Nepal Tightens Regulations on Underground Hundi Money Transfer Network

Nepal’s Shadow Banking System Faces crackdown as Economy Hangs in the Balance

Kathmandu, Nepal – A centuries-old, informal money transfer system known as hundi is under intense government scrutiny in Nepal, threatening a vital, albeit illicit, financial lifeline for millions. While authorities aim to dismantle the network, citing links to financial crimes like gold smuggling, cryptocurrency dealings, and drug trafficking, the crackdown risks disrupting remittances – a cornerstone of the Nepali economy.

The hundi system operates outside formal banking channels, relying on a network of middlemen (hundis) to facilitate money transfers, particularly for the roughly 3.5 million Nepalis working abroad. These hundis collect funds,frequently enough transferring them to digital wallets (sometimes illegitimate),and ultimately deliver cash to families,frequently in remote areas with limited access to conventional banking. Families benefit from avoiding bank fees and the inconvenience of travel, often receiving interest – typically 5-7% – on the transferred amount.

For decades, the government largely tolerated the hundi system, recognizing its importance for financial inclusion. However, a recent surge in illicit activity has prompted a crackdown. In April, 21 individuals where arrested on charges related to fraudulent digital wallets used to disguise illegal remittances. Authorities allege these operators are “turning black money into white” by funding families with proceeds from criminal enterprises.

“These informal operators…are a criminal offense against foreign exchange regulations,” stated Yubaraj Khadka,spokesman for the Central Inquiry Bureau.

The hundi system’s impact extends beyond individual transactions. Economists warn it weakens Nepal’s foreign currency reserves. Despite this, Chandra Mani Adhikari acknowledges the system’s practicality, particularly for those in remote regions, stating, “Until workers can easily send money home through formal channels, the hundi system will thrive.”

A Global Network & International Pressure

The hundi system’s reach expanded dramatically with the rise in Nepali migrant workers beginning in the 1980s.Today, legal remittances account for over a quarter of Nepal’s GDP – a figure that excludes the substantial volume of transactions handled through hundi. Legal remittances rose 16.5% between July 2023 and July 2024, reaching 1.4 trillion Nepali rupees (approximately US$10.5 billion). However, informal transactions are estimated to comprise around 40% of the nation’s economic activity.

Recent policy

How do the new NRB regulations aim to prevent licensed money exchange companies from participating in hundi transactions?

The Crackdown on Hundi: A Deep Dive

Nepal’s central bank, Nepal Rastra Bank (NRB), is intensifying it’s efforts to curb the widespread use of hundi – an informal, frequently enough illicit, money transfer system. This crackdown aims to bolster financial stability, combat money laundering, and increase formal remittance flows. For years, hundi has been a dominant force in Nepal’s economy, particularly for migrant workers sending money home. Recent regulatory changes signal a significant shift in the government’s approach. this article explores the details of these new regulations, their potential impact, and what individuals and businesses need to know.

Understanding the Hundi System

Hundi operates outside the formal banking channels, relying on a network of trusted agents. Here’s how it typically works:

* Initial Deposit: A migrant worker deposits funds with a hundi operator in the host country (e.g., Malaysia, Gulf countries, South Korea).

* Informal Network: The operator contacts their counterpart in Nepal.

* Delivery in Nepal: The Nepali counterpart delivers the equivalent amount in nepali Rupees to the worker’s family, often at a slightly better exchange rate than official channels.

* Settlement: Settlement occurs through complex, frequently enough untraceable, mechanisms, frequently involving trade and other informal financial flows.

Key terms related to Hundi:

* Hawala: A similar system prevalent in other parts of Asia and the Middle East.

* Remittance: Money sent home by migrant workers.

* Foreign Exchange Reserves: Nepal’s stock of foreign currencies.

* Money Laundering: The process of concealing the origins of illegally obtained money.

New Regulations and Enforcement Measures

The NRB has implemented a series of measures to tighten control over hundi operations. These include:

1. Increased Monitoring of Money Exchange Operators: Stricter scrutiny of licensed money exchange companies to prevent their involvement in hundi transactions. This includes enhanced reporting requirements and surprise audits.
2. Collaboration with Law Enforcement: Closer cooperation between the NRB and nepal Police to investigate and prosecute hundi operators. Several high-profile arrests have already been made in late 2024 and early 2025.
3. Digital Remittance Promotion: Incentivizing the use of formal remittance channels like banking apps, mobile wallets, and international money transfer services (IMTS) such as Wise (formerly TransferWise), Remitly, and Xpress Money. The NRB is offering subsidies and streamlining processes for digital remittances.
4. Stricter penalties: Increased fines and imprisonment for individuals and businesses found to be involved in hundi activities. Penalties now include potential asset forfeiture.
5. Border Control Measures: Enhanced surveillance at border crossings to prevent the physical transportation of cash used in hundi transactions.

Impact on Remittances and the Nepali Economy

The crackdown on hundi is expected to have several significant impacts:

* Increased Formal Remittances: A shift towards formal channels will boost Nepal’s foreign exchange reserves, currently under pressure. Official remittance inflows are projected to increase by 15-20% in the next fiscal year.

* Reduced Money Laundering: Formalizing remittances will make it harder for criminals to launder money through the hundi system.

* Exchange Rate Stability: Increased foreign exchange reserves can help stabilize the Nepali Rupee against the US Dollar and Indian Rupee.

* Potential Short-Term Disruptions: Some migrant workers may initially face difficulties sending money home as hundi networks are disrupted. This could lead to temporary fluctuations in exchange rates.

* Increased Banking Sector Activity: More remittances flowing through banks will increase their liquidity and profitability.

Benefits of Using Formal Remittance Channels

choosing formal remittance channels offers several advantages:

* Security: Your money is protected by banking regulations and security measures.

* Transparency: Transactions are recorded and traceable, providing a clear audit trail.

* Convenience: Digital remittance services offer 24/7 access and easy online transfers.

* Better Exchange Rates (Possibly): While hundi sometimes offers slightly better rates, formal channels are becoming increasingly competitive.

* Contribution to national Economy: Using formal channels supports Nepal’s economic development.

Real-World Example: The Case of the Kathmandu-Based Hundi Ring (2024)

In November 2024,Nepal Police dismantled a large hundi ring operating in Kathmandu. The investigation revealed that the ring was facilitating the transfer of billions of Rupees annually, evading taxes and contributing to illicit financial flows. The ring involved several money exchange operators and individuals with connections in the Gulf countries. This case highlighted the scale of the hundi problem and the NRB’s determination to address it. The seized assets are currently being investigated for potential forfeiture.

Practical Tips for Migrant Workers

* Explore Digital Remittance Options: Research and compare different IM