One of the major barriers to the use of formal transfer mechanisms is, not surprisingly, the legal status of the sender. If a migrant worker is without legal status in the host country, using a bank or a formal money-transfer firm (where formal identification is usually a requirement) is difficult and risky. In Thailand, foreigners wanting to access a bank need to set up a ‘non-resident’ baht bank account, which in turn requires the production of a passport, a long-term visa or work permit, as well as a letter of recommendation from an employer, existing bank customer or from the customer’s bank abroad. In contrast, informal funds transfers require minimal paperwork and are ‘anonymous’ as far as government authorities are concerned.
The legal status of the sender is likely the most significant reason for the use of informal funds transfers in most circumstances. There are other reasons, however, including the following.
A cultural or historical familiarity with informal funds-transfer mechanisms and, conversely, unfamiliarity with formal financial institutions such as banks. Naturally, many hundi dealers and the like are themselves members of remitting and recipient communities.
Informal funds transfers are based on trust networks of personal contacts—precisely the same sorts of networks and contacts that are important in enabling cross-border migration (such as that between Thailand and Burma) in the first place.
A lack of formal financial institutions in the (often predominantly rural) areas where recipients live. In the literature, this is sometimes referred to as the ‘last-mile’ problem (World Bank 2003:29). Such problems can dictate the use of informal funds transfers, even if formal channels are available and cost effective for the sender—that is, in the so-called ‘first mile’.
Informal funds-transfer systems tend to be extraordinarily resilient in the face of all manner of instability, including conflict and civil wars, economic crises, weak and unreliable monetary and financial systems, the levying of economic sanctions and other events than can affect the formal economy and what the World Bank (2003) calls ‘national infrastructure’.
Informal funds transfers move funds remarkably quickly. The typical experience globally is that even people in very remote areas receive payment via informal funds transfers within 24 hours.
Informal funds transfers are often the cheapest remittance channel. Estimates vary, but informal funds transfers typically cost between 2 and 10 per cent of the transaction principal (Adams 2006; World Bank 2003). Informal funds transfers do not have to meet regulatory or compliance costs and the like, nor do their promoters typically have much in the way of expensive infrastructure.
In many countries and circumstances, ‘quasi-legal’ economic activity (such as informal funds transfers) is the dominant form of business. In such circumstances, commerce runs along functional rather than strictly ‘legal’ channels. Informal funds transfers are illegal in many places; their functionality is a product, however, of their widespread and everyday acceptance.