Hawala

60-Plus Delinquencies

What is Hawala?

Hawala is a method of transferring money without the money actually moving. Hawp’s definition of Interpol is “money transfer without money movement”. Another definition is simply “trust”. Hawala is an alternative money transfer channel that exists outside of traditional banking systems. Transactions between hawala brokers are carried out without promissory notes because the system is strongly based on the trust and balance of the books of hawala brokers.

Hawala, also known as hundi, literally means transfer or delivery.

Understanding Hawala

Hawala originated in South Asia in the 8th century and is used worldwide today, particularly in the Islamic community, as an alternative means of transferring funds. Unlike the conventional method of transferring money across borders by bank transfer, transferring money to hawala is organized through a network of hawaladars or hawala merchants.

Hawala dealers maintain an informal journal to record all credit and debit transactions in their accounts. The debt between Hawala merchants can be settled in cash, goods or services. A hawaladar who does not respect the end of the agreement in the implicit contractual system of hawala will be labeled as having lost his honor and will be ex-communicated from the network or the region.

Migrant workers who frequently send money to relatives and friends in their country of origin find the Hawala system beneficial. Hawala facilitates the flow of money between poor countries where formal banking services are too expensive or difficult to access. In addition to the convenience and speed of making hawala, commission rates are generally low compared to the high rates that banks charge. To encourage currency transfers across hawala, dealers sometimes exempt expatriates from paying fees. The system is also easy to use, as you only need to find a trusted hawaladar to transfer money.

An example of Hawala

How does Hawala work? Let’s say Mary has to send $ 200 to John, who lives in another city. She will approach a hawaladar, Eric, and give him the amount of money she wants John to receive, including the details of the transaction – the recipient’s name, city and password. Eric contacts a Hawala dealer in the recipient’s city, Tom, and asks him to give John $ 200, provided that John correctly enters the password. Tom transfers the money to John from his own account, less the commissions, and Eric will owe Tom $ 200. The transaction initiated by Mary and concluded by the receipt of funds by John takes only one to two days or, in some cases, only a few hours. No money is transferred and no IOU is signed and exchanged by Eric and Tom, because the Hawala system is only supported by trust, honor, family ties or regional relationships.

Special considerations

The very characteristics that make hawala an attractive avenue for legitimate customers also make it attractive for illegitimate uses. So hawala is often called an underground bank. Money launderers and terrorists take advantage of this system to transfer funds from one place to another.

Hawala provides anonymity in its transactions, as official records are not kept and the source of the money that is transferred cannot be traced. In addition, corrupt politicians and the wealthy who prefer to avoid taxes use hawala to anonymize their wealth and activities.

Since hawala transfers are not routed through banks and, therefore, are not regulated by government and financial agencies, many countries have had to reconsider their regulatory policies regarding hawala.

[Important: Some countries have made hawala illegal due to the absence of bureaucracy in the system.]

For example, in India, the Foreign Exchange Management Act (FEMA) and the Money Laundering Prevention Act (PMLA) are the two main legislative systems that discourage the use of Hawala in the country.

Some FinTech companies are implementing the Hawala system by providing financial services to the unbanked and underbanked populations of the world. Mobile banking and payment platforms, such as Paga and M-Pesa, are revolutionizing the financial system in some African countries by promoting financial inclusion through the hawala system of providing financial services.

Key points to remember

  • Hawala (sometimes called an underground bank) is a method of transferring money without the money actually moving and is an extremely archaic method of transferring money.
  • Hawala provides anonymity in its transactions, as official records are not kept and the source of the money that is transferred cannot be traced.
  • Some FinTech companies are implementing the Hawala system by providing financial services to the unbanked and underbanked populations of the world.
  • Migrant workers who frequently send money to relatives and friends in their country of origin find the Hawala system beneficial.
  • Some countries, such as India, have made hawala illegal because of the absence of bureaucracy in the system.

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