Hawala

Background

Hawala, which means “transfer” in Arabic, is an ancient remittance system that allows money to be transferred without the need for physical transportation or traditional formal banking mechanisms. Originating in India and widely used across South Asia and the Middle East, it operates on networks of trust and family connections.

Historical Context

Hawala has its roots in a pre-modern society where formal banking systems were either undeveloped or non-existent. It pre-dates the introduction of Western banking by several centuries. Its expansion paralleled the trade networks in the Indian subcontinent, the Middle East, and beyond, driven by the necessity to transfer funds quickly and securely over long distances due to the commercial activities around these areas.

Definitions and Concepts

Hawala Dealer (Hawaladar): The intermediaries who orchestrate the transactions within this system relying on personal relationships rather than institutional backing.
Trust-Based System: Unlike formal banking, hawala transactions are predicated on mutual trust and the integrity of the hawaladar.

Major Analytical Frameworks

Classical Economics

Classical economics primarily oscillates around markets free of regulation. While hawala can be seen as congruent with this due to its deregulated nature, its operation outside formal financial systems means that it often exists on the periphery of classical economic discussions.

Neoclassical Economics

Neoclassical economists view hawala within the context of supply and demand and marginal utility. The system operates on the efficient function of trusted agents who mediate demand for international remittance.

Keynesian Economic

From a Keynesian perspective, hawala bypasses official monetary channels and can impact macroeconomic policies such as controlling money supply and financial regulation.

Marxian Economics

Marxian economics would analyze hawala from the perspective of its role in the informal sector, predominantly servicing those marginalized or underserved by traditional financial institutions.

Institutional Economics

Hawala serves as an alternative to institutional structures, emphasizing how social, cultural, and family networks underpin economic transactions.

Behavioral Economics

This perspective focuses on the trust-based aspect of hawala, examining how personal relationships and established trust affect individual economic decisions.

Post-Keynesian Economics

Similar to Keynesian analysis, yet focuses more on how hawala’s shadow economy impacts inefficiencies and inequalities.

Austrian Economics

Hawala can be seen through the lens of spontaneous order and reduced state interference respected by Austrian economists who advocate for decentralized financial systems.

Development Economics

Hawala plays a significant role in developing economies, providing vital remittance services in regions lacking formal banking infrastructure. This has significant implications for economic growth and poverty reduction.

Monetarism

Monetarist theory might criticize hawala for complicating the control of money supply in the economy due to its parallel nature alongside standard financial systems.

Comparative Analysis

Compared to formal remittance channels like Western Union, hawala offers faster transfers often with lower fees. However, it lacks the regulatory oversight, posing concerns over potential misuse for illegal activities.

Case Studies

India: Utilized mainly within transport and trading communities.
Middle East: Heavily relied upon for transferring earnings of expatriate workers back to their home countries.
Somalia: Seen as a crucial tool for transferring funds during times of economic instability.

Suggested Books for Further Studies

“The Money Exchange Dealers of Kabul” by Edwin de Rham
“Hawala: An Informal Payment System and Its Use to Finance Terrorism” by Interpol
“Underground Banking: Mechanisms, Methods, and Uses” by P. Brito

Informal Economy: Part of the economy not regulated by the government and not included in Gross National Product (GNP).
Remittance: Transfers of money by foreign workers to recipients in their home countries.
Alternative Routines of International Money Transfer (ARIMT): Refers to non-traditional methods like hawala for transferring funds across borders.