The hawala system, or method, is an alternative money transfer modality, in which there is a lower level of registration or surveillance. It is used mostly by migrant users and requires intermediation.
Hawala is widespread globally within the monetary funds transfer models, considered as alternatives.
Its use includes both local money transfers and those made at a longer distance between different countries.
In fact, there are other names to refer to this model depending on the geographical area in which it operates. In this sense, being examples of it the Chop system in China or Padala in the Philippines.
The main users of hawala are people who, in general, have emigrated to the West (especially the United States and Western Europe) and who send money to their territories of origin, located between the Middle East, Asia or North Africa.
Origin of the hawala system
Although the name of hawala is identified with Arab roots, its creation or expansion is located in South Asia, specifically in India.
The appearance of different trade routes in the Middle East, especially, and the traditional way of making payments between its participants is considered as the touchstone of this exchange modality.
On the other hand, its expansion also responds to the coverage of less populated or industrialized areas, in which the population historically has not had access to usual banking alternatives.
How the hawala works
The basic operating scheme of the hawala assumes the intervention of intermediaries. It is common for them to share the nationality of origin with the users, creating communities established in different territories.
In this sense, there are international networks that operate following this modality and connected different countries in an agile and less bureaucratic way.
If a person wants to send an amount of money from country A to another individual from country B, they must contact a hawaladar or service manager in A, who will in turn contact a professional counterpart in B, providing the data of the operation (amount of shipment, currency of origin and an identification code).
Through an identification by reference code, the recipient individual will be able to finally receive said amount. In other words, it is only made between money between customer and supplier in A and supplier and receiver in B.
The hawala method stands out for a series of elements that distinguish it from other transfer systems, among which the following stand out:
- Simple nature: The transfer of funds does not require physical or material transfer between A and B. Therefore, it does not have a bureaucratic weight, and exhaustive registration, which slows down the service. There is no documentary justification for the operations.
- Agility: The hawala involves movements in a very short space of time, as there is no physical or electronic transport or shipment of funds.
- Identification: This system facilitates the anonymous transfer of money, since it does not require identification of the intervening parties.
- Exchange character: In the process, a currency exchange often takes place. The shipment in A is made in a different currency than the one received by the recipient in B.
- Provider margin: Hawaladares deduct a profit margin for the provision of their service. These commissions are not usually high and are often backed by possible benefits resulting from the currency exchange.
- No taxation: These money transfers are not subject to taxes of any kind, which is another incentive for their users.
- No official record: The amounts moved through this system are not recorded and measured in the official economic indicators, which makes their control or knowledge of their real magnitude even more difficult in the different economies in which it is applied.
All these characteristics make this mechanism difficult to detect by the authorities and economic watchdogs.
Criticism of the hawala system
One of the most relevant aspects of this system is that it is based on the trust of its users, as there is no official and detailed monitoring of movements.
This point is often placed as an element of criticism, since it is assumed to be a defect in terms of security or surveillance. In other words, it is a riskier model than the current alternatives.
For this reason, hawala is considered a tool for harmful behavior from a socio-political and economic point of view, since it is sometimes a financing channel for criminal organizations such as fraud, money laundering and even terrorist financing.
That said, the use of hawala is not legal in countries like the United States or the United Kingdom. However, in many countries it has legal backing and is commonly used.