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The informal funds transfer system of Havala is alive, well and enjoys global growth

While the established global Banking and Financial Institutions and System continue to debate the one-size-fits-all and ongoing Basel reforms, now at no. IV and the Bank for International Settlements is once again rewriting the rules that govern the banks capital to mitigate their exposures to different types of risks, and while oversight authorities focus on specific models to measure Counterparty Credit Risk Exposures, there is an age-old parallel system of transferring money and performing other monetary transactions that are completely out of the officially governed oversight radar, scope and view. It’s called Havala or the poor man’s Bitcoin.

Are the current banking and financial system out-of-date?

To address the regulatory overreach of existing credit risk calculations, continued the introduction of significantly more complex models with added controls for asset classes and rules regarding the treatment of particular product sets, mean that the western financial institutions are all the time trying to implement and achieve check-the-box compliance.

Western firms are already learning from the Havala system to cut the cost of international money transfers. Instead of moving customers’ money electronically, and charging hefty fees, other systems directly match people with money and then ‘deposit’ the funds into their local bank accounts. Other technology firms, such as Apple, Facebook, Google, and Bitcoin are also getting in on the money transfer business in their way, to bypass the overreaching regulation by digitising the Havala methodology.

Havala (Arabic: meaning transfer), also known as hundi in India is an informal value transfer system, based on the performance and honour of a huge network of money brokers, originally located in the Middle East, Africa, Asia and the Indian subcontinent. They operate outside of, or parallel to, traditional banking, financial channels, and remittance systems.

The Informal Funds Transfer (IFT) systems have been for centuries used for trade financing. They were created because of the dangers from thugs and bandits. In China and East Asia, they go under Fei-Ch’ien (China), Padala (Philippines), Hundi (India), Hui-Kuan (Hong Kong), and Phei Kwan (Thailand) and continue to be in daily use.

The havala (or hundi) system now enjoys widespread global use but is historically associated with South Asia and the Middle East. Due to globalisation and migration, the primary users are members of expatriate communities across the globe. The immigrant workers and entrepreneurs have reinvigorated the system’s role and importance. While Havala can also be used to legitimate the transfer of funds. Due to the anonymity and minimal documentation, the system is vulnerable to abuse by individuals and groups that transfer funds to finance illegal activities.

Effects of designing and implementing monetary, fiscal, and financial sector regulatory policies

Since informal funds transfers are conducted outside the formal banking system activity, they are not subject to taxes on income and services. Like any underground business, IFT systems also entail a loss of business for the formal financial sector and thereby of potential government income. The International Monetary Fund is concerned that the rapid increase of this parallel system.

– Reduces the reliability of statistical information available to policymakers.
– Effectively limits the significance of economic data by underestimating the factors that affect individual economic aggregates, including national accounts.
– Have negative fiscal implications for both remitting and receiving countries.

Havala probably running in the trillions

The full extent of Havala systems has not been explored and cannot be quantified reliably and accurately given the informal nature of the transactions. It is likely that it ranges to billions of USD. Based on estimates of the expatriate community and balance of payment data, Pakistan officials estimate that more than 10 billion USD while Interpol estimates the size of Havala in India to be at 40% of the country’s gross domestic product. What happens in China is anybody’s guess.

This article appears in the Copenhagen Complicance

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