Hawala, Or The Bank That Never Was - Part I
By Sam Vaknin, Wed Dec 7th

I. OVERVIEW

In the wake of the September 11 terrorist attacks on the USA,attention was drawn to the age-old, secretive, andglobe-spanning banking system developed in Asia and known as"Hawala" (to change, in Arabic). It is based on a short term,discountable, negotiable, promissory note (or bill of exchange)called "Hundi". While not limited to Moslems, it has come to beidentified with "Islamic Banking".

Islamic Law (Sharia'a) regulates commerce and finance in theFiqh Al Mua'malat, (transactions amongst people). Modern Islamicbanks are overseen by the Shari'a Supervisory Board of IslamicBanks and Institutions ("The Shari'a Committee").

The Shi'a "Islamic Laws according to the Fatawa of Ayatullah alUzama Syed Ali al-Husaini Seestani" has this to say about Hawalabanking:

"2298. If a debtor directs his creditor to collect his debt fromthe third person, and the creditor accepts the arrangement, thethird person will, on completion of all the conditions to beexplained later, become the debtor. Thereafter, the creditorcannot demand his debt from the first debtor."

The prophet Muhammad (a cross border trader of goods andcommodities by profession) encouraged the free movement of goodsand the development of markets. Numerous Moslem scholars railedagainst hoarding and harmful speculation (market cornering andmanipulation known as "Gharar"). Moslems were the first to usepromissory notes and assignment, or transfer of debts via billsof exchange ("Hawala"). Among modern banking instruments, onlyfloating and, therefore, uncertain, interest payments ("Riba"and "Jahala"), futures contracts, and forfeiting are frownedupon. But agile Moslem traders easily and often circumvent thesereligious restrictions by creating "synthetic Murabaha(contracts)" identical to Western forward and futures contracts.Actually, the only allowed transfer or trading of debts (asdistinct from the underlying commodities or goods) is under theHawala.

"Hawala" consists of transferring money (usually across bordersand in order to avoid taxes or the need to bribe officials)without physical or electronic transfer of funds. Money changers("Hawaladar") receive cash in one country, no questions asked.Correspondent hawaladars in another country dispense anidentical amount (minus minimal fees and commissions) to arecipient or, less often, to a bank account. E-mail, or letter("Hundi") carrying couriers are used to convey the necessaryinformation (the amount of money, the date it has to be paid on)between Hawaladars. The sender provides the recipient with codewords (or numbers, for instance the serial numbers of currencynotes), a digital encrypted message, or agreed signals (likehandshakes), to be used to retrieve the money. Big Hawaladarsuse a chain of middlemen in cities around the globe.

But most Hawaladars are small businesses. Their Hawala activityis a sideline or moonlighting operation. "Chits" (verbalagreements) substitute for certain written records. In biggeroperations there are human "memorizers" who serve as arbiters incase of dispute. The Hawala system requires unbounded trust.Hawaladars are often members of the same family, village, clan,or ethnic group. It is a system older than the West. The ancientChinese had their own "Hawala" - "fei qian" (or "flying money").Arab traders used it to avoid being robbed on the Silk Road.Cheating is punished by effective ex-communication and "loss ofhonour" - the equivalent of an economic death sentence. Physicalviolence is rarer but not unheard of. Violence sometimes alsoerupts between money recipients and robbers who are after thehuge quantities of physical cash sloshing about the system. Butthese, too, are rare events, as rare as bank robberies. Oneresult of this effective social regulation is that commoditytraders in Asia shift hundreds of millions of US dollars pertrade based solely on trust and the verbal commitment of theircounterparts.

Hawala arrangements are

used to avoid customs duties,consumption taxes, and other trade-related levies. Suppliersprovide importers with lower prices on their invoices, and getpaid the difference via Hawala. Legitimate transactions and taxevasion constitute the bulk of Hawala operations. Modern Hawalanetworks emerged in the 1960's and 1970's to circumvent officialbans on gold imports in Southeast Asia and to facilitate thetransfer of hard earned wages of expatriates to their families("home remittances") and their conversion at rates morefavourable (often double) than the government's. Hawala providesa cheap (it costs c. 1% of the amount transferred), efficient,and frictionless alternative to morbid and corrupt domesticfinancial institutions. It is Western Union without the hi-techgear and the exorbitant transfer fees.

Unfortunately, these networks have been hijacked and compromisedby drug traffickers (mainly in Afganistan and Pakistan), corruptofficials, secret services, money launderers, organized crime,and terrorists. Pakistani Hawala networks alone move up to 5billion US dollars annually according to estimates by Pakistan'sMinister of Finance, Shaukut Aziz. In 1999, InstitutionalInvestor Magazine identified 1100 money brokers in Pakistan andtransactions that ran as high as 10 million US dollars apiece.As opposed to stereotypes, most Hawala networks are notcontrolled by Arabs, but by Indian and Pakistani expatriates andimmigrants in the Gulf. The Hawala network in India has beenbrutally and ruthlessly demolished by Indira Ghandi (during theemergency regime imposed in 1975), but Indian nationals stillplay a big part in international Hawala networks. Similarnetworks in Sri Lanka, the Philippines, and Bangladesh have alsobeen eradicated.

The OECD's Financial Action Task Force (FATF) says that:

"Hawala remains a significant method for large numbers ofbusinesses of all sizes and individuals to repatriate funds andpurchase gold.... It is favoured because it usually costs lessthan moving funds through the banking system, it operates 24hours per day and every day of the year, it is virtuallycompletely reliable, and there is minimal paperwork required."

(Organisation for Economic Co-Operation and Development (OECD),"Report on Money Laundering Typologies 1999-2000," FinancialAction Task Force, FATF-XI, February 3, 2000, athttp://www.oecd.org/fatf/pdf/TY2000_en.pdf )

Hawala networks closely feed into Islamic banks throughout theworld and to commodity trading in South Asia. There are morethan 200 Islamic banks in the USA alone and many thousands inEurope, North and South Africa, Saudi Arabia, the Gulf states(especially in the free zone of Dubai and in Bahrain), Pakistan,Malaysia, Indonesia, and other South East Asian countries. Bythe end of 1998, the overt (read: tip of the iceberg)liabilities of these financial institutions amounted to 148billion US dollars. They dabbled in equipment leasing, realestate leasing and development, corporate equity, andtrade/structured trade and commodities financing (usually inconsortia called "Mudaraba").

While previously confined to the Arab peninsula and to south andeast Asia, this mode of traditional banking became trulyinternational in the 1970's, following the unprecedented flow ofwealth to many Moslem nations due to the oil shocks and theemergence of the Asian tigers. Islamic banks joined forces withcorporations, multinationals, and banks in the West to financeoil exploration and drilling, mining, and agribusiness. Manyleading law firms in the West (such as Norton Rose, Freshfields,Clyde and Co. and Clifford Chance) have "Islamic Finance" teamswhich are familiar with Islam-compatible commercial contracts.

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About the author:Sam Vaknin is the author of Malignant Self Love - NarcissismRevisited and After the Rain - How the West Lost the East. He isa columnist for Central Europe Review, United PressInternational (UPI) and eBookWeb and the editor of mental healthand Central East Europe categories in The Open Directory andSuite101.

Web site:

http://samvak.tripod.com/