Analysis of Recent Worker Remittance Operations of Citibank, N.A., Bangladesh Essay Example

it has been only catering to the need of market in Kingdom of Saudi Arabia (K.S. A). There are avenues for the bank to increase its remittance volume and revenue through innovation of new policies and careful implementation of existing ones.

Sources and Methods of Collecting Information

The data has been collected from both primary and secondary sources. The major sources are:

• Face-to-face interview with some personnel at different hierarchies of Citibank N. A. , Bangladesh.
• Local and international newspapers, magazines, government circulars and various websites
• Materials on the subject matter supplied by the bank Various analysis techniques such as Trend Analysis, Quantitative Analysis, Qualitative Analysis and SWOT Analysis have been used to analyze the raw data in order to fulfill the objectives of the report.

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This analytical report is divided into five chapters. The first chapter is the introduction. The second chapter presents the current remittance scenario of Bangladesh by the discussion of outside employment, different fund transfer systems and market analysis of remittance. The third chapter includes an in-depth financial Analysis of remittance position of Citibank N.A. Bangladesh. The last two chapters include conclusion and recommendation respectively. Current Remittance ScenarioBangladesh, being a huge labor surplus country, belongs to the supply side of the global labor market. Flow of migrant workers is associated with growing flow of remittance to Bangladesh. Different macro-economic reforms to increase official flow of remittance have been encouraged by the successive governments since 1990.

Although there is widespread presence of different formal institutions for remittances and many of them are gradually penetrating the market, a large number of migrant workers still prefer to remit their earnings through informal systems.This chapter discusses both formal

and informal fund transfer systems to send remittance in Bangladesh as well as explains the reason of existence of informal money transfer system and ways to formalize them.

Informal Money Transfer System (IMTS)

Informal Money transfer systems (IMTS) are funds transfer systems that operate outside the banking and financial system.

Developed centuries ago as a way to settle financial obligations, IMTS remain the preferred remittance vehicle among migrant communities.Characteristics, such as low transactions costs, speed, and little paperwork, render them more attractive than banking institutions. Although Hundi is the most popular forms of informal money transfer system, there are also some others like black market exchange networks, invoice manipulation schemes, trade diversion schemes, courier services and physical transfer methods, gift and money transfer services overseas via special vouchers and internet web sites, stored value, such as pre-paid telephone cards etc.

Hundi, the most popular way of transferring remittance Hundi was developed in India before the introduction of western banking practices. It is currently a major remittance system parallel to 'traditional' banking or financial channels. Though it is referred to as 'underground banking' it is often operated in the open and advertised heavily and effectively.

The components of hundi that distinguish it from other remittance systems are trust among involved parties and the extensive use of connections such as family relationships or regional affiliations.In the hundi system, money is transferred via a network of hundi brokers. A customer approaches a hundi broker in one city and gives the sum of money to be transferred to a recipient in another, usually a foreign city. The hundi broker calls another hundi broker in the recipient's city, gives disposition instructions of the funds (usually

after taking a small commission), and promises to settle the debt at a later date. Unlike traditional banking, hundi makes minimal (often no) use of any sort of negotiable instrument.

Thus transfers of money take place based on communications between members of a network of hundi dealers. . 1. 2 Reasons for the existence of Informal Money Transfer System (IMTS) Despite the increased pace of globalization, ease of travel, introduction of new technologies and the growth of transnational banking, IMTS have not been replaced by conventional banking.

Formal remittances to Bangladesh Most of the international remittances come from the Middle East In the last ten years.A very important share of remittances comes from temporary migrant laborers. In the financial year 2007-2008, Middle East accounted for 62. 58 percent of the official remittance flow of which 30 percent was from Saudi Arabia. Top five remitting countries over last ten years are Saudi Arabia, USA, Kuwait, UAE and Malaysia.

The statistics of the Bangladesh Bank and other sources only reflect the formal remittance. It is estimated that informal remittances account for 20 per cent of the total amount of remittances in Bangladesh.Hence, a significant number of financial transfers do not appear in the official data. Official channels refer to demand drafts, traveler’s cheques, telegraphic transfers, postal orders, account transfers, automatic teller machine (ATM) facilities and electronic transfers.

Of these, demand drafts are most popular (Siddiqui and Abrar, 2001). Expatriates and migrants using official channels have following options: 1. They can send money from a bank in the destination country to a bank in Bangladesh. The former bank must have a correspondent relationship with the latter.

They can send money through branches or

subsidiaries of a Bangladeshi bank in the destination country. 3. Money can be remitted through exchange houses or banks in the destination country with which a Bangladeshi bank has a taka drawing arrangement. Analysis of Remittance Operations of Citibank N. A Citibank N.A. Bangladesh has been offering remittance services to Bangladeshi Nationals residing in Saudi Arabia for the last 10 years. It is the correspondent bank of SAMBA, a well-known financial group of Kingdom of Saudi Arabia (KSA).SAMBA has a reputation for being at the forefront of developments in the Saudi banking sector.

Citibank N. A. Bangladesh has been offering Speed Cash remittance products of SAMBA Financial Group since 1995. The brand name “Speed Cash” includes two products- Speed Cash and Safe Draft, which are branded remittance products of SAMBA.

The bank had agreements with SAMBA since 1995 for Speed Cash and 1997 for Safe Draft. The bank also provides life insurance coverage to Bangladeshi nationals living in Saudi Arabia who remit funds to their beneficiaries in Bangladesh through Citibank and SAMBA Financial group.The remitters get up to 90 days coverage from the date of remittance and also coverage for natural death and accidental deaths. In these cases, beneficiaries receive the insurance benefit from the group insurance service provider of Citibank.

SAMBA Financial group: an overview SAMBA Financial Group was formed on February 12, 1980 pursuant to Royal Decree dated 26/3/1400 H. (according to which all foreign banks were required to sell at least 60% equity interests to Saudi nationals) to take over the then existing branches of Citibank, N. A. n Riyadh and Jeddah. SAMBA was always the acronym for the SAudi AMerican BAnk but the name

was changed to SAMBA Financial Group permanently in 2003 and all references to Saudi American Bank were removed when Citibank sold all its shares to Saudi national and organizations.

With its strong focus on innovation, SAMBA is continuously launching new products and services. In 2006, SAMBA won The Banker Magazine’s 2006 Technology Award in the “Technology Innovation” category the Best Bank in Saudi Arabia award for 2006 from both Euromoney and Global Finance.SAMBA’s 3,000 employees operate through a network of 66 branches across the Kingdom and they have branches in London and Dubai. It has over one million customers who access their services through their branches, 450 ATMs, SAMBA. com, SAMBAphone and SAMBAmobile.

KSA Market Remittance inflow from the Kingdom of Saudi Arabia, the single biggest overseas job market for Bangladeshis, continued to increase gradually over the period 1998-2007 amidst widespread fear of deportation. However remittance inflow from the Kingdom of Saudi Arabia decreased in the financial year 2007-2008.

Percentage of KSA remittance increased over 2003-2007, Though the percentage of KSA remittance inflow has decreased over the year 2003-2007, it still holds the largest share of the total remittance inflow to Bangladesh.

Bangladeshi workers in KSA are sensitive more to the cost and safety than the speed of sending remittance home. The Bangladeshi workers are mostly concentrated in the big cities like Riyadh, Jeddah, Mecca and Medina.

Bangladesh Market Though the amount of remittance sent to Bangladesh in legal ways was gradually increasing over last 15 years, it took a dip in 2007-08. It can be seen from following figure that nationalized commercial banks holds the largest market share and foreign commercial banks hold the second smallest market share of

remittance inflow.

SpeedCash Under SpeedCash product, Citibank issues account payee Bangladeshi Taka (BDT) drafts after getting electronic issuance information from SAMBA on a daily basis. SAMBA branches receive cash amount in Saudi Rial (SAR) from remitters. SAMBA maintains a Remitter Account Number (RAN) for each remitter and one or multiple beneficiary detail for a single remitter according to the remitter’s request in its system.Citibank issues SpeedCash instruments on its own branches in Bangladesh and also uses 105 locations of 3 correspondent banks Arab Bangladesh Bank, Sonali Bank & Agrani Bank. Process is going on to activate Islami Bank’s branches for issuing SpeedCash drafts on them. Citibank’s dedicated courier service delivers the drafts to beneficiary’s addresses or to their banks.

The beneficiary deposits it to his/her bank for the funds to be cleared from Citibank’s or its correspondent bank branches. SAMBA funds Citibank according to the agreed terms between the two banks. SafeDraftSafeDraft is a check (popularly called draft because of its brand name) issued by SAMBA on the Nostro account maintained with Citibank N. A. Bangladesh after receiving the cash amount in Saudi Rial from remitters. A Remitter Account Number (RAN) is created by SAMBA after getting the copies of Passport and Work permit of a SafeDraft remitter.

A remitter can send remittance through SpeedCash or SafeDraft using single RAN. After issuance/printing, the draft is handed over to the remitter who sends it to his beneficiary via mail/courier or through a person physically traveling from KSA to Bangladesh.The beneficiary deposits it to his/her bank for the funds to be cleared from Citibank N. A.

Citibank Bangladesh’s correspondent bank branches. Citibank has coverage of more than 800 locations in Bangladesh

for SafeDraft payment. Citibank is using Islami Bank, Sonali Bank, AB Bank and Agrani Bank as its correspondent banks for Safedraft payments in Bangladesh. Citibank funds its correspondent banks according to the terms of the respective agreements with the correspondent banks. SAMBA funds Citibank according to the agreement terms between the two entities.

Cash product team manages the SAMBA and various correspondent bank relations, courier / vendor relations, controls and tracks product profitability for both products. Cash Product Manager is responsible for introducing enhancements in the product delivery and offering, based on feedback from sales, operation and service teams. The product manager negotiates the FX conversion rate and other agreement terms with SAMBA and defines the standard costs and recommended prices for the products.

SAMBA generates two encrypted files on a daily basis for all SpeedCash and SafeDrafts remittances for the day and uploads it in a FTP site. Citibank downloads these two files in the Citibank Remittance Management System (CRMS). Access to this FTP site is password protected and only designated personnel can access the site for downloading the files.

Negotiation is going on with SAMBA at present for adopting Citibank standard ‘Entrust Encrypted File Transfer’ between the two banks for transferring the encrypted files. The entire Local Operating Procedure is discussed later. SpeedCashCitibank Remittance Management System (CRMS) processes the SpeedCash transactions and generates an . imp file, which is internally imported through CitiDirect and goes to DDE system (for Pay-order / Manager’s Check issuance) via Regional Server, Global Interdict and IBBS.

Due checking for the SDN (Specially Designated Nationals) names for SpeedCash drafts are done like other products in Global Interdict Server. SafeDraft CRMS decrypts the SafeDraft

file sent by SAMBA and the issuance information is uploaded in CRMS database. An issuance report/file is generated from CRMS on a daily basis and is run through the GI using the web based utility.The utility generates an SDN positive match report and due Citibank compliance measures based on that report is taken. Citibank is going through the process of establishing ‘Positive Pay’ for Safedrafts drawn on its local correspondent banks. Post implementation of Positive Pay, the correspondent banks will be honoring Safedrafts after checking the SafeDrafts against the ‘Advices’ sent to them from Citibank in addition to the existing process of honoring drafts based on signature verification and physical SafeDraft stationery authentication.

Once the planned Positive Pay process is in place for SafeDraft, if there is any SDN positive draft found through the checking, Citibank will not send the advice of that SafeDraft to the correspondent bank concerned. As a result it will not be honored by respective correspondent bank. Citibank will mark the SafeDraft ‘Stopped’ and return the funds to SAMBA. 3. 6 Correspondent Banks As it is quite inconvenient for the Citibank to operate in every nook and corner of the country for remittance purposes it has struck out deals with banks having branches throughout various locations of the country for the processing of remittance.

Correspondent Banks for SpeedCash Citibank entered into an agreement with Janata Bank in 1995 to process the SpeedCash remittances of SAMBA to Bangladesh. This continued up to 1999 when an internal review of the process pointed out that the profitability was negative from this relationship with Janata.

SpeedCash Demand drafts issued through DDE were drawn on Agrani Bank branches during

this time under the agreement made by Citibank with Agrani in 1998. In March 2002, Citibank entered into correspondent banking agreement with AB Bank.Lastly, on May 2002 Citibank started relationship with Sonali Bank, the largest nationalized bank of the country. Currently, Citibank funds Agrani, AB and Sonali in BDT for the SpeedCash drafts paid by them as per the terms of the respective agreements with them.

When Citibank first started processing SAMBA SafeDrafts in 1997, the instruments were drawn on Citibank itself. In September 2000, Citibank came to an agreement with Islami Bank, the largest private sector bank of the country.In March, correspondent-banking agreement for honoring Safedrafts was signed with AB Bank.

In May 2002, similar agreement was done with Sonali Bank to take the facility of its widespread network. In June 2002, similar agreement was signed with Agrani Bank. At present, Citibank funds Islami Bank and Agrani Bank in USD and AB Bank and Sonali Bank in BDT for SafeDrafts honored by them as per the terms of the respective agreements with them.

Documentation is one of the most important parts of remittance procedure.Its very foolproof procedure reflects the strict demeanor of the banks. SpeedCash and SafeDraft Remitter ID Number (RAN) are not issued without obtaining some vital information like full name, nationality, complete address, telephone number, home telephone number (if any), copy of resident / work permit (Iqama) and passport for non-Saudis (to be retained), copy of Saudi ID for Saudis, beneficiary’s name, country, profession / business, source of funds. Sanctioned names are checked through the system in order to monitor transactions and the data is updated regularly.

The risks involved can be differentiated into various categories.

The risks and the remedial measures that are already adopted or should be adopted are given below. 3. 8. 1 Customer Risks Being a non Citigroup entity, SAMBA has turned to a normal financial institution entity to Citibank Bangladesh that makes Citibank exposed to the risks of SAMBA going bankrupt or performing Citibank non-compliant practices in terms of Know Your Customer (KYC) procedure and Specially designated national/ terrorist (SDN/SDT) checking etc. MitigatesSAMBA is taking adequate control measures through certain KYC documentation.

Citibank gets funding for SpeedCash four days a week as per the SpeedCash agreement with SAMBA. The USD funds are credited to Citibank Bangladesh’s Nostro account in Citibank New York. The probability of the SpeedCash BDT account with Citibank Bangladesh being overdrawn is high during occasional long holidays when banking transactions are closed either in Bangladesh or in the US.

SafeDraft The funding for SafeDrafts is done in USD by SAMBA to Citibank Bangladesh’sNostro account in Citibank New York once a week for the previous seven days SafeDraft issuance amount. There might be cases when a SafeDraft is presented for clearing well before 7 days if the remitter himself or the beneficiary personally carries it from KSA to Bangladesh after issuing it. In that scenario, there is the risk of SafeDrafts payment being done by Citibank or claimed by the correspondent bank before the receipt of funds from SAMBA. Mitigates: Citibank Bahrain is the PAM for SAMBA. Citi Bahrain arranges for the Code-1 approval.

To address the credit risk of SAMBA, a credit line of USD 750,000 has been allocated to SAMBA and all the SpeedCash and SafeDraft accounts maintained in Citibank Bangladesh’s books are linked to

this line.

Processing Risks

•SAMBA Operational risks in SAMBA might include wrong information printed on the SafeDraft, erroneous issuance file sent to Citibank Bangladesh, internal fraud by SAMBA people.

Mitigates: According to Section 15 of the SafeDraft Agreement and Article 14 of the SpeedCash Agreement between SAMBA and Citibank N.A, SAMBA is responsible for the correct issuance of Drafts and for the timely delivery and accurate transmission of the remittance information specified in the agreement.

Correspondent Branches Operational risks in Citibank’s corresponding bank branch can be delay in processing, delay in intimating Citibank about paid drafts, failure to detect and prevent fraud due to gross negligence. Mitigates: There are penalty clauses in each of the correspondent bank agreements that Citibank has entered into for SpeedCash and SafeDraft.These penalties reduce the occurrence of the risks mentioned above and indemnify Citibank in case they happen.

Citibank N.A. Bangladesh Operational risks can be incorrect funding to the correspondent banks, delay and error in updating paid information in the Remittance Management System, lack of proper reconciliation with SAMBA and correspondent banks. Mitigates: Citibank’s internal control procedures like DCFC, PCFC, independent review by ICU ensures minimum occurrence of such operational risks.

The business performance is affected by support from external agencies such as couriers and correspondent banks and other externalities like natural calamities, strikes etc. Mitigates The courier risks are mitigated through vendor documentation, which restrict the banks exposure through force major clauses. The risk of frauds perpetuated by the employees of correspondent banks is mitigated by the internal regulations of the concerned banks as well as documentation with the banks.

The two remittance products are cash management disbursement product offering, and Citibank’s revenues are a combination

of float, and FX and commission (for SpeedCash). Foreign exchange rate volatility might negatively hit revenue from the products. Mitigates Citibank keeps provision of daily quoting of the rate based on updated market information and a cushion over the local market rates while quoting rates to SAMBA and thus reduces the FX risk.

For SpeedCash, the revised agreement has revoked the ‘exclusivity’ of the agreement parties regarding remittance from KSA to Bangladesh.Hence, SAMBA can start remittance agreement with any other local Bangladeshi bank.

In spite of the revocation of the ‘exclusivity’ clause in the agreements with SAMBA for the SpeedCash products, Citibank’s superior technology and customer service level, similar internal control procedures of the two banks due to SAMBA being a previous Citibank entity and ten years of successful relationship between Citibank Bangladesh and SAMBA for processing these two products will make it difficult for SAMBA to switch to another local bank as its correspondent bank in Bangladesh.

Competitive Advantages

There are various aspects of the remittance products offered by the Citibank N. A that are likely to give them an edge over the other competitive financial institutions offering their services in the same area in Bangladesh. Cost SpeedCash is the premium remittance product of SAMBA, which costs remitters 25 SAR per transaction. The product features include door-to-door prompt delivery, secured payment and two-way messaging service call for the higher price.

Again, SafeDraft is one of the cheapest modes of remitting money from KSA to Bangladesh. Remitters pay SAR 5 for issuing a SafeDraft.Security & Control SpeedCash and SafeDraft have common security features of being an account payee instrument and secured transaction encryption and processing. Management Information System Citibank can

provide information on issuance, inquiry, and delivery status of both SpeedCash and SafeDraft within one minute to one day. Volume and Throughput Analysis over 2003-2008.

SpeedCash Volume is number of transaction that occurs during a specific period and throughput is the summation of the monetary value of all of the transactions.Though monthly volume of SpeedCash experienced a steady growth of over the year 2002 to 2004 but it was increased considerably after 2004 up to 2006. But in 2007 the volume jumped off significantly with a decline of 10%. However, analysis of the monthly volume of first five month of the year 2008 reveals a sign of its turning around from the decline in 2007. The estimated volume of SpeedCash (on the basis the volume of January to May) is 10% higher than that of 2007.