EVERY month, millions of overseas Pakistanis send money home to support families, invest in property, or simply stay connected with their roots. These remittances, now a cornerstone of Pakistan’s balance-of-payments, crossed $36 billion in FY25, often dwarfing exports and foreign direct investment. But behind this feel-good figure lies a murky incentive system that disproportionately benefits banks, not the hardworking diaspora or their families.

At the heart of this set-up is the Pakistan Remittance Initiative — a government scheme designed to incentivise banks and exchange companies to solicit the flow of remittances through formal channels. The intention is sound and supports transparency, security and stability of the financial system by reducing the volume of hawala transactions, improving documentation and building foreign exchange reserves. However, the mechanism has created a rent-seeking bonanza for banks, with limited value addition and extent of comfort on the quality of scrutiny over the implementation of the scheme.

When a Pakistani abroad sends money through a formal channel — like Western Union, Ria, or directly via a bank — the recipient’s bank in Pakistan gets a fee from the government. This incentive is meant to encourage both banks and registered money changers to build a remittance infrastructure and attract flows away from the informal hawala/ hundi system.

There is a fixed rate and a variable component tied to this incentive, the latter being linked to an increase in the remittances mobilised. In the case of banks, the tiered fee structure is as follows: a fixed incentive of Saudi riyal 20 for transactions of $100 or more. For a 10 per cent increase in remittances deposited, the bank is entitled to an additional SR8 and another SR7 for additional growth of 10pc. For exchange companies, the fixed incentive is Rs2 for $100, Rs3 for a 5pc increase and Rs4 for an increase greater than 5pc.

Why do we want to give banks Rs87bn in the current budget for no real effort?

It should be apparent that the scheme actively favours banks and discriminates against exchange companies for surrendering the same amount of dollars. So, for a $1,000 transaction, a bank can earn, on average, as much as Rs23,000by processing the transaction, with this money flowing directly from the public exchequer. Rs87bn has been earmarked in the budget this year, of which close to 90pc will be pocketed by banks.

The workings of this scheme have been complemented by a variety of restrictions on the operation for a free market for exchange. There are two obvious implications of this scheme, which functions like a multiple-currency operation (seemingly contrary to the policy objective): a) the beneficiaries are essentially the banks, which have no incentive to offer the remitter a better rate — both the remitter and recipient lose out by receiving rupees at the official exchange rate, less than what would accrue to them if they could sell the remittance directly in the market; b) by restricting the operations of the hawala market, the rupee remains overvalued by approximately 7.5pc!

Gaming the system: Also, rather than passively facilitating remittances, banks have seemingly invented ways to maximise their fee income, in the process compromising policy intent, transparency and the authenticity of the nature and actual volume of data.

There are growing concerns that, to exploit the tiered fee system, banks break down large-value remittances into smaller individual remittance transactions by routing them as multiple $100 transactions to claim higher per-dollar rebates. In the process, they become entitled to the higher fixed incentive as well as the variable incentive for the increase in remittances deposited over the previous year. It is not clear if the State Bank actually conducts periodic reviews to ensure that the banks are not gaming the system in this manner.

Banks are also suspected of collusion while routing undeclared money parked outside by corporates and individuals and some non-LC-related export proceeds under the remittance banner, cloaking them as ‘home remittances’ to claim unjustified rebates. In the case of individuals, the declaration of laundered money as remittance is exempted from taxation under the IT Ordinance. It is not known if the SBP and FBR have adequate safeguard reviews to check such practices.

There are also justified fears that banks are encouraging freelancers or tech exporters to route earnings as remittances rather than service exports. So, the bank earns the rebate, facilitating tax evasion by the exporter while distorting macroeconomic data and the classification of exports.

The system was invented to incentivise banks to attract remittances to the formal channel. It’s hard to understand what the goal was. If the parallel market premium was significant, why would the remitter give remittance to the banker to earn off? Would it not make sense to give the remitter the incentive directly? Or is it designed to invisibly tax the unaware remitter?

There have been attempts to develop a street foreign exchange market with licensed dealers. This incentive was not given to them, and only made available to bankers. Dealers were still competing well and had to be tamed with excessive regulation and restrictions to an almost negligible status. Increasingly. the government has been tightening restrictions on exchange flows, to the extent that most foreign exchange business is now largely in the hands of banks. Why then do we want to give banks Rs87bn in the current budget for no real effort?

Pakistan’s remittance system has helped keep the economy afloat in times of crisis. But that’s no reason to allow banks to extract rents from public funds while adding minimal value. Incentives must be restructured to reward the real stakeholders: the remitter and the recipient — not the middleman. Until that happens, we’ll have a system where policy is bent to suit profits, while what was designed to serve Pakistanis abroad is now serving the bottom line of powerful banking lobbies at home.

Nadeem-ul-Haque is former VC PIDE and deputy chair of the Planning Commission.Shahid Kardar is a former governor of the State Bank of Pakistan.

Published in Dawn, June 27th, 2025