Definition

Hawala can be simply defined as an alternative or parallel remittance system that exists and operates outside the traditional banking system. Typically, a hawala transaction transfers the value of money from one country to another without the corresponding movement of cash or cover across borders. Another way of looking at the transaction is that it is a transfer of debt.

Hawala has existed a long time and actually predates bank transfers by hundreds of years. During the twelfth and thirteenth centuries, the development of trade between regions called for the establishment of reliable and trustworthy instruments to finance those transactions. The instruments predate the conventional banking system and have contributed to the development of trade and the exchange of goods between nations and regions.

Hawala transactions operate essentially on principles similar to the payment systems that were in use with the appearance of hundis, or bills of exchange).¹

The original objective of hawala was to facilitate all aspects of longdistance trade, whether by ship down the Red Sea and across the Indian Ocean or by camel through Mesopotamia and Iran to Central Asia and China. Financial security was a major problem for such traders, as it was difficult for them to protect their bullion (as a means of payment) from marauding thieves. Hence, traders created hawala. Hawala is based purely on a system of trust and originally operated within tight-knit extended families that were based in two or more major trading centers.

What is called hawala in Arabic is also known as hundi in India and Pakistan and as havala in Iran. The word hawala comes from the Arabic root hawal, meaning to “to change” or “to transfer.” A traveler’s check is called a hawala safir. The Arabic word hawala has been adopted into both Hindi and Urdu. The alternative term, hundi, comes from the Sanskrit root meaning “to collect.” A hawala operator or dealer is called a “hawaladar.”

Examples

Hawala was the usual mode of money transmission in many regions of Asia up until the mid-twentieth century. Thereafter, banks took over, and many countries also enacted foreign exchange controls. This did not reduce the popularity of hawala in South Asia, however; quite to the contrary, it thrives in currency control environments.

Migrant workers who started coming to the United Arab Emirates in the early 1960s sent and continue to send money using banks, money changers (who are well regulated in the U.A.E.), and hawala, which is also regulated.

An example of a typical hawala transaction is as follows: a foreign worker gets paid in U.A.E. dirhams cash. He wants to send money to his family outside the U.A.E., so he goes to a hawaladar in the U.A.E. and gives the hawaladar the amount he wants to transfer. The hawaladar calls or sends an e-mail or fax to an associate in, for example, India and passes on the information about the amount to be transferred. The worker’s family in India receives the equivalent in rupees (always better than bank rate) in cash from the original hawaladar’s associate.

This transaction can be completed very fast, sometimes in 15 minutes, and in almost all cases the hawaladar back home sends the money directly to the worker’s house. In this case, the originating hawaladar will have a credit balance of the transferred amount and the associate in the recipients’ country will have a debit balance of equivalent currency (less fees).

This transaction is simple and efficient in comparison to most alternatives. The worker pays the hawaladar and his family picks up the money the same day. The worker does not need a bank account, and no one asks him to fill out elaborate forms or show an ID number. Nor does he need to deal with an official exchange rate.

We in the U.A.E. consider that hawala has regained its popularity for the following reasons:

• it is often faster and more reliable in reaching the beneficiary;

• transmission charges are cheaper compared to banks and money exchanges;

• the hawala rate is better than the official banking exchange rate; and

• it can be used in rural areas, which in some countries lack formal banking facilities.

Therefore, hawala is used by many people and organizations worldwide, such as individuals who do not have bank accounts and low-salaried migrant workers who wish to transfer funds to their families overseas and at the same time benefit from a better exchange rate, no commission or other charges, and fast and convenient home delivery of funds.

Initiatives Taken by the Central Bank of the U.A.E.

The Central Bank of the U.A.E. has offered to participate in any forum to discuss the ramifications of hawala. We took the lead by arranging the “International Conference on Hawala” on May 15–16, 2002, in Abu Dhabi. Three hundred delegates from 58 countries attended, and the conference resulted in the Abu Dhabi Declaration on Hawala.

The declaration stated, “The international community should continue to work individually and collectively to regulate the hawala system for legitimate commerce and to prevent its exploitation or misuse by criminals and others.”

The declaration also acknowledged that hawala has many positive aspects and that much of the activity conducted by hawaladars is for legitimate business, but it also noted the system’s lack of transparency and accountability.

We believe that hawala transactions originating in the U.A.E. are innocent and reflect migrant workers’ remittances to their home country. However, the Central Bank of the U.A.E. has a responsibility to ensure that criminals, money launderers, and terrorists do not misuse this system of hawala.

To that end, the central bank actively encourages hawaladars operating in the U.A.E. to register and follow a very simple set of rules.

Regulation of Hawala—Steps Already Taken in the U.A.E.

As a result of the Abu Dhabi Declaration on Hawala, in November 2002 a public notice placed in local newspapers invited hawaladars to register with the Central Bank of the U.A.E. The notice outlined the following conditions.

• A simple certificate will be issued, free of charge, to hawaladars who come to register with the Central Bank of the U.A.E. The Central Bank of the U.A.E. will assure hawaladars that their names and details will be kept safe at the bank.

• A hawaladar must maintain a record of each transaction; the records must include details of the remitter. The hawaladar must also give full particulars of his or her bank account.

• Full details of reverse transactions (inward remittances) should also be registered.

• Hawaladars must report transfers they suspect may be related to money laundering.

• Hawaladars must submit returns to the Central Bank on forms provided by the bank.

The system is in the infant stage. All those who have applied have been given certificates to carry out hawala business. So far, 124 hawaladars have registered.

International Cooperation—Regulation

Both the First and Second International Conference on Hawala produced a consensus that hawala needs to be generally understood on a worldwide basis. Internationally, hawala has many variants, which are best described as informal funds transfer (IFT) systems.

One example of an IFT system describes the “first mile” (collection of funds to the point of consolidation) and “last mile” (deconsolidation and delivery at the destination), with the intermediary transfer of funds made by SWIFT or telegraphic transfer (TT) using the “formal” system offered by either banks or exchange houses.

The majority of participants in the conference also agreed that, given the large sums passing through IFT systems, the issue of regulation could not be avoided. Regulation is needed to do the following:

• protect the rights and interests of retail customers;

• prevent the evasion of taxes, excise duties, and so forth;

• underwrite the reliability and creditworthiness of public companies operating in the financial marketplace;

• prevent drug money launderers and other criminals from laundering their profits; and

• prevent the financing of terrorist activities.

The Financial Action Task Force is also deliberating on the issue and may suggest certain best practices in this area.

The Way Forward

The Second International Conference on Hawala was organized by the Central Bank of the U.A.E. and the IMF and took place on April 3–5, 2004. Four hundred delegates attended. The conference statement reflected a general agreement that, despite issues of global security, hawala will continue to grow in volume and needs to be better understood.

It must also be understood that hawala is steeped in history; care must be taken not to overregulate it, which would likely drive the hawaladars underground.

As a regulator, the Central Bank of the U.A.E. has taken a first step by encouraging hawaladars to register. At present, more than 100 hawaladars have registered, which is very encouraging.

Although formal funds transferors, such as banks and exchange houses, might find it a difficult proposition, they must become more competitive by reducing their fees and operating more efficiently. Then, at least, the migrant workers and other innocent users of hawala would have a viable alternative. In time, there will be international standards; but reaching that point will require a great deal of hard work.