What is Hawala? (Part II)

This is part two of an earlier video that provided an introduction to the Hawala (or Hundi) system of money transfers and remittances. You can watch the previous video first to get a basic understanding of this system.


Hello. My name is Faisal Khan. I’m a banking and a payment consultant. A question I got again and again is, I keep getting again and again is, you know, how does, how does hawala work. I did an earlier video perhaps, I didn’t do all that good of a job in trying to explain it. So, maybe I’ll do another one.

So, in the initial days when a lot of laborers went to, you know, UAE, Saudi Arabia for example, this is just an example, from India, from South East Asia, you know, South Asia, India, Pakistan, Bangladesh, Sri Lanka, Nepal etc. They had to send that money back home. And the way they initially did it is, you know, if someone was going back home, let’s say someone was going back to Delhi etc. they would send them a, give them a 1000 dirhams, and say hey can you give it to my mother or give it to my father. And the reason this happened is because they really did not know how to use the banking channel. Remember, most of them they were illiterate people, you know, in an economy working day and night did not really know how to go to a bank and send money despite the education process that was being done by the governments and so forth. They trusted people rather than they trusted banks.

So, typically what would happen is, you know, in the initial days physical money was moved. So you know they would say hey you know I have some money can you send it to my, you know, my my father in Dhaka, and they would give a 1000 Riyal, and someone would travel home all the way to Dhaka and go to that person’s father and hand them the 1000 Riyals equivalent and then the father would take that money and go cash it out into Bangladeshi taka and so forth.

That was when the physical money moved. Then later on, you know, the hawaldars, the people who are part of the Hawala network, the agents, they are called hawaldars, they started doing a demand and supply network. So, at the end of the day they said ok how much money is actually moving from let’s say UAE to India. And it would be 10,000 dirhams, and then on the flip side in India, you know, people wanted to make payments in UAE, and there were currency restrictions etc. and there were 10,000 dirhams for the payments that needed to be made in UAE from India. Someone wanted to buy gold, downpayment for a house, pay some loan back etc. So there was money from UAE that wanted to go to India. There was money in India in order to go to UAE. Well, lo and behold. The hawaldar agents in India took the money in Indian rupees from the people at a certain rate, and they’ll say ok, we have now basically taken Indian rupees from you and we are going to payout 10,000 dirhams equivalent in Dubai. The hawaldars in Dubai, would take 10,000 dirhams from people who wanted to send the money back home, and say okay we’re going to pay 10,000 rupees, but 10,000 dirhams worth of Indian rupees back home, and then the flip would happen. The people, the hawaldars in India who have collected the Indian Rupees would disperse 10,000 dirhams on behalf of the people who’ve collected in Dubai, and likewise hawaldars who have collected 10,000 dirhams in Dubai would disperse locally on behalf of the people who would elect India minus their fees of course. And that is how these demand and supply networks came into being. In most cases they are not symmetric like, like the ideal case. In most cases they are asymmetry. There is more money being moved in one side or in one corridor than the other. And this is you know and trying to mass transact, and then you know trying to match the transactions and the demand and so forth, they will see what is a net amount that really needs to be moved, otherwise it is usually settled locally.

This isn’t new right. I mean it’s been happening for hundreds of years. Hawaldars, the Hundi, Hawala networks have been in existence more before banking was done. The knight emperors were doing it, you know, when the, during the crusaders, and during the time when people were going for a pilgrimage from France into Jerusalem and so forth. The New England discoverers were doing it, the Chinese were doing it, the Venetian bankers were doing it. So it’s, the informal economy has been operating for a long long time. It changed after 9/11 in 2001 when the United States clamped down on its allies and the allies clamped down on their, you know, their network countries and saying hey listen you need to clamp down on hawaldar networks and Hawala networks and so forth, and you know, bring those transactions more into the formal economy.

Today governments are doing the same. So, they are incentivizing money that moves, that otherwise is moving in an undocumented economy, in an underground economy to be moved where the formal channels are. The reason is when money moves into a country using the Hawala networks, the financial status of a country doesn’t improve because that money is not recorded on the books. The financial health of a country does not improve. So, governments are incentivizing this saying okif you bring money in legally, through the white channel guess what, we’ll give you a tax credit. Guess what, we will waive the two times that amount in custom duties, you know, and we will give you priority banking, we will give you better services on this discounts on that and so forth. And that is how they are slowly, but surely trying to decrease the amount of Hawala transactions and increase the formal transactions.

Hawala networks will stay. You know, they are very you know, the imagination really runs wild when it comes to these people. They’re not always bad money. That’s the rep that’s been given to them, you know, the label that’s been given to them, Hawala networks are bad. No they were not bad. Remember, like I said many governments were doing it, many entities were doing it, many civilizations were doing it for a long long time.

It’s now that under the guise of more regulatory pressure and more pressure from certain countries that the Hawala networks have been clamped down, and you know, they were labeled bad. You know, they say bad money moves through Hawala network. No it’s not really that.

I would highly encourage you to go read up on these networks and what they do but that is typically how Hawala networks work. I hope I was able to explain it. If you have a question or a comment, there is a contact form in the section below and you can fill it out and I’d be happy to answer a question. Till next time, have a good one.

This page was last updated on September 1, 2022.

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