Definition
Hawala is a traditional method of transferring funds used in Arab countries and South Asia, primarily India and Pakistan. It operates outside of, or parallel to, traditional banking or money transfer systems. This system involves a complex network of money brokers, known as ‘hawaladars’, who settle transactions without money actually crossing borders.
Key Takeaways
- Hawala is an informal method of transferring money without any physical money actually moving. It solely depends on a network of money brokers, also known as ‘Hawaladars’, typically located in different countries, who perform transactions on behalf of their customers.
- One of the key features of Hawala transactions is trust and extensive use of connections such as family relationships or regional affiliations. It was developed as a system for trade that does not depend on unpredictable and potentially risky long-distance travel for moving funds.
- While it is a convenient, tax-efficient, and rapid system, its unregulated nature often makes it a tool for money laundering and financing of illegal or illicit activities. Therefore, many nations have regulations treating Hawala as illegal or strictly regulated.
Importance
Hawala is significant in the financial sector as it represents an informal and trust-based system of transferring money, which originated in South Asia and the Middle East.
This system bypasses the traditional banking methods, making it an essential mode of transaction for people who do not have access to banks.
Hawala operates anonymously and leaves no paper trail, making it impossible for regulatory authorities to trace the transactions.
Even though this makes it susceptible to misuse for money laundering and funding of illicit activities, it remains a crucial financial method used all over the world due to its speed, efficiency, and reliability.
Explanation
Hawala is a traditional system of money transfer used globally, but primarily in the Middle East, North Africa, and South Asia. The purpose of this peer-to-peer method is to allow for the movement of funds without necessarily moving the money physically, or involving banks.
Essentially, it is a protocol for transferring money where the funds can be made available in one location but paid for in another. This system is often used by migrant workers for sending remittances back to their families in their home countries, particularly in regions where banking services may be limited or trust in financial institutions is low.
It’s also commonly used in situations where the speed of a transaction is important; Hawala can often be quicker than traditional banking methods. Although Hawala is a system often linked to underground economies, because it can facilitate avoidance of taxes or bypassing governmental regulations, it’s noteworthy that it also serves a legitimate purpose in providing financial services to people who otherwise have no access to them.
Examples of Hawala
Hawala Used by Migrant Workers: One of the most common real-world examples of Hawala is the use of the system by migrant workers for sending money back to their families in their home countries. Often, these countries lack a stable banking system or a convenient way to transfer funds internationally. For example, a migrant worker in the UAE may wish to send money to his family in Pakistan. He can do this by going to a Hawala dealer, giving him the money along with his family’s information. The UAE dealer communicates with another Hawla operator in Pakistan, who then gives the money to the worker’s family.
Hawala in Afghanistan: Due to lack of established banking systems and infrastructure, Hawala is commonly used in Afghanistan for local and international transactions. Hawala brokers are present in every major city, and their services are often faster and cheaper than banks. For instance, a businessman in Kabul can send payment to his supplier in Herat through Hawala, which is faster and cheaper than sending through traditional banking channels.
Hawala and Global Trade: Hawala also plays a role in global trade where certain goods are imported or exported, particularly in places where local currency isn’t strong or there are limits on international transactions. For example, a trader in India who wants to import goods from China can use a Hawala broker who has contacts in both countries. The Indian trader gives money to the local Hawala broker who contacts a Chinese Hawala broker who can then pay the Chinese manufacturer. This can be quicker, cheaper, and easier than traditional banking methods. However, it is important to note that because of the informal and often unregulated nature of the Hawala system, it can also be used for illicit activities like money laundering and financing of terrorism.
Hawala FAQ
What is Hawala?
Hawala is a traditional system of transferring money used in Arab countries and South Asia, predating the modern banking system. It is based on a network of money brokers, known as ‘Hawaladars’, who operate outside of traditional banking systems and transfer money via a system of trust and balance.
How does Hawala work?
Hawala works by transferring money without actually moving it. Essentially, it is a system of credits and debits. For example, if person A in Country 1 wants to send money to person B in Country 2, person A would approach a Hawaladar in Country 1 and give them the money. This Hawaladar would then contact a Hawaladar in Country 2, telling them to give person B the corresponding amount of money. The money is therefore transferred without any actual movement of funds.
Is Hawala legal?
Legality of Hawala is a complex issue and can vary greatly from one jurisdiction to another. In some parts of the world, Hawala brokers are required to register with the government and are subject to regulations and oversight, similar to traditional money transfer services. However, in other areas, using Hawala can be seen as participating in an illegal activity.
What are the benefits and risks of using Hawala?
The benefits of using Hawala include fast and cheap cross-border transfers, the ability to conduct transactions without a bank account, and the provision of services in areas with poor banking infrastructure. However, the risks include a lack of consumer protection and oversight, potential for misuse for illegal activities such as money laundering and terrorist financing, and the potential for loss of funds if a Hawaladar fails to honor the agreement.
Related Entrepreneurship Terms
- Hawaladar
- Informal value transfer system
- Trust-based transfers
- Money laundering
- Underground banking
Sources for More Information
- International Monetary Fund (IMF): A global organization that provides data on international finance and monitors economic growth. They have resources about Hawala transactions.
- Financial Action Task Force (FATF): An intergovernmental body that promotes and implements regulations for combating money laundering. They have documents detailing the laws and regulations surrounding Hawala.
- Federal Bureau of Investigation (FBI): The domestic intelligence and security service of the United States, which can also provide an overview of Hawala along with case studies.
- World Bank: Provides data and other financial information about countries all over the world. They have documents on the role of Hawala in the world economy.
