–– the way they work.
In my previous post about Hawala I had explained whats this most common term ‘Hawala’ is all about. Now, let me finish this topic with ‘How does a Hawala System Work?’ It is being given in a layman language for I am supposed to help starter entrepreneurs.
An initial transaction can be a remittance from a customer (CA) from country A, or a payment arising from some prior obligation, to another customer CB in country B. A hawaladar from country A (HA) receives funds in one currency from CA and, in return, gives CA a code for authentication purposes.
He then instructs his country B correspondent HB to deliver an equivalent amount in the local currency to a designated beneficiary CB, who needs to disclose the code to receive the funds. HA can be remunerated by charging a fee or through an exchange rate spread. After the remittance, HA has a liability to HB, and the settlement of their positions is made by various means, either financial or goods and services.
Their positions can also be transferred to other intermediaries, who can assume and consolidate the initial positions and settle at wholesale or multilateral levels.
The settlement of the liability position of HA vis-a-vis HB that was created by the initial transaction can be done through imports of goods or “reverse hawala.” A reverse hawala transaction is often used for investment purposes or to cover travel, medical, or education expenses from a developing country. In a country subject to foreign exchange and capital controls, a customer XB interested in transferring funds abroad for, in this case, university tuition fees, provides local currency to HB and requests that the equivalent amount be made available to the customer’s son XA in another country (A).
Customers are not aware if the transaction they initiate is a hawala or a reverse hawala transaction. HB may use HA directly if funds are needed by XB in country A or indirectly by asking him to use another correspondent in another country, where funds are expected to be delivered. A reverse hawala transaction does not necessarily imply that the settlement transaction has to involve the same hawaladars; it could involve other hawaladars and be tied to a different transaction.
Therefore, it can be simple or complex. Furthermore, the settlement can also take place through import transactions. For instance, HA would settle his debt by financing exports to country B, where HB could be the importer or an intermediary.
Let me remind you that this whole system works on Trust, and most of the network is led by underworld, so a breach in trust means instant punishment.
If you have any Question regarding Hawala or Hundi please drop a mail or write in the comment box below.
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What is Hawala?