Is the mysterious Hawala money exchange safe?
After a fatal shooting on the M1 highway in Johannesburg was linked to the secretive, and often illegal, mean of money transfer called Hawala, we have decided to shed some light on the concept.
The so-called Hawala originated centuries ago, in South Asia during the 8th century, and is still used as a means of transferring money throughout the world today. Its name comes from the Arabic word for trust. So what is it about? According to Investopedia, it is a method of transferring money without any money moving. Interpol’s definition of hawala is “money transfer without money movement.” Hawala is an alternative remittance channel that exists outside of traditional banking systems. Transactions between hawala brokers are made without any documents and written agreements because the system is heavily based on trust and the balancing of hawala brokers’ books.
Who uses hawala?
Hawala is especially useful for migrant workers who frequently send money to relatives and friends in their countries of origin. Therefore, hawala facilitates the flow of cash between developing countries, where formal banking is often too expensive or difficult to access. To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees. The system is also simple, as one only needs to find a trusted hawaladar (hawala dealer) to transfer money.
As an example: Let’s say a foreign worker in South Africa wants to send money to his West African family. All he needs is to contact the local hawala man. You pay him the money – there is no receipt, only his word. He will then contact his local contacts in your homeland, and someone of them will give your family the money. What are hawala commission rates, you may ask. The provisions vary wildly, from 2 to ten percent, but due to the nature of business they are usually way lower than most banks charge for an international transfer.
Is hawala legal?
As the benefits of hawala are apparent, so are the disadvantages. The market is unregulated, and the people sending money away often have no guarantees at all that it will reach their friends and families. In addition to that, as these transactions are never archived or taxed, local governments see them in a very negative light. Therefore, this concept has been made illegal in many countries, such as India, as it is understood to be a form of money laundering because the very features that make hawala an attractive avenue for legitimate patrons also make it attractive for illegitimate uses. It provides anonymity in its transactions, as official records are not kept, and the source of money that is transferred cannot be traced. Besides, corrupt politicians and the wealthy who would prefer to evade taxes can use it as well.
Hawala is therefore likely to continue unless the regular banks will do the only reasonable thing and lower the fees for international transfers significantly. Only then will the negatives of hawala be more significant than the benefits.