The Vicious Circle of Hundi

The latest data from Nepal Rastra Bank (NRB) shows that remittance inflows have risen by 35.4% to Rs 553.31 billion in the first quarter of the current fiscal year. Between mid-September and mid-October alone, Nepal received Rs 201.22 billion in remittances. This steady rise in remittances has been sustaining Nepali economy. However, there also lies a hidden, non-transparent and largely unexplained world known as Hundi.

The History

Derived from the Sanskrit word hundika, meaning “collection” or “note”, the Hundi system is believed to have originated in ancient India. Long before the emergence of modern banking, it functioned as a traditional instrument for remittances, credit, and trade financing.

The earliest forms of Hundi can be traced back to the Maurya (321–185 BCE) and Gupta (320–550 CE) periods, when merchants needed a safe way to move money across long distances without carrying cash. Hundi operated as early bills of exchange, allowing traders to deposit money in one city and withdraw it in another through trusted intermediaries.

During the Mughal era, Hundi evolved into a central component of the indigenous banking system. Communities such as the Marwaris, Multanis, Bohras, and Chettiars used them for trade financing, remittances, and even tax payments. At one point, Hundi was even the official mode for revenue transfer. Hundi continued to thrive under British colonial rule in India and was eventually regulated under the Negotiable Instruments Act of 1881, which recognized it as indigenous bills of exchange.

In Nepal, the history of Hundi dates back to several centuries. It served as a crucial means for extending credit, settling trade accounts, and transferring money. Newar merchants from the Kathmandu Valley, who travelled long distances for trade, were among the first Nepali groups to use Hundi. During the Malla era, Hundi facilitated trade between Kathmandu, Bhaktapur and Patan, with Lhasa of Tibet and Varanasi of India. These trust-based networks were documented on palm-leaf manuscripts or paper notes signed by the issuing trader.

After the unification of Nepal, Newar, Thakali, and Marwari merchant communities played an influential role in maintaining the Hundi system. During the Rana period, Hundi was used extensively for remittances from Nepali laborers and soldiers working in India, for trade financing between Nepal, India and Tibet, and for tax payments and money lending among merchants. Later, when the Tejarath Adda was established and eventually Nepal Rastra Bank came into existence, the importance of Hundi gradually declined.

Historically, Hundi was the foundation of the indigenous banking system. It not only facilitated trade and commerce but also fostered trust-based networks. It supported economic integration on one hand and influenced the development of modern financial instruments on the other. Hundi enabled cross-border trade at a time when no formal mechanism existed and provided rural populations and traders with access to credit, helping foster small-scale commerce and community-level finance.

The Illegality Pattern

Hundi’s growth as a practice has evolved alongside the history of trade. This important component of trade since ages continues to operate widely today—regardless of its legality. Concerns about its misuse are not new. In 2016, the United States expressed concerns over Nepal’s vulnerability to money laundering and terrorism financing in its Country Reports on Terrorism 2015. The Asia Pacific Group on Money Laundering also identified that groups such as Lashkar-e-Taiba and Jaish-e-Mohammed were funneling funds through the Nepal–India border.

The very mechanism that once facilitated trade is now classified as illegal for several reasons. Some of them are listed below:

Outside Banking Regulation: Modern banking requires licensing and legal approval for money transfers, adherence to Know Your Customer (KYC) standards, and mandatory reporting of all transactions. Hundi operates entirely outside this regulated environment, making even legitimate transactions illegal.

Violation of Foreign Currency Laws: Hundi bypasses the Foreign Exchange Regulation Act and Nepal Rastra Bank’s directives, allowing foreign currency to enter the country through unregulated channels. Such actions directly breach national laws, making such practice illegal.

No Taxation or Recording: Funds transferred through Hundi do not appear in government or central bank records. With no documentation, these flows bypass taxation and remain invisible to auditors or regulators. This weakens not only tax policy but also monetary policy oversight.

A Conduit for Money Laundering: Because Hundi requires no documentation, it is often used for money laundering, drug trafficking, gold smuggling, cross-border gambling, bribery, and even terrorism financing. Its association with criminal activities contributes to its illegal status.

Criminalized by Global Standards: International anti-money laundering standards, including those of the FATF, classify unregistered money transfer systems like Hundi as high-risk. Countries with widespread Hundi use are flagged for weak financial regulation and elevated terrorism-financing risk. Regardless of cultural acceptance, Hundi is illegal under global financial norms.

Who Actually Uses Hundi? Migrant Workers: This is the largest user group in South Asia, including Nepal. Nepali workers in countries like Qatar or the UAE often send money home through local agents because it is quick, convenient, and accessible. Individual amounts may be small, but the volume is significant.

Small and Medium Traders: Continuing a long historical practice, many small and medium-sized traders still settle payments with suppliers in India or China through Hundi. Since banks demand extensive documentation, traders often prefer the simplicity and speed of Hundi.

Diaspora Communities: Nepalis living abroad, including in developed countries, also rely on Hundi. Whether sending money home or receiving funds from Nepal, they choose Hundi for ease and flexibility. For example, a family in Melbourne may finance a home purchase using proceeds from land sold in Nepal, transferred through Hundi.

These users typically have no criminal intent. The real risk emerges on the opposite side of the transaction—where the same channel may be used to move illicit funds. A family in Melbourne may receive legitimate money sent from Nepal, but the corresponding payment—meant to move funds from, say Australia to Pakistan—may be diverted to extremist networks. The same agent, who delivers money to a Nepali household, may also funnel funds to support organized crime or terrorism.

This lack of transparency is what makes Hundi dangerous.

Difficulty to control

The ancient practice of informal money transfer is surprisingly trusted even today. People continue to use Hundi because it is fast, low-cost, discreet, and convenient. There is no need for compliance procedures or documentation, and the entire system operates informally across borders without leaving a paper trail—making it extremely difficult to regulate.

Police frequently arrest individuals carrying large amounts of cash, suspecting them of involvement in Hundi operations. But nothing has changed. One operator is caught, another emerges. Nepal’s 'grey-listing' by the FATF and Hundi-based transactions are deeply interconnected. Although authorities are working to tighten oversight, several factors make Hundi extremely difficult to control in practice.

Given below are some of the reasons why controlling Hundi is a very difficult task:

Integrated with International Hawala Networks: Hundi is not a standalone system. It is a part of a vast global value-transfer chain that facilitates cross-border money movement, settles international trade outside formal channels, and finances smuggling. This deep international integration makes it extremely challenging for countries like Nepal to regulate or dismantle Hundi networks.

No Paper Trail: Like centuries ago, Hundi still operates on personal trust. Transactions are verbal, conducted within tight-knit community or ethnic networks, with no receipts, KYC checks, or digital records. This makes monitoring and investigation extremely difficult for authorities. Prosecuting cases becomes nearly impossible in the absence of evidence.

Financially Beneficial and Quick: Hundi typically offers better exchange rates than banks. Funds are usually delivered within hours—often the same day—without service charges. Some operators even provide door-to-door delivery throughout the country. As long as Hundi is cheaper and faster than the formal system, regulatory crackdowns will have little or no impact.

Convenient for Migrant Workers: Many Nepali workers in Malaysia, India, South Korea, or the Gulf do not have updated bank accounts, proper documents, or easy access to remittance centers. Hundi agents, however, are easily available—at workplaces, markets, and labor camps. Hundi is, therefore, an easy channel for people to send money. Until the formal system becomes equally accessible, efforts to control Hundi will not be effective.

Social Protection: Hundi operators are often well-known and trusted within migrant communities. Despite their illegality, people rarely report them or disclose their identity. In many cases, operators receive advance warnings of enforcement actions. With neither senders nor receivers willing to file complaints, enforcement becomes extremely difficult.

Higher Incentives: Hundi operators earn substantial profits from exchange-rate margins, commissions, and settlement fees. Even though it carries risk, the business is so lucrative that new operators continually enter the market, even when others are arrested.

Ultimate Solution

Solving Hundi hassle might be difficult, but it is not impossible. The long-term solution lies in making the formal financial system faster, cheaper, safer, and more convenient than Hundi.

This is not an issue that one country can tackle alone; it requires data-sharing agreements with destination countries and coordination among regional Financial Intelligence Units. The matter also needs to be raised in global forums. Given the involvement of influential members of society, putting in place an independent and transparent oversight mechanism is essential. Public awareness is equally important. Since Hundi is rooted in long-standing tradition, such practices cannot be eliminated overnight. It requires sustained effort.

Specialized AML/CFT units within the police, customs, and the FIU must be strengthened. At the same time, low-cost digital remittance services and same-day settlement options with competitive foreign currency rates need to be promoted. Ultimately, two parallel efforts are necessary: strengthening the legal and enforcement framework, and making the formal financial system superior to Hundi.

(Regmi is Deputy Manager at Rastriya Banijya Bank Ltd, currently working in the Treasury Department.)

This piece was first featured in New Business Age magazine’s December 2025 issue.