In Praise of Hawala by J. Orlin Grabbe
When I was teaching at Wharton, I remember one student who was amazed that he could "wire" his Treasury bill from a bank in Chicago to a bank in Manhattan. Of course there was no mystery to the process. Treasury bills only exist as accounting entries on the books of the Federal Reserve: there is no physical token or quality printed document involved.
The bank in Chicago was the registered owner of the T-bill on the Fed's books, and it simply sent instructions to the Fed to turn the T-bill over to the bank in Manhattan — i.e. to attach the Manhattan bank's name as the owner of the T-bill on the Fed's books. Meanwhile, the bank in Manhattan handed the student a computer-printed receipt, showing that the student was the owner of the T-bill from the bank's point of view.
In this Federal Reserve transaction we have the essence of the hawala system, a system currently under frontal assault from the U.S. because it is efficient, low-cost, and unregulated. As in the hawala system, a person in Chicago (the student) goes to an agent (the Chicago bank) and asks for the transfer for something of value (the T-bill). Through a centralized record- keeping system (the Federal Reserve), value is transferred to an agent elsewhere (the bank in Manhattan) and given to a person at the remote location (in this case, the student again, but it could have been anyone). A typical hawala transaction in Dubai, here on the shore of the Persian (Arabian) Gulf, might go like this. Iqbal, a Pakistani working in the Jebel Ali Free Zone, gets paid in cash, in UAE dirhams. He wants to send money to his family in Karachi, so he goes to a hawaladar and gives him 5000 dirham. The hawaladar sends an email or a fax to his uncle in Karachi (who is also a hawaladar), along with an agreed code for collecting the money. Iqbal's wife picks up 80,000 rupees from the hawaladar in Karachi. The transaction is simple and efficient by comparison to most of the alternatives. Iqbal pays on one day and his wife picks up the money the next day. Iqbal doesn't need a bank account, no one asks him to fill out elaborate forms or show a government ID number. Nor does he need to deal with an artificial exchange rate set by the Pakistani central bank — a rate of exchange intended to rip off (tax) Pakistanis in foreign countries who are purchasing rupees with their repatriated earnings. Instead, the local hawaladar in Karachi deals on the white market and gets a market-determined exchange rate. (The central bank calls the free market in currencies a "black market," but since the market involves voluntary exchanges between individuals, it should be referred to as a "white market" — or maybe not, depending on your psychological associations with colors.)
Why does the system work? The hawaladars are reliable and trustworthy. As even Interpol observed, "the delivery associated with a hawala transaction is faster and more reliable than in bank transactions." And "the components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships . . ." It takes honest people to run this "illegal" business.