How hundi/hawala system works

Hundi or hawala is an important element in economic life of many Pakistanis and Indians. Nearly 900 million US dollars are remitted every month to Pakistan through this informal system of money transfer. This system evolved centuries ago and now has been established on modern principles.

So what hawala (hundi) is?

hawala (hundi) is a system of transferring value without actual transfer of money from one place to another. Hawala payment works on the basis of trust.

It works when one person wants to send money to another person, at another place. He tells a secret word (password) to payee, in another location. Then goes to hundi agent, gives him money and tells him same secret word (password). Hundi agent tells amount as well as password to his other office, at another location, where value is to be transferred. This other office makes payment to the person who tells password. Now the payee got the payments and one office has become debtor of another.

Same process will be repeated between two offices when transfer is to be made and after setting off each others liabilities, balance amount will be transferred through actual cash delivery between offices.

Hawala/hundi system remains an impediment in increasing foreign exchange reserves of the country and must be discouraged. This can be done by making banking channel more efficient.

Using this system for money transfer in a country is illegal, but it can be used inside country for transfer of value from one city to another. Mobile banking also uses this method of money transfer.