Hawala and use cases.
Hawala has persisted through economic failures of states, political regime change, wars, and heavy regulatory blocks.
(Meaning and etymology - From Arabic ḥawāla, literally ‘assignment, bill of exchange’.)
Hawala is a way to move money between individuals using a global network of intermediaries. The hawala system predates western banking, don’t be shocked, despite the collapse of financial markets and regulatory blocks, it has endured for over a millennium.
You might say who these guys are?
In a typical hawala transaction, the operator collects a sender’s money and deposits it into his own cash pool. They then contact partnering agents who use their own cash pool to pay the recipient. Value, in the form of credit and debit, is exchanged between the participating operators. Hawala is considered an informal value transfer system. As money is not physically exchanged between the dealers, the debt between them will be settled later.
Hawala and Terrorism
The traditional hawala ecosystem bypasses the formal system and is highly unregulated. As such, the anonymity of these networks presents money laundering opportunities.
According to research, al-Shabaab uses hawala to collect donor funds from the Somali diaspora and implement extortion programs against Somali citizens.
Settlement practice within the network is the doorway to money laundering activities. Checkmating the operations of the network is of primary major concern to many governments battling terrorism around the world, as it has been a key node in financing the activities of terror groups.
Hawala and Remittances
Due to the lack of bureaucracy, it facilitates the volumes of remittances in emerging countries(Africa), where banking is expensive or difficult to access.
In nearly 20% of the world’s underdeveloped states, formally recorded remittances represent over 10% of their GDP, according to the IMF.
According to the World Bank and the IMF, the amount moved through hawala may be up to 50% more than recorded formal flows of remittances. (E.g. If the officially recorded flow in 2018 was $529 billion, then nearly $800 billion more was distributed unofficially).
According to fragmented data collected and cleaned by me, some 134 million Africans are intra-migrants, and the majority are workers moving across borders to search for decent work—jobs that pay a living wage, safe working conditions, etc.
Most of these individuals use hawala to send money home due to broken border infrastructure across Africa, most travel without proper travel documents and no valid means of identification, and access to formal financial services might be a hurdle.
For most immigrants from remote, rural areas, remittances may be the only link between themselves and their families.
In a study focusing on the global resettling of Sudanese refugees, scientists identified that not only is the money sent back home from migrant workers critical to the survival of recipient households but also toward sustaining familial ties and a sense of cultural identity for migrant workers.
Hawala and Humanitarian Aid.
According to the US State Department, increasing evidence demonstrates that humanitarian bodies are leveraging hawala as part of their crisis response strategies.
From studies, I discovered, a system described as (Cash-based intervention), also called “cash transfer program” (CTP), which involves the movement of cash and vouchers for goods and services.
Traditionally, these organizations respond to relief operations by giving in-kind support, like food and clothing, also by providing services, like medical care or shelters.
Recently, CTP has been used to give recipients access to these same services but in a manner that is faster and more efficient than traditional distribution models. Research identifies that it can mitigate the risk of violence to humanitarian workers, reach remote regions faster, and can positively impact the local financial market.
An estimated $4.7 billion in 2018, in cash, was disbursed as humanitarian assistance internationally, an increase of nearly $2 billion from 2016. According to the UNHCR.
According to WFP, in regions suffering from food insecurity like Sudan, humanitarian agencies have deployed this initiative using hawala. From May to August 2017, $44 million in cash and vouchers for food, sheltering, water, sanitation, and hygiene were distributed each month, they were able to reach more than three million people a month.
The Hawala system facilitates the flow of remittances and other cash transfers within Africa. As well as a financing system for terror groups, they also depend on hawala to acquire wealth, recruit members, and fund their illicit activities. Opportunities for more analysis exist to study how the startups and venture builders can come up with business models to minimize hawala’s adoption by migrants, this is definitely a drag race but to move up to the digital economy the race must continue.
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Inspiration for the week ahead
Next week, I will still be writing about Hawala, from a Retrospective point of view. Stay tuned.
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