized by the community. So it is like community enforcement. They would never go to the police, as it is illegal anyway,” he added.

While some dealers may offer the transfer services for free, most hundi businesses only collect a transaction fee of up to 2% for outgoing and incoming cross-border transfers, according to Frontier Myanmar.

Although there are more than 4.25 million Myanmar migrants living abroad, only USD 2.8 billion was being transferred through formal remittance channels last year, contributing to more than 4% of the country’s GDP, but with around USD 5.2 billion being left out of formal financial channels annually, according to the Ministry of Labor, Employment, and Social Security.

While the country’s fledgling formal finance sector remains immature, a clutch of fintech firms racing to digitalize cross-border remittances are supported by the government’s desire to formalize the sector.

Driven by the lightning-speed construction of internet infrastructure and mobile penetration rate in recent years, mobile wallet operators such as Ant Group-backed Wave Money, Ooredoo’s M-Pitesan, and KBZPay have attracted more than 56.8 million subscribers to their services—Wave Money alone has facilitated USD 4.3 billion in transactions last year, an amount equivalent to more than 2% of the country’s gross national product, according to the company. Some Myanmar citizens have learned to trust and use digital payments, while Myanmar’s fintech sector has worked proactively to digitize cross-border remittances.

Hefty fees scare away users

Money transfer organizations such as Western Union and MoneyGram entered Myanmar as early as 2012, but their hefty transaction fees have scared away migrant workers—in the case of Western Union, the maximum transferable amount is USD 5,000 and the minimum is USD 1 per transaction, while the transaction fee runs at USD 3.20–292, or 3–6% of the transfer.

Only 2% of Myanmar migrant workers can afford or are willing to send money via money transfer organizations, while 55% of the migrant workers opt for the hundi or broker system and another 25% hand-carry cash to their destinations on their own, according to a study conducted by the International Labor Organization in 2017.

Apart from the hefty fees, low levels of trust towards the formal banking system, lack of accessibility to bank branches, high costs for remittance, and other factors lead to a preference for hundi networks, as identified by multiple academic studies. For migrants in Thailand, which are the source of 68% of informal remittances to Myanmar, their legal status in the country, the language barrier, and convenience for recipients are the main reasons that deter them from using formal channels.

While hundi are useful when formal financial channels fall short, Turnell added that recent technological advancements have encouraged more people to embrace formal financial channels and ditch informal pathways. “As hundi gets pushed more away, what we are hoping for is the replacement of informal trust networks with formal laws. So why do we use Wave Money [the leading mobile wallet in Myanmar]? Because you have trust in the institutions. We don’t rely on personal networks anymore while we put money in the bank, so in other words, you’re trusting an institution,” he said.

Digital remittance gains popularity

While online payments have been slowly gaining adoption in Myanmar since 2016, the digital remittance channels via mobile wallets and internet banking have started to gain both momentum and trust from Myanmar users. “Mobile financial services will be the game-changer,” said Turnell.

According to research conducted by International Labor Organization in 2017, 95% of all migrants from Myanmar sent back remittances, which is a fundamental source of income for around 2.1 million recipients in Myanmar, of whom 72% live in rural areas and 56% are women.

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Regional fintech firms like True Money and 2C2P have rolled out cheaper and easier options, which allow users to transfer money through agents or outlets throughout Thailand while the beneficiaries will receive money in their bank accounts, mobile wallets, or even in cash in Myanmar. Myanmar’s second largest bank, AYA Bank, has expanded its collaboration with Thailand’s Siam Commercial Bank to facilitate cross-border remittances.

In an interview with KrASIA in July, Brad Jones, CEO of Myanmar’s leading mobile wallet Wave Money, said that the company had applied for a license for cross-border remittance and was waiting for approval from the Central Bank of Myanmar.

For now, the change may be slow, but it will eventually bring benefits to the country’s economy. “Transitioning migrants from using informal to formal remittance products can potentially add an additional USD 6–17 billion to the formal remittance market, which in turn can further unlock a more inclusive financial market,” said a report conducted by the UN Capital Development Fund (UNCDF).

Government flounders to formalize the sector

Despite the promising economic gains, the Myanmar government struggles to issue licenses in a timely manner for the cross-border remittance sector. Last November, the Central Bank of Myanmar allowed locally registered companies, including mobile financial services providers like Wave Money, to apply for a cross-border remittance license to offer remittance services to migrant workers.

This new directive might benefit not only the legal migrants but also illegal ones who are forced to remit money via informal agents, owing to their “legal status, language barrier, and convenience of the recipients.”

Still, critics question whether the directive will effectively tackle illegal hundi operations. As the monthly transfer amount is limited to USD 5,000 per worker and USD 1,000 per transaction, banking insiders told Myanmar Times that the caps are too restrictive for traders or enterprises. Meanwhile, the lack of strong law enforcement will only encourage the hundi business even more.

When asked about what the authorities could do to speed up adoption, Turnell said that the government should start using digital financial channels themselves.

“Some key people, in my opinion, at the Central Bank, want to encourage mobile money as much as they can. So I think there’s been a big attitudinal change as well,” Turnell said. “They need to make sure that nothing goes wrong and to regulate it properly because the worst thing that could happen in the market now would be a crisis of confidence in mobile financial services. It’s really important at this point that people build up trust in mobile financial services.”

Turnell suggested that it might take another two or three generations until the hundi network is totally eliminated, but he added that mobile money is fundamentally changing the sector now, and the key is to win the trust of Myanmar’s people.