Around 38% of the world's two billion poorest individuals do not have bank accounts and hence do not have access to the global financial market. Hawala, which means "transfer" in Arabic, is a remittance system that operates alongside conventional banking operations. Although it is frequently connected with financing terrorist operations, drug trafficking, and tax fraud and is therefore prohibited in most countries, the hawala may be a useful instrument for facilitating the transfer of funds. This is especially true for impoverished communities in developing nations and transactions involving unauthorized individuals. In reality, remittances obtained through hawala account for one-third of Somalia's GDP.
Despite its prevalence in many regions of the world, hawala remains mostly unknown. This article explores how hawala works, why it might be an appealing alternative remittance system, and if hawala should be controlled as a security problem or pushed as a business development tool.
What exactly is Hawala?
Hawala, which derives from the Arabic word for "transfer" or "trust," is an informal means of transferring money in which no money physically moves from one location to another. It is based on a system of money lenders known as hawaladars, which is widely employed outside of established banking institutions across the Middle East, Africa, and the Indian subcontinent.
The Origins of Hawala
The hawala system was invented in India in the eighth century and has been used ever since, particularly in Islamic nations. Instead of the typical approach of utilizing bank wire transfers,Hawala presented its users with an alternate system for making financial transfers across geographical borders.
Throughout the years, the system became highly complex, was utilized for commerce along the Silk Road, and subsequently evolved into a fully-fledged money market instrument in South Asia. Moreover, it was not until the middle of the twentieth century that it was supplanted by the more traditional and official banking institutions that were widespread in Western nations.
Why do its users like Hawala?
Aside from the fact that the hawala system is much faster and more convenient for transferring payments, its users are drawn to it for other reasons, such as the ability to transfer money between poorer, less developed countries where formal banking systems are expensive or difficult to access for those with lower socioeconomic status.
This is especially true for migrant workers who send money and remittances to families back home. Additionally, hawala consumers are drawn to the significantly lower commission rates paid by banks within traditional banking systems.
How may hawala be used for worldwide development software?
Is there a security risk with hawala? It, like most remittance systems, can be used to facilitate illegal activity. Because hawala has no paper trail and does not require lenders to provide confirmation of identification, many people use it to commit money laundering and finance terrorist activities. Al Qaeda's financing for the 9/11 attacks and the Bombay bombings in 1993 are two examples of hawala use mentioned in the Financial Crimes Enforcement Network report. Despite the security dangers involved with this system, it is premature to dismiss the potential for international development that hawala presents.
Hawala networks can be used as a tool for development. Because hawala is mostly focused on in-person transactions, it may reach isolated places that would otherwise lack access to official banking institutions. It's also worth noting that the majority of hawala users have "poor levels of literacy, no bank accounts or credit cards, and, in some cases, no identifying credentials." Nevertheless, "remittances are highly essential sources of income for many underprivileged households and may play a vital role in encouraging growth and development," as TransparencyInternational said on the Expert Response in 2008. Remittances have become an important source of income for thousands of destitute people, and they may be utilized to invest in small firms that would not otherwise have access to finance.
How should hawala be regulated?
The Financial Action Task Force (FATF) and the International Monetary Fund (IMF) have issued recommendations recommending how hawala services may and should be regulated. While Western countries seek to control this business since they have well-established banking and financial institutions, the same cannot be true for weak governments. In the case of Afghanistan, the State Department stated in 2015 that "there is no obvious distinction between the hawala system and the legal banking sector." Even banks will occasionally utilize hawaladars to "transmit cash to hard-to-reach places." In the absence of official institutions, hawala provides everybody with equitable access to financial transactions.
This firm is a prominent example of how to maintain the benefits of the hawala system while preventing the criminal crimes linked with it. The concept of in-person money transactions is beneficial, and it should be controlled so that everyone giving and receiving money is identifiable and registered. The documents, like those of any other private organization, should be kept secret and only divulged in the event of a criminal inquiry.
Rates of Hawala commission
Hawala system charges its clients very low commission rates since there is no expenditure of international bank transfer fees and it is an informal arrangement, therefore the likelihood of hawaladars charging more commission is very minimal. The hawala method typically charges 0.2% to 0.5%, which is far cheaper than the bank transfer fees charged by international banks, which vary from 12% to 15%.
One of the appealing aspects of the hawala system is that there are no transaction limits, allowing users to transmit as much money as they desire. International banks, on the other hand, set a maximum of $250000, which is equal to Rs. 17663694.
