Published: 12:19 AM, 26 April 2026
When Monitoring Drives Businesses Away from Banks
Modern financial systems are designed to operate through formal institutions. Banks, payment systems, and regulatory authorities together create an organized framework through which economic agents conduct transactions with the rest of the world. Ideally, cross-border payments - whether related to trade, remittances, services, or investments - should pass through banks so that transparency, stability, and regulatory oversight are maintained. Yet reality shows that many individuals and businesses are increasingly operating outside the formal banking structure when conducting international transactions. This trend raises an important policy question: if people have already moved outside the system, can they be brought back by measures confined within the system?
Experience suggests the answer is no. When people move away from banks, the banking system must go beyond its own institutional boundaries to reconnect with them. In other words, to bring people back into the system, banks must first reach the places where people are already operating.
Across many developing economies, including Bangladesh, cross-border financial transactions frequently take place outside formal banking channels. Informal networks such as hundi or hawala have long existed as parallel mechanisms for transferring funds internationally. These systems function through trusted intermediaries and community networks rather than through regulated financial institutions. Their existence is often attributed to regulatory evasion or illegal practices, but the deeper reality is that they thrive because they meet user needs more effectively than formal systems in certain contexts.
For migrant workers sending remittances, for freelancers receiving service payments, or for traders settling cross-border obligations, the decision about which channel to use is often based on three practical considerations: cost, convenience, and accessibility. If the formal banking system cannot compete in these dimensions, users will naturally shift to alternatives.
One of the most common reasons individuals avoid banks for cross-border transactions is the cost of formal transfers. Bank-based international payments often involve multiple layers of charges. These may include remittance fees, exchange rate margins, intermediary bank deductions, and compliance-related costs. For small transactions, these charges can represent a significant portion of the transferred amount. Informal channels frequently offer more competitive exchange rates and lower transaction costs, making them attractive to users who are sensitive to even small financial differences.
Speed is another decisive factor. Traditional cross-border banking transactions may take several days to complete, especially when multiple correspondent banks are involved. Informal networks, by contrast, can settle transactions within hours. The efficiency of these networks stems from their trust-based nature and the absence of formal documentation or settlement processes. Although this informality creates regulatory risks, it also demonstrates the strong demand for faster financial services.
Documentation requirements also play an important role. Banks must comply with strict regulatory obligations such as know-your-customer procedures, identity verification, and anti-money-laundering checks. These safeguards are essential for protecting the financial system, but they can create barriers for individuals who lack formal documentation or who work in informal sectors. Migrant workers, particularly those in temporary or irregular employment situations, often find it difficult to access banking services in their host countries. Informal networks fill this gap by offering services without requiring extensive documentation.
Accessibility further strengthens the position of informal systems. In many migrant communities, informal financial agents operate directly within neighborhoods, workplaces, or social networks. This proximity makes their services convenient and familiar. By contrast, banks may be physically distant or administratively complex for individuals who are unfamiliar with formal financial procedures.
Trust is also a determining factor. Financial systems function on confidence. If users perceive banks as slow, complicated, or unresponsive, they may prefer community-based alternatives. Informal networks rely heavily on reputation and social relationships. A trusted intermediary in a migrant community can often command greater confidence than an unfamiliar financial institution.
In the context of Bangladesh, another important factor has emerged over the past few years. Since around 2022, strict monitoring of import-related transactions - particularly those conducted through letters of credit - created an environment where many importers felt subject to excessive scrutiny and administrative hurdles. While monitoring international trade transactions is necessary to ensure compliance and prevent misuse, the approach taken during that period was often perceived by businesses as harassment-type monitoring. Importers faced frequent queries, delays, and procedural obstacles when opening or settling letters of credit. As a result, some traders gradually moved their settlement arrangements outside the formal banking system.
When legitimate business activities become excessively burdened by procedural pressures, economic actors naturally seek alternative arrangements. In some cases, importers began relying on offshore payment arrangements or informal settlement mechanisms rather than opening formal letters of credit through banks. This shift not only reduced the visibility of trade transactions within the banking system but also weakened the role of banks as intermediaries in international commerce.
The consequences of these developments are significant for the broader economy. When cross-border financial flows move outside banks, policymakers lose important information about foreign exchange movements. Accurate monitoring of remittances, trade payments, and service income becomes more difficult. This lack of visibility complicates foreign exchange management and macroeconomic planning.
Parallel financial channels also create pressures on official exchange markets. Informal networks frequently operate at exchange rates that differ from official rates, creating distortions in the currency market. When a large portion of foreign exchange flows occurs outside banks, it can weaken the effectiveness of exchange rate policies and reduce the availability of foreign currency in formal markets.
Moreover, transactions conducted outside regulated institutions are more vulnerable to misuse. Without proper documentation and oversight, such channels can potentially be used for illicit financial activities. Even when used for legitimate purposes, their opacity creates regulatory concerns.
Perhaps the most troubling consequence, however, is the gradual marginalization of the banking system itself. If businesses and individuals become accustomed to conducting cross-border transactions outside banks, the formal financial system risks losing its relevance in a critical area of economic activity.
Addressing this challenge requires a shift in mindset. Attempting to force users back into the banking system solely through enforcement measures is unlikely to succeed. If the underlying reasons for avoidance remain unresolved, users will continue to find ways around formal channels.
Instead, the financial system must adapt to the realities of how people conduct economic activities. Banks need to extend their presence beyond traditional branch networks and engage directly with the ecosystems where cross-border transactions originate.
Digital financial platforms offer an important opportunity in this regard. Mobile financial services, online payment gateways, and fintech solutions can serve as bridges between the formal banking sector and users who might otherwise remain outside it. By integrating these platforms with regulated banking infrastructure, authorities can provide convenient and efficient cross-border payment channels while maintaining oversight.
Simplifying international payment procedures is equally important. Many formal transactions still involve complex documentation and multiple intermediaries. Investments in modern payment technologies, real-time settlement systems, and automated compliance tools can significantly reduce these frictions.
Regulatory frameworks also need careful calibration. While safeguards against financial crime are essential, policies must avoid creating unnecessary barriers for legitimate transactions. Excessively restrictive rules may inadvertently encourage the growth of informal channels rather than suppress them.
Community-based financial intermediaries could also play a constructive role. Informal networks demonstrate the power of local trust relationships. By incorporating regulated agent networks or licensed intermediaries into the financial system, banks can replicate some of the advantages of informal networks while ensuring regulatory compliance.
Above all, rebuilding trust between economic actors and financial institutions is essential. Businesses and individuals must feel that banks are partners in economic activity rather than obstacles to it. Efficient service delivery, transparent procedures, and responsive customer engagement are crucial for restoring this confidence.
The central lesson is clear. Financial systems cannot remain confined within their institutional boundaries while expecting people to conform to them. When users migrate outside the system, the solution lies not in tightening the walls but in expanding the system’s reach.
Banks must go beyond banks - into digital platforms, community networks, and user-centric service models - to reconnect with those who have drifted away.
Only by doing so can the formal financial system reclaim its central role in managing cross-border transactions and supporting economic development.
Mehdi Rahman works in the development
sector. He also writes on foreign trade
and monetary issues.
