It is a transfer system that goes back 100s of years. Hawala, Hundi and many other names by which it is known. So what is it and how does it work? Here is a small explainer video on the subject.
Hello. My name is Faisal Khan. I am a banking and a payment consultant. And today I want to let you know about the question that I get a lot is what is hawala and hundi?
Well, Hawala and Hundi is a form of an informal agent based payment method. Although it has become very famous because of the so crude and the, you know, sub Indian continent treating the Arabs that used to trade all the way from the South East Asia, South Asia, Timbuktu, North Africa and the silk route.
The origins are even more before. The earliest known form of Hawala and Hundi were the ones done by the Crusaders, you know, the Knights Templar used to do it when people used to go from pilgrimage from let’s say France and the east had to go to the holy cities of Jerusalem and so forth. They got robbed and you know they gave their wealth and they kept it in the custody of the crusaders, you know, the Knight Templars in let’s say in Paris and they got their money delivered in Jerusalem when they arrived. And it was used, you know, it was paid out using a sealed system.
So, Hawala and Hundi is the one that’s actually very pronounced today. When the Arabs were financing trade, and all the spice trades that were happening and the other oil and all of trades that were happening and the silk route that was coming in so forth. The agent payments system was done on hawala or hundi. So, for example you would be a merchant in Shanghai and you needed to get paid in let’s say somewhere in Cairo. So, they would just, you know, give you something, you write it, you take it, you go to Cairo, you present it and it was paid out. So it was a merchant banking kind of a banking system, an informal banking system. It was informal because obviously it was not under the official tax regime of the various geographies that it was operated under.
It still exists today. But rest assured Hawal isn’t the only one. There is, you know, there’s the Chinese one which is you know flying money. There is a lot of Hawala happens in Russia, in Africa and even in the developed nations they do it in a slightly different manner. You don’t call it hawal or hundi, obviously. But they have ways of skirting around the tax base and they would do so because of the offshore banking system.
But, traditionally if an informal money transfer occurs or informal payment transfer occurs, it is referred to as, these days, as a Hawala transaction or a hundi transaction. And an informal transaction is one that is not documented, that is not happening under the aegis of a licensed entity. It is happening because I have money, someone else has money and we are trying to net off the transaction, based on an arrangement. And that is how hawala typically works. There are not thousands, tens of thousands, millions of agents worldwide.
And when we say hawala one should not be stereotypical and assume it’s an Arab or its a Muslim or its an Indian or a Pakistani. Hawala exists in many shape, color, religion, creed, forms and nationalities. Its just that the word originates from the South Asia and that’s why it’s stuck there. But believe me Hawala occurs in Bulgaria, in Romania, in China, in Russia, in Eastern Europe, in Africa, in sub-Saharan Africa it’s very very common. It occurs in Chile, Peru, you know, Argentina Venezuela, Brazil. It occurs in the United States as well. I mean, you might want to raise an eyebrow or two and say well you know the U.S. doesn’t do it. The U.S. actually happens to have the largest informal economy in the world combined. An estimated two to three trillion dollars if not more.
Well I hope I was able to answer the concept and explain it to you. I’ll include some links in the description below and you can read it. Till next time, have a good one.