Different terms are used to describe informal funds transfer systems, including “alternative remittance systems,” “underground banking,” “ethnic banking,” and “informal value transfer system.” This study uses the term “informal funds transfer systems” for four basic reasons. First, in some jurisdictions, these systems are the dominant means by which financial transfers are conducted and therefore cannot be referred to as “alternative remittance systems.” Second, in some communities, informal funds transfer service providers operate openly—with or without government recognition; thus, this system cannot be referred to as “underground.” Third, the use of these mechanisms is often cross-cultural and multiethnic; thus the term “ethnic banking” is overly restrictive. Fourth, IFT better captures the sense and nature of financial transfers akin to conventional banking that are of primary interest to this discussion.
Definitions and Conceptual Framework
Hawala. In Arabic, “hawala” simply means “transfer.” For analytical purposes, the research team designated the term “informal hawala system” to refer broadly to money transfer mechanisms that exist in the absence of, or are parallel to, conventional banking channels. In some countries, commercial banks use the term hawala to refer to formal sector money transfers. The definition of hawala in this paper excludes the use of the term hawala in the formal banking sector.
Hawala transaction. A hawala transaction, as defined in this paper, encompasses financial transfers that are made by principals, or customers, CA and CB located in countries A and B, respectively, through hawala service providers in their respective countries. These providers, designated hawaladars HA and HB, operate outside the formal financial sector, regardless of the use or purpose of the transaction and the country of remittance or destination. Typically, HA receives funds from CA and asks HB to advance the amount to CB in the local currency equivalent.
In a prototype hawala transaction (see Figure 3.1), an expatriate worker (CA) uses a hawaladar (HA) to arrange a remittance to his or her home country. CA makes a payment in dollars or another currency to this intermediary. The intermediary contacts a hawaladar counterpart (HB) in the receiving country, who arranges payment in local currency to the remitter’s family or another beneficiary (CB). Figure 3.1 also shows how a hawaladar can use a reverse transaction to facilitate transfer of funds from a family member in country B to a family member in country A. Obviously, some network of family or connections among hawaladars is required to make such a system work on an ongoing large-scale basis.
Table 3.1 shows the simple balance sheet changes resulting from a hawala remittance for the remitter, the recipient, and the intermediaries. The remitter in country A makes a payment, assumed here to be in U.S. dollars, to a hawaladar in the same country, requesting the equivalent value in his home local currency (LC) be delivered to someone, say, his family in country B. At this level of transaction, the remitter pays out dollars and his net worth declines. At the other end, the recipients receive a local currency delivery and their net worth increases accordingly.6 The requested transaction is set in motion by a communication from the intermediary in country A to the one in B detailing to whom the payment is to be made along with an agreed-upon way by which the recipient can be identified. Clearly, the intermediary in country B needs to have funds available ahead of time, out of which such payments can be made.
Prototype Informal Hawala Remittance Transaction
Prototype Informal Hawala Remittance Transaction
| Hawala Customer Transaction: Remittance to Home Country | ||||
| Remittance Sender, Country A | Remittance Recipient, Country B | |||
| Assets | Liabilities | Assets | Liabilities | |
| – $ | – $ (net worth) | + LC | + LC (net worth) | |
| (Net worth of remitter declines) | (Net worth of recepient increases) | |||
| Hawaladar Intermediaries | ||||
| Hawaladar A (HA) | Hawaladar B (HB) | |||
| Assets | Liabilities | Assets | Liabilities | |
| + $ (cash) | + $ (HB) | – LC (cash) | ||
| + $ (HA) | ||||
Prototype Informal Hawala Remittance Transaction
| Hawala Customer Transaction: Remittance to Home Country | ||||
| Remittance Sender, Country A | Remittance Recipient, Country B | |||
| Assets | Liabilities | Assets | Liabilities | |
| – $ | – $ (net worth) | + LC | + LC (net worth) | |
| (Net worth of remitter declines) | (Net worth of recepient increases) | |||
| Hawaladar Intermediaries | ||||
| Hawaladar A (HA) | Hawaladar B (HB) | |||
| Assets | Liabilities | Assets | Liabilities | |
| + $ (cash) | + $ (HB) | – LC (cash) | ||
| + $ (HA) | ||||
At this point, both remitter and recipient have completed their roles in the transaction’s sequence. As for the intermediaries, however, the hawaladar in country A (HA) has received funds in trust without making a payment, and the one in country B has made a payment without receiving its countervalue. Both these hawaladars have taken a financial position in the deal, and this is represented in the lower half of Table 3.1. In effect, HB has made a loan to HA, and the transaction needs to be cleared and settled between the intermediaries.
Settlement. After the hawala remittance is completed, HA has a liability to HB, and HB a claim on HA. The principals in the initial transaction do not play any role in the subsequent clearing and balancing of this position. HA and HB can settle their positions in various ways, including simple or complex reverse informal hawala transactions. Such settlements are described in greater detail in Section V. The hawaladars’ positions can also be transferred to other intermediaries. These other entities can, by various means, assume and consolidate the initial positions and settle at wholesale or multilateral levels.
Operational Characteristics
The informal hawala system has several characteristics that account for its widespread use. These characteristics include speed, convenience, versatility, and potential for anonymity. The system operates in the informal sector but hawaladars often hold accounts with the banking sector or sometimes use its channels for settlement operations. The system can be used for both legitimate and illegitimate purposes.
Speed. Carrying out hawala transfers between major international cities takes, on average, 6-12 hours. Generally, transfers between countries where the recipient is in a location with a different time zone or where communications are less reliable require 24 hours. Slightly more time may be required for payments in more rural regions or villages where the hawaladar does not have a local office or representative. Telecommunication and information technological advancements have greatly benefited this informal system. Payment orders can now be sent by facsimile, telephone, or e-mail. It must be noted, however, that because the system is based on trust, modern telecommunication is not a prerequisite. In the past, innumerable transactions were carried out by word of mouth, and credit was based on personal note of hand, rather than on documents representing specific goods.
Cost. The direct cost of making funds transfers between major international centers is said to average 2-5 percent.7 The final quotation depends on the volume of the transaction, the financial relationship between the remitter and the hawaladars, the currency of exchange, the destination of funds, and the negotiating skills of both parties and their understanding of how the market operates. HA can be remunerated by charging a fee or through an exchange rate spread, but often a hawala transaction remains less expensive than payments made through the formal banking sector. The reason is related to hawala’s limited overheads and the virtual lack of regulation and taxation. The infrastructure needed by hawaladars to conduct business is simple compared to that of banks involved in international payment transactions or even of money changers. Since hawaladars can operate from either their homes or little shops, or can be accommodated unobtrusively within already existing businesses—from exchange bureaus, brokers, money transmitters, and changers to multibusiness shops such as carpet stores, small supermarkets, travel agencies, and telephone or call shops—few, if any, additional operating costs are incurred by the hawala business. They often need little more than a table, phone, facsimile machine, or—for the most sophisticated—an Internet connection. Unlike banks, little, if any, consideration is given to the commercial and tax aspects of accounting obligations or principles of formal accounting procedures.
Cultural convenience. Absence of language barriers, trust among community members, solidarity among migrants facing the same situation, and cultural considerations have enhanced the development of IFT systems.8 Limited education levels and illiteracy also pose potential obstacles for expatriate workers, who would not feel comfortable dealing with banks and filling out forms to send money abroad or even open an account. Cultural considerations also apply to family members in the hawala-recipient country and shape social rules and behaviors, including respect for confidentiality and privacy. In many expatriate communities, only men tend to emigrate, leaving their spouses and other family members in the home country. In these communities, conservative and restrictive family traditions sometimes prevail. Women maintain minimal contacts with the “outside world” and do not establish relationships with institutions such as the banks or the post office. A trusted hawaladar, who is known in the village and aware of social codes, would be an acceptable intermediary in such circumstances.
Versatility. Hawala transactions are highly adaptable to wars, civil unrest, conflicts, economic crisis, weak or nonexistent banking systems, as well as economic sanctions and blockades. The informal hawala system has long existed but only recently gained prominence in conflict-torn regions such as Afghanistan, Iraq, Kosovo, and Somalia. For instance, the formal banking system in Afghanistan is not operational—the six licensed banks in Afghanistan do not provide any commercial banking services. After years of conflict, confidence in the banking system is absent and the remaining banks neither accept deposits nor extend loans. Significantly, banks do not have the capacity to provide international or domestic remittance services. Unless they physically move money around the country, most organizations operating in Afghanistan use the informal financial sector to conduct banking business. Given the security concerns, in the short term, the system has appeared to be the only reliable, convenient, and cost-effective mechanism for fund transfers. Also, hawala transactions are adaptable to different forms of foreign exchange, tax, and other economic regulatory regimes. Their flexibility allows them to be used by persons intent on avoiding or evading taxation. In Guinea, for example, the scarcity of foreign currency in the official market, associated with exchange controls and the expansion of the parallel market for the Guinean franc, boosted a hawala-type system in a parallel market in the 1990s, which enabled people to transfer funds to Europe or the United States within hours. The Nigerian emigrants are reportedly using the informal system to remit funds to their country. Generally, the weakness of local currencies and the related rise in the spread between the official and parallel markets seem to encourage expatriate communities to resort to IFT systems for funds remittance.
Anonymity. Generally, the documentation, if any, used by hawala dealers is inaccessible to third parties. The study found that, in the various countries that the research team visited, there are neither any standard documentary requirements nor accounting methods for conducting business. Except for the slip with the code to be transmitted to the beneficiary, hawaladars do not necessarily need a customer identification document to execute transactions. The recipient needs to only present the code as evidence that he or she is the intended beneficiary of the funds. When some form of customer identification is requested, it is commonly on a voluntary basis. Furthermore, once the transaction is completed, all customer identification documents, codes, or references can be destroyed, except, perhaps, those required for settlement purposes. Consequently, many informal funds transactions leave no audit trail for law enforcement agencies were there to be a need to investigate.
