Hawala is a traditional money transfer system used in the Middle East, North Africa and South Asia. The hawala system is used to transfer money between two parties without the use of a bank or other financial institution. The hawala system is based on trust and personal relationships between hawala brokers or hawaladars.
The hawala system has been in use for centuries and is still used today because it is quick, efficient and secure. The hawala system is often used to transfer money between family members or to send money to friends and business associates. The hawala system is also used to send money to people in other countries who may not have access to a bank or other financial institution.
Did you know?
The Hawala system was first developed in India during the 8th century.
Understanding How Hawala System Works
The hawala system is used extensively in the Middle East, North Africa, South Asia, and Central Asia. In the United Arab Emirates, for example, an estimated 95% of all commercial transactions are conducted using hawala.
The hawala system works as follows:
1) A person who wants to send money contacts a hawala broker.
2) The hawala broker contacts a hawala broker in the destination city.
3) The sender gives the hawala broker the money that is to be sent, plus a fee.
4) The hawala broker in the destination city gives the recipient the money minus a fee.
The hawala system is often used by immigrants who want to send money to their families back home. Businesses also use it to send money to suppliers in other countries.
The hawala system is not regulated, and there is no paper trail. This makes it difficult to trace the flow of money and makes the hawala system vulnerable to abuse.
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Parties in the Hawala System
Many different people use the hawala system for many different purposes. There are three main groups of people involved in the hawala system:
1) The hawaladars: People who run the hawala system and they are the ones who collect the money from the sender and then pay out the money to the receiver.
2) The senders: People who want to send money to someone else, and they give the money to the hawaladar, who then pays out the money to the receiver.
3) The receivers: People who want to receive money from the sender. They give their information to the hawaladar, who then pays out the money to them.
Features of the Hawala System
Let’s look into the features of the hawala system to see and how it varies from other existing systems
1. Informal System
- The hawala system is an informal value transfer system that operates outside of traditional banking channels.
- The hawala system is based on trust and personal relationships.
- Funds are transferred via a network of hawala brokers, with each broker trusting the next in the chain to make good on the transaction.
2. Hawala brokers, or hawaladars, act as intermediaries
- Hawala brokers, or hawaladars, are intermediaries who facilitate the transfer of funds between sender and receiver.
- Hawaladars typically charge a commission for their services.
- The hawala system is often used to send money to family and friends in other countries. It is also used to facilitate business transactions and to pay for goods and services.
3. Funds are transferred via a network of hawala brokers
- The hawala system is based on trust and personal relationships.
- Funds are transferred via a network of hawala brokers, with each broker trusting the next in the chain to make good on the transaction.
4. Often used to facilitate illicit or illegal transactions.
- Because the hawala system is based on trust, it is often used to facilitate illicit or illegal transactions.
- The hawala system is used extensively in the Middle East, Africa, and South Asia.
- The hawala system has recently been used to launder money and finance terrorist activities.
- US law enforcement agencies are currently investigating the hawala system.
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What Are the Benefits of the Hawala System?
Some benefits of the hawala system include:
Fast and Efficient
The hawala system is fast and efficient because hawala brokers can quickly and easily transfer funds between two parties without going through the traditional banking system.
Convenient
Hawala brokers can often be found in convenient locations, such as markets or shops which makes it easy for people to use their services.
Cheap
Hawala brokers typically charge lower fees than banks. This helps people to send money at lower costs and makes it a more attractive option.
Simple to Use
All that is typically required to transfer funds using the hawala system is the name and contact information of the hawala broker. This simplicity makes it simple for anyone to use.
Relatively Safe
Hawala brokers typically have a good reputation and are trusted by their clients. Therefore, the system is run on trust and personal relationships, and it is relatively safe.
Anonymous
Transactions can be handled confidentiality as hawala brokers typically do not keep records of their client's transactions. This ensures that the privacy of the users are protected.
Flexible
Hawala brokers can typically tailor their services to meet the needs of their clients. Unlike banks and financial institutions, they can provide various services and are not bound by any restrictions.
Widely Used
Though the network is more prevalent in the Middle East, millions of people around the world use the hawala system. The network has also been around for centuries.
Efficient in Cross Border Transactions
This is because hawala brokers can quickly and easily transfer funds between two parties in different countries. Unlike the various procedures and requirements needed by banks and other institutions, hawala brokers barely require any documentation.
Concerns Regarding the Hawala System
On the one hand, the hawala system has many benefits that make it a convenient and affordable way to transfer funds. On the other hand, criminals often abuse the hawala system for illegal activities such as money laundering, terrorist financing, and drug trafficking. While the hawala system has many benefits, the potential for abuse makes it a risky way to transfer funds, and this is why many countries have banned the hawala system.
There are a few illegal activities where the hawala system is used. These activities include money laundering, terrorist financing, and drug trafficking. The hawala system is often used for these activities because it is fast, efficient, and anonymous. While the hawala system has many benefits, it is also often abused by criminals, and this is why many countries have banned the hawala system.
In the modern era, the hawala system has been used to finance terrorist organisations and launder money. The hawala system has come under scrutiny in recent years because it has been used to finance terrorist activities. In response to this, the United Nations has enacted regulations to try to control the hawala system and prevent it from being used to finance terrorism.
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Conclusion:
In India, hawala is commonly used to send money to family members who live in rural areas. This is because many rural areas in India do not have access to traditional banking services. In the USA, hawala is often used by immigrants to send money to their families back home. This is because it is a cheaper and faster way to send money than traditional methods such as wire transfers.
There is no specific penalty under Indian law for hawala transactions. However, if the hawala transaction is part of a larger criminal scheme, then the person may be charged with money laundering or other criminal offences. In the USA, hawala is illegal. The penalty for engaging in hawala transactions is up to 10 years in prison and a fine of up to $250,000 ( around ₹2 crores).
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