It is very difficult to trace the history of a subject that is believed to predate history. There are several viewpoints on this subject with a civilisational perspective. For instance, the Wikipedia states that Hawala has its origins in classical Islamic law, and is mentioned in texts of Islamic jurisprudence as early as the eighth century. Hawala it seems migrated as an idea from the Middle East to Europe in those times. Hawala itself later influenced the financial as well as legal development in Europe and in civil laws such as the aval in French law and the avallo in Italian law. In fact, the words aval and avallo, the Wikipedia claims, are derivatives of the word Hawala.

Further, the Wikipedia states that the transfer of debt, which was “not permissible under Roman law but became widely practised in medieval Europe, especially in commercial transactions,” and was due to the large extent of the “trade conducted by the Italian cities with the Muslim world in the Middle Ages.” The Hawala mechanism was also “an institution unknown to Roman law” as no “individual could conclude a binding contract on behalf of another as his agent.” In Roman law, the “contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him.”

On the other hand, Islamic law and the later common law “had no difficulty in accepting an agency as one of its institutions in the field of contracts and of obligations in general.” Finally, the Wikipedia concludes that Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centres in the early medieval period. In South Asia, it appears to have developed into a full-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the twentieth century.

Just as you are perhaps led to believe that Hawala was a medieval idea coinciding with the emergence of Islam, I have to request you to pause a little. In a paper prepared in early 2009 titled “Controlling Money Laundering in India – Problems and Perspectives”, Mr. Vijay Kumar Singh captures the entire subject in a nutshell rather brilliantly. According to him, “Hawala is an alternative or parallel remittance system. It exists and operates outside of, or parallel to, traditional banking or financial channels.”

Interestingly, he states that the idea of Hawala originated in India. In this connection, he states, “It was developed in India, before the introduction of Western banking practices, and is currently a major remittance system used around the world.” Obviously, Singh was referring to the age-old Indian practice of issuing Hundis. That means that Hawala could well be traced to the period even before Christ!

Further, explaining the precise modus operandi of a typical Hawala transaction, Mr. Singh explains succinctly: “In Hawala networks, the money is not moved physically. A typical Hawala transaction would be like a resident in the USA of Indian origin, doing some business, wants to send some money to his relatives in India. The person has the option either to send the money through the formal channel of the banking system or through the Hawala system. The commission in Hawala is less than the bank charges and is without any complications for opening an account or visiting the bank, etc. The money reaches the doorstep of the person’s relative and the process is speedier and cheaper.”

Whatever be the origins of the system, what is of relevance to us here is that the Hawala system provides a person service like that of a regular bank, but with virtually no documentation. Naturally, as the system works purely on trust, Hawala provides virtually complete anonymity, secrecy and security. On top of all this, the system is efficient, effective and cost competitive. This success is not because of one factor, efficiency or secrecy, but both. That makes it attractive to all types of users – the innocent ones as well the notorious ones.

This idea of Mr. Singh that Hawala must be predominantly a South Asian idea gets further credence by a document by Mohammed El-Qorchi, senior economist, Monetary and Exchange Affairs Department, International Monetary Fund (IMF), who, in an article in Finance and Development in 2002, comes to a similar conclusion. According to El-Qorchi, international fund transfer mechanisms were, in earlier times, used for trade financing.

Obviously, they were created because of the dangers of travelling with gold and other forms of payment on routes beset with bandits. El-Qorchi goes on to demonstrate that Hawala was indeed a global idea, perhaps predating the first wave of globalisation itself. Tracing its worldwide presence, he states, “Local systems were widely used in China and other parts of East Asia and continue to be in use there. They go under various names – Fei-Ch’ien (China), Padala (Philippines), Hundi (India), Hui Kuan (Hong Kong), and Phei Kwan (Thailand).”

The conclusion from his paper is revealing: “The Hawala (or Hundi) system now enjoys widespread use but is historically associated with South Asia and the Middle East. At present, its primary users are members of expatriate communities who migrated to Europe, the Persian Gulf region, and North America and send remittances to their relatives on the Indian subcontinent, East Asia, Africa, Eastern Europe, and elsewhere.”

But there is yet another dimension to Hawala. Remember, I had told you that it was a perfectly secular idea. If that were so, could I leave out Christianity, especially having covered its origins through the Islamic laws and the Hindu precepts? Dan Brown in his bestselling novel The Da Vinci Code suggests that secrecy, banking and Hawala transactions were intricately linked to Christianity.

Whether Hawala is a Hindu, Islamic or Christian idea, the choice is entirely yours. But whatever it might be, it surely is a system that has evolved by a cross-fertilisation of ideas over generations, religions and civilisations. Nevertheless, the point that I need to make repeatedly is that it is an extraordinary secular idea! Exactly as E.M. Forster said in A Passage to India: “Nothing in India is identifiable.” How true. Not even Hawala.

The US Department of State in its International Narcotics Control Strategy Report for 2009 explains the linkage of Hawala with the Indian society rather bluntly. It encapsulates the entire paradigm by stating, “Hawala is an alternative remittance system whose deep roots in South Asia make it popular among all strata of Indian society, not only immigrant workers.” It also points to the relative ease of documentation in a Hawala system, better rates, and efficiency while simultaneously providing anonymity and security for its customers as reasons for its popularity. Whatever be it, Hawala as a system is deeply ingrained in the collective psyche of Indians.

The US State Government Report on the subject points to a different need for Hawala transactions which cannot be ignored in the Indian context. Hawala, the report points out, can also be used to circumvent foreign exchange restrictions imposed by the Government of India and to avoid scrutiny of financial transactions. Many Indians, the report states, especially among the poor and illiterate, do not trust banks and prefer to avoid the lengthy paperwork required to complete a money transfer through a financial institution. That in a way explains why Hawala flourishes in this country.

But what is the precise manner in which the actual transactions take place? First and foremost, what needs to be understood is that a large number of Hawala transactions into India are believed to be “routine ones.” That implies involving the transfer of remittances from migrant workers, especially from the Gulf regions, to their relatives in India. It has been often seen that many NRIs prefer to use the Hawala system for reasons already explained.

Thus, in a simple Hawala deal, a migrant in a foreign country, say the Gulf, seeking to send some remittances to his relatives in India approaches a Hawala dealer. The dealer, in turn, directs his agent in India to deliver an equivalent amount to the relative in India. One such group actively involved in squaring Hawala transactions in recent years has been suspected to be software companies. Experts believe that some money receivable out of India is brought safely back into India as proceeds of software exports. Under some conditions, these export proceeds are exempt from tax. Using fictitious agencies, sham employees and dubious sub-contractors, the export proceeds are suspected to be distributed across the country.

But that is part one of the entire transaction, which, as can be seen, is fairly simple. It does not need any seer to understand that Hawala funds that come into India need to be matched by a corresponding movement of funds in the opposite direction so as to “square” off the accounts between the Hawala dealer abroad and his agent in India.

The mechanism by which the Hawala dealer compensates his agent forms part of the second leg of the Hawala mechanism. This is done over a period of time through a variety of methods – systematically, scientifically and methodically. These include cash transfers from other sources within India to their relatives outside India, that is, those who may be in need of delivering foreign exchange outside India. In such a scenario, the agent becomes the Hawala dealer and the dealer becomes his agent. But again, these are two simple transactions working in opposite directions, cancelling out each other.

Extracted from:-

Sense, Sensex and Sentiments. The Failure of India’s Financial Sentinels

M.R. Venkatesh

Knowledge World, New Delhi, 2010

Pages: 336

Price: Rs 595/-