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What is Havala
Havala is an unofficial form of money transfer that occurs through a network of brokers without the physical movement of cash. When money is transferred outside of established banking channels, it is referred to as underground banking. The Arabic word havala translates to "transfer" in English. Havala was popular in ancient times, such as in China during the second half of the Tang Dynasty, where it was known as Fei Quian, which meant "flying money." It is now more commonly associated with the Middle East, North Africa, and India. Havala is a non-physical money transfer method. The basic principle of Havala is the unrecorded transfer of funds.
Working of Hawala
Havala is a network that transfers havala money without the use of banking systems. These business transactions are unregulated and solely based on mutual trust between the two parties. This method may be preferred when sending money from a remote location with no access to banking facilities. Immigrants who want to send money home to their families use the Havala system.
Characteristics
- Havala brokers are middlemen who facilitate money transfers between senders and recipients.
- For havaladars, havala is a side business; they are not required to be in the main business of transmitting money.
- There isn't any actual cash or bank activity.
Background of Havala
Since its creation in India in the eighth century, the hawala system has been used primarily in Islamic nations. Instead of the conventional method of using bank wire transfers, Hawala offered its users a different way to transfer money across international boundaries.The system, which was employed for trade along the Silk Road and later developed into a fully-fledged money market instrument in South Asia, became quite sophisticated over the course of the last few centuries. In fact, it wasn't until the middle of the 20th century that it was replaced by the more formal and conventional banking systems found in Western countries.
Havala Money
Money that is transferred through the havala system is referred to as "havala money" because no actual money is moved from one account to another, no paper trail is left behind, and no promissory notes are produced.
Why do its users prefer Havala?
This is particularly true for migrant workers who remit funds to family members back home. Furthermore, compared to the commission rates charged by banks in traditional banking systems, havala users are drawn to the relatively lower commission rates. Havala system is more fast and easy in term of transactions.
Arguments on Havala
Although havala is legitimate and permitted in many jurisdictions, it has a bad reputation due to its abuse in schemes to launder money. Terrorist organizations may use havala to covertly transfer funds to support their operations abroad. It is largely regarded in the U.S. as a security risk as a result.
Key Points
- Havala is an unofficial form of money transfer that takes place through the network of brokers without the actual movement of cash. It is also referred to as "underground banking" when money is transferred outside of the established banking channels.
- It is a system that is dependent on the idea of trust, so it isn't always legal. As a result, hawala transactions do not require notes of promise.
Advantages
- People who work abroad can send money to their friends and family more easily, quickly, and comparably less expensively.
- If a reliable havala broker is found, it is simple to use.
- The products and services are high-quality, productive, and dependable.
- Avoid law enforcement organization
Disadvantages
- It becomes the main factor in an economy's rise in unreported, unaccounted-for, and black money. The result is corruption.
- In some countries, there are penalties for engaging in such transactions.
- Typically, havala don't keep any records of their transactions. As a result, during the inquiry of any illegal transactions, no data can be speculated.
Conclusion:
A person can transfer money from one person to another without actually moving any cash thanks to the informal havala system. It is a straightforward, paperless system of moving money that requires no identification. Many developing nations have benefited from this as people move abroad to work and send money home without incurring high transfer fees or other formalities. Havala has served as a vehicle for illegal activity like money laundering and terrorism financing because of its anonymity. For this reason, havala is outlawed or subject to restrictions in many nations.