Down an unlit side street in Khartoum, Sudan, a crumpled, dirty note slides out from under a rotting rubber band. Then another. And another. A hand counts the notes on the receiving end. A gift of cash from abroad has both travelled a thousand miles and yet not at all.
Hawala, hundi, chiti, chop, and dozens of other names describe a system that moves billions of dollars across grey and black markets, faster and cheaper than your local bank. Dealings in the dark alleyways of Kandahar, the bombed streets of Mogadishu, and everywhere in between; it could also be happening in the backroom of a corner store on a US city street, right now.
References to hawala date back to the eighth century, when it emerged as a way to protect tradesmen from the pirates and bandits that plagued the long-distance trade routes of the Indian Ocean or Mesopotamia. Before insurance and high-speed travel, moving large amounts of bullion by sea or camel-led caravan was not only slow but also incredibly risky.
The answer? Never move the money. With the ingenious method of hawala, a rial stayed in Iran and a pound stayed in Sudan. Money instead moved time zones and continents via a single communication between two hawaladars or thadekars (hawala agents): a promise that the cash had been deposited on one end, and thus could be withdrawn from the other.
So long as cash trades at either end were relatively balanced, the system worked—so well that hawala remained the mainstay of monetary trade in more than 50 countries until the early 20th century.
In its infancy, hawala created a safe and smooth journey for long-distance merchants, facilitating the first movements of globalized trade. Fast-forward a few hundred years, and hawala has a less celebrated reputation. Money launderers, drug dealers, and terrorists continue to use hawala as their preferred monetary transaction service. Yet this is not its main use: for families in developing countries supported by diaspora relatives, hawala is a lifeline.
Cash in the Clear
Adam Bagadi, a child and adolescent psychologist, and UK citizen of 36 years, studied medicine in Khartoum. When we spoke, he recalled a hawala transfer that brought him right back to those university days.
“Maybe 10 years ago, a nephew sent a letter with someone who was coming to England. It said, ‘Uncle, I need GBP 300 in order to do my final graduation exam. And I need it in the next 10 days.’”
Despite his own financial pressures, Adam took a loan from the bank and turned to hawala. “It got to him directly, and he passed his exam. Now he is married with children and is supporting them with a job at the bank.”
This example is one of the millions of grey money transactions that support communities from Chad to Pakistan. With USD 300 billion transferred in 2008, the remittance support network outdoes aid donations by three times and fills gaping holes in government welfare.
“War and government instability in Sudan has disrupted people’s normal customs of living,” Adam explained. “People who don’t have access to a bank or who live in rural areas start to depend more and more on people like us.”
Hawala agents fill the gap for places and people Western Union and large banks simply don’t invest. The system works best when the remitter’s country has a convertible currency and no capital controls, and the receiver’s country has inconvertible currency or a black market exchange rate. The result is usually a five percent charge, far lower than the 10-20 percent of most formal channels.
Hawala’s clear economic rationale comes through a single extraordinary factor: it relies solely on trust. Where a formal company must set up complex and costly internal structures regulated by auditors and the state, the guarantee of security in the hawala system comes through highly personalized relationships.
In its early days, a tight-knit family served as the core of every hawala operation. The trust these family members could place in each other connected countries and converted currencies like magic. What has been called a “spatially extended kinship network” was simply good old family business gone global.
With trust at a high premium, sanctions against failure to fulfill the unwritten rules of a highly lucrative trade were severe. Any miscreant would promptly find himself cut off from his family and community, lest his untrustworthiness reflect on this precious extended network of hawaladars. Trust meant business.
Times, of course, have changed. Yet while a few relationships inevitably go bad, the vast majority of transactions go ahead without issue. What should be a fraudster’s paradise simply isn’t.
Bagadi admits that he has lost money and that it takes trial and error to find the right hawaladar. Over the years, his trusted source has now become a friend. “If we can’t give money,” explains Adam, “we contact our person in Sudan, and they extend credit for an urgent request because there is so much trust”. Without having to justify his need to a bank or repay the crippling interest of a loan shark, Adam can quickly and cheaply send money to Sudan. “There is more flexibility in having this personal contact. There is a lot of convenience.”
On and off the Books
Unsurprisingly perhaps, hawala has another dirty little secret, one that earns its poor reputation in formal banking. In grey market parlance, it is the snake that eats its own tail: hawala is recordless. With just a name and telephone number, you can transfer thousands of dollars across continents. And as the figures grow, the details get blurrier.
Though an increasing number of countries are finding ways to push hawala to the fringe, its no-record tradition isn’t illegal. In an age of collecting every Insta-moment, hawala’s vapor trail seems at least a wasted opportunity—at most a sign of abuse. For hawaladars, dirty and clean, records are kept only on a need-to-know basis.
Straddling both sides of the coin is Liban Egal. He works as the Chairman of First Somali Bank, the first fully functional bank to open in Mogadishu. According to Liban, hawala is “Somalia’s biggest industry”.
“From when you walk into the airport to when you walk down the street, you can’t miss how many hawala dealers there are.” Liban, brought up immersed in both hawala mentality and trade, now faces the challenge of bringing formal banking security to a country that hasn’t seen a checkbook since the Cold War.
A functional central government has eluded Somalia since 1991; the ensuing decades have featured various factions vying for power in a complex civil war. Pirates, suicide bombers, and terror groups became virtually synonymous with Somalia. Even today, only the hardiest of businessmen brave the risks of investing in Mogadishu.
“There is no industry there at present,” says Liban, “So when businesses want to buy something from Dubai, they give the money to a hawaladar, and he charges them almost nothing for the transaction.” This offers some incentive for money and goods to flow into the country.
Just next door in Kenya, the country’s Central Bank, facing international pressure, outlawed hawala operators without licenses. New license fees of KSH 5 million (USD 59,000), a minimum core capital of KSH 20 million (USD 230,000), and a seven-year audit trail are part of an effort to curb money laundering. It will also drive thousands of small hawala operators out of business.
According to Liban, this is a movement forward that can’t be avoided. “In the wake of 9/11, the US initiative KYC—“Know Your Customer”—was introduced to prevent money laundering through anonymous transactions,” he explained. “If authorities come to you and say, ‘Who is this person that transferred an amount of USD 300,000 four years ago?’ you cannot tell him you do not know.”
The highest estimate of piracy in the Somali hawala system in 2010 was six percent of the USD 1.6-3 billion the World Bank says was sent via the country’s informal channels. Non-governmental organizations and even United Nations agencies have used hawala to get aid money to those in need.
After the dissolution of Somalia’s formal banking system, hawala became fundamental in underwriting the country’s development. This is not forgotten in the creation of First Somali Bank. Just one month from now, FSB will launch a system to allow diaspora communities of Minnesota and London to send remittances from their mobile phones directly to a recipient’s debit card in Somalia— signs of attempts to formalize hawala’s informal success.
The system differs from neighboring Kenya’s M-PESA system in that the money goes directly into the recipient’s bank account. Each person becomes his or her own hawaladar. And each transaction comes with a record and attached bank account, complete with photograph and fingerprint.
This system may well be the future of hawala. It brings together the personal, cheap, and efficient elements of hawala but ensures a reliable and traceable channel.
Back and Forth
An email arrived last night from Liban. In it, a code and phone number of an agent. After wading through the murky world of dirty money, it was my turn to receive a gift.
Thousands of family agents still exist, but so too do large-scale operators. It was through the largest, Dahabshiil—with branches in 150 countries, including the US—that Liban sent me USD 20.
In most cities, Dahabshiil relies on its agent network, based in small corner shops, often behind the same counter that deals with Western Union transfers. I live in Qatar, a country of 1.6 million people, three-quarters of which are migrant laborers sending remittances home.
Just off Doha’s Bank Street sits the Gulf Exchange Company. Under Western Union branding, my agent sat among dozens of other country representatives: two or three for Pakistan, one for Gulf Cooperation Council countries, and a vague-looking sign that read “Arabic countries”. For the locus of grey-market trading, it felt disappointingly orderly, as I stood among lines of men after presumably larger sums.
Within a few minutes the deal was done. And with QAR 73, the agent looked thoroughly confused when I asked him to send the money right back to Mogadishu. It cost me USD 1, or five percent of the total amount.
My Somali hawaladar denied the existence of more underground agents in the city. Yet it seemed hard to believe that something so simple to set up and impossible to trace wouldn’t be churning in the back streets of Doha, in languages I wouldn’t understand.
This may be a romanticized fantasy, but one thing is certain: if money makes the world go round, then hawala is the undervalued engine coughing out a cloak of grey-black smoke. And despite the regulatory encroachment, it seems unlikely to cut out—at least from the places that need it most.
Photo by Jan Chipchase