Exploring the determinants of hundi system using data on migration from Pakistan to Saudi Arabia

Abstract

In developing countries like Pakistan, the informal hawala markets and the formally regulated money exchange companies are working in parallel on the domestic as well as international level. It is believed that the conspicuous use of informal money transfer methods prevail due to economic, geographical and cultural realities on the one hand and lack of understanding of the formal system on the other hand. The study develops an understanding of the hundi system, which is perceived as an informal system used for the transfer of remittances. The determinants of the hundi system are studied. The study finds that despite the regulations, factors like distance from the bank, inability to visit the bank during working hours, difficult and lengthy banking procedures, the time involved in transaction through bank, unfriendly banking staff, no access to the banks in the area and the high cost of money transfer encourage migrants to continue to use informal ways to transact. Based on these findings, some of the policy recommendations are offered for gradual reduction and complete elimination of the use of hundi system of remittance transfer in Pakistan.