The Asian Development Bank in its latest Quarterly Economic Update on Bangladesh said such illegal and informal channels keep foreign currencies out of reach of the formal economy, for which the country could not reap desired benefits.

"Capacity constraints and inefficiency in the formal system may be held partly responsible for existence of these informal channels. Insufficient number of bank branches in remote areas, procedural complexities and transaction costs have created the problem," the ADB report said.

In addition, the bank said, relatives of rural migrant workers often do not have access to bank accounts and find it difficult to get the official paperwork done, which have aggravated the situation.

The hundi system, where operators receive foreign currency from workers abroad, while their relatives receive local currency at home, is the major informal mode of transfer in Bangladesh, the ADB noted.

It, however, said the potential for much greater flows through the legal banking system exists. "Boosting the capacity and efficiency of financial institutions is crucial to increase in remittance flows by directing more funds into official channels," it said.

The major challenge confronting the financial sector is to integrate remitters and recipients into the legal financial system, it said, adding, "Private commercial banks that are more efficient service providers, but have a limited number of branches in rural areas, need to create a better network in partnership with licensed micro-finance institutions or even local post offices to broaden the service coverage area."

The ADB emphasised increasing public awareness of the benefits of the legal banking system and hazards of informal transfers to overcome the problem.

It said international efforts to crack down on money laundering and terrorism financing have already created concerns regarding the unsafe transfer of funds through illegal channels, creating more demand for legal transfers.

"Harmonising regulatory and compliance requirements of financial institutions between source and destination are required to meet this demand and fully capitalise on the benefits of these valuable remittances in Bangladesh."

The quarterly economic update said Bangladesh has been experiencing a huge surge in remittances from non-resident workers.

Remittance totaled US$ 4.80 billion in FY '06, making a 25 percent increase over FY '05. This trend continued with 29 percent growth during the July-January period of FY '07, aided by flexible exchange rate management.

Most of the remittances were generated from the Middle East, followed by United States, United Kingdom, Italy, Singapore and Malaysia.

"Improved services provided by banks and money transfer agencies and effective regulatory support from Bangladesh Bank to simplify and speed up the money transfer process have facilitated remittances," it said.

The greater inflow of remittances has provided strong support to maintaining macroeconomic stability by improving the country's import payment capacity, current account position, currency reserves and external debt servicing capability, it added.