Hawala

What is Hawala?

Hawala is a method of money transfer without the involvement of physical money moving. It is an informal method of money transfer. Interpol defines Hawala as ‘money transfer without money movement’. This method is sometimes also called underground banking and completely relies on trust. It is used as an alternative remittance method outside the prominent banking systems.

The transfer of money between hawala brokers are done without promise notes since trust is the major Factor here.

More about Hawala

This method has been used since ancient times. It started in South Asia during the 8th century and is still in use across the world. It is majorly used in Islamic countries. In this method, a network of hawaladaars or hawala dealers is involved if the money has to be transferred even across borders.

Today, hawala has found a footing in financial technology which grants access to money transfers among the Unbanked and underbanked population in the world.

However, in India, this method has been deemed illegal because of its informal nature and the absence of oversight and regulations.

Important Points About Hawala

The hawala dealers keep an informal journal to record the credit and debit transactions of the accounts. The debts between these dealers are settled in cash, property or services. Note that if a hawaladaar turns out to be untrustworthy by not keeping his end of the deal under the system, he will be excommunicated from the hawala network or regions.

One of the major beneficiaries of the system is the migrant workers who send remittances to their friends or relatives in their home countries. They use this method of money transfer since it ensures the flow of money to poor countries where traditional banking may be too expensive for access.

Another benefit of the hawala system is the commission rates are low when compared to the rates that banks charge. Hawala dealers charge a small fee for foreign exchange transfers.

Example of Hawala

The hawala system is backed by trust, family connections, regional relationships and integrity. For instance, Jayshree wants to send Rs. 1000 to her friend Maithili in another region. She will meet a local hawaladaar Mithun and give him the money along with details of her friend like the name, city and a password.

Mithun approaches the hawaladaar of the specified city, Rajesh, and asks him to give Maithili Rs. 1000 from his account. However, the amount will be transferred only if Maithili says the right password as mentioned by Jayshree. Rajesh then sends money to Maithili from his own account minus the commission. Mithun now owes Rs. 1000 to Rajesh. No IOUs are signed and no money is moved. The transaction was initiated by Jayshree and the funds reached Maithili.