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In Praise of Hawala by J. Orlin Grabbe

When I was teaching at Wharton, I remember one student who was amazed that he could "wire" his Treasury bill from a bank in Chicago to a bank in Manhattan. Of course there was no mystery to the process. Treasury bills only exist as accounting entries on the books of the Federal Reserve: there is no physical token or quality printed document involved.

The bank in Chicago was the registered owner of the T-bill on the Fed's books, and it simply sent instructions to the Fed to turn the T-bill over to the bank in Manhattan — i.e. to attach the Manhattan bank's name as the owner of the T-bill on the Fed's books. Meanwhile, the bank in Manhattan handed the student a computer-printed receipt, showing that the student was the owner of the T-bill from the bank's point of view.

In this Federal Reserve transaction we have the essence of the hawala system, a system currently under frontal assault from the U.S. because it is efficient, low-cost, and unregulated. As in the hawala system, a person in Chicago (the student) goes to an agent (the Chicago bank) and asks for the transfer for something of value (the T-bill). Through a centralized record- keeping system (the Federal Reserve), value is transferred to an agent elsewhere (the bank in Manhattan) and given to a person at the remote location (in this case, the student again, but it could have been anyone). A typical hawala transaction in Dubai, here on the shore of the Persian (Arabian) Gulf, might go like this. Iqbal, a Pakistani working in the Jebel Ali Free Zone, gets paid in cash, in UAE dirhams. He wants to send money to his family in Karachi, so he goes to a hawaladar and gives him 5000 dirham. The hawaladar sends an email or a fax to his uncle in Karachi (who is also a hawaladar), along with an agreed code for collecting the money. Iqbal's wife picks up 80,000 rupees from the hawaladar in Karachi. The transaction is simple and efficient by comparison to most of the alternatives. Iqbal pays on one day and his wife picks up the money the next day. Iqbal doesn't need a bank account, no one asks him to fill out elaborate forms or show a government ID number. Nor does he need to deal with an artificial exchange rate set by the Pakistani central bank — a rate of exchange intended to rip off (tax) Pakistanis in foreign countries who are purchasing rupees with their repatriated earnings. Instead, the local hawaladar in Karachi deals on the white market and gets a market-determined exchange rate. (The central bank calls the free market in currencies a "black market," but since the market involves voluntary exchanges between individuals, it should be referred to as a "white market" — or maybe not, depending on your psychological associations with colors.)

Why does the system work? The hawaladars are reliable and trustworthy. As even Interpol observed, "the delivery associated with a hawala transaction is faster and more reliable than in bank transactions." And "the components of hawala that distinguish it from other remittance systems are trust and the extensive use of connections such as family relationships . . ." It takes honest people to run this "illegal" business.

Yet Time magazine has called hawala "a banking system built for terrorism." They accused Dubai of being the hub of the hawala business. But Time gave its game away by ominously noting: "Dubai is a free trade zone with no limitations on the movement of goods or currency."

Dubai, and the Persian Gulf generally, may be the last refuge of laissez-faire capitalism in the world. Yes, there are pockets elsewhere: Hong Kong seems to have survived the takeover by the PRC. And Costa Rica, for all the government's boast of offering a "cradle-to-grave" welfare state, probably is host to the largest percentage of self-proclaimed libertarians per capita of any country in the world. But it's hard to beat Dubai. Here you will find none of the war-mongering socialism of Iraq and Israel.

From the futuristic buildings lining Sheikh Zayed Road to the cozy gold, electronic, linen, you-name-it souks of Deira, this place rocks. I come in at midnight to my apartment overlooking the Gulf, and the Pakistani workers who are constructing a new shop on the ground floor are still hard at work. The main streets are wide, cabs are clean, people are courteous. Dubai has 28 five-star or better hotels, including the top-rated hotel in the world, the Burj Al Arab, which sits in the shape of a large dhow sail on a man-made island offshore, a sail 1000-feet (321 meters) tall, a ship eternally headed inland. There are the free zones of Jebel Ali, with the world's largest artificial port, and the more recent ones of Internet City and Media City. Dubai is about the size of Las Vegas, but a woman can safely walk alone at night pretty much anywhere. Here in Dubai we are living in a Golden Age, but one which, I suspect, will have disappeared in a decade because of U.S. big brother meddling.

No, everything is not perfect. By contrast to the 1990 census which showed that a majority of Dubai native Arabic women aged 15 to 19 were married, in 2000 over 90 percent were still single. That perhaps accounts for the annoying excess of nubile females running around — especially when you add into the picture those foreign beauties from Eastern Europe, Russia, the Philippines, and South Africa. Native Dubai Arabs comprise less than 25 percent of the population, with foreigners from India, Pakistan, the Philippines, South Africa, and a horde of European countries making up the rest. Signs are written in Arabic and English, with more English spoken than Arabic. Internet City has been invaded with the likes of Microsoft, Oracle, IBM, and Network Associates. Microsoft couldn't build a secure computer system if you held a gun to Bill Gate's head; Oracle's Larry Ellison is a fascist who wants to create a national ID database on all Americans; IBM has forgotten how to make a profit; and Network Associates has discontinued support for PGP. Who needs this kind of progress? With the beginning of the new International Financial Center over by the Emirates Tower (the tallest structure in the Middle East and Europe), we'll be seeing the likes of Merrill Lynch, NASDAQ, and Goldman Sachs.

There are other problems. The weekend is on the wrong days: Thursday and Friday, instead of the civilized Saturday and Sunday revealed to us by the Gods of Tom DeLay. And while you can smoke in pretty much any restaurant in Dubai, they have a small hang-up about alcohol. Since non-moslem tourists were believed to be desirous of having a pint now and then, hotels were hospitably given an alcohol monopoly — ordinary restaurants can't sell it. You can buy it at a store, but you have to get a license. I got a liquor license from the Dubai Police Department, but have yet to use it. I find that when I want a drink, I tend to wander over to one of the hotels down the street. Who do they think they are?


What is called hawala in Arabia, is also known as hundi in India and Pakistan, and havala in Iran. The word "hawala" comes from the Arabic root hwl, meaning to "change" or "transform". A traveler's check is called a hawala safir. The Arabic word "hawala" has been adopted into both Hindi (India) and Urdu (Pakistan). The alternative term hundi comes from a Sanskrit root meaning to "collect." A hundi operator is called a hundiwala (recall the dishwalas who sell satellite TV dishes out of corrugated tin shacks in India). In Farsi (Iran) the "w" is pronounced as a "v": havala. Farsi also uses the word saraf, meaning a "money changer" or "money remitter" (i.e. a hawala dealer).

A few days ago the Gulf News, a local Dubai English-language newspaper, carried a large ad: "HAWALA IS ILLEGAL, DON'T RISK IT!" Now, hawala is not illegal here: the ad was referring to the illegality of persons in India receiving hawala payments from Dubai. Because the Indian central bank has said hawala violates exchange control laws. The ad luridly carried two newspaper headline clippings: "US tells India to regularize hawala transactions" and "US treasury nudges India to tackle hawala networks". And who was it that took out the ad, all in great concern and alarm that Indians in Dubai might send money to the folks back home in New Delhi, and upset the poor little U.S. Treasury? Western Union. A rival money-transmitting business. The ad represents the classic case of a business attempting to use government regulation as a whip to drive out the competition. (Click here to see the ad.) What is most absurd about the whole thing is Western Union's invoking of U.S. meddling in India as a behavorial guide for expatriate Indians living in Dubai.


Of course Western Union is just another hawala-type business. In the old days, you took cash to a Western Union office in one city, and had them "telegraph it" to a Western Union office in another city. What happened was the Western Union office in the first city put the cash in its safe. Then they sent a telegram to the second office, with the message: "Give so-and-so this much cash." The thing that moved between the two cities was not the cash, but rather a message that described the value transfer that was to take place in the remote location. Today Western Union maintains bank accounts, and if they need more cash in one place they take it out of the bank. If they have a cash surplus in another place, they take the cash to the local bank, and then send a wire to the place the cash is needed.

The only thing that distinguishes Western Union from hawala is that Western Union is regulated in India. And they are quite happy to help the Indian central bank rip off expatriate Indians by selling them too few rupees for their foreign-earned dirhams, dollars, and other currencies. This, then, is what makes Western Union a great patriot and supporter of the U.S. Treasury.


The first paragraph of the Time article mentioned above, "A Banking System Built for Terrorism" (Oct. 5, 2001), paints a sinister picture: "In the labrynthine depths of old Delhi, where the lanes are too narrow even for a rickshaw, men drink tea and chat in shabby offices. Nobody seems to be doing any work, until the phone rings. Then, numbers are furiously scribbled, followed by some busy dialing and whispered instruction. Although it's far from obvious in the innocuous setting, these men are moving money — to exporters, drug traffickers, tax evaders, corrupt politicians. And terrorists."


Let's rewrite this paragraph, shall we? "In the labrynthine depths of a nondescript floor in Manhattan's Citibank tower, where the aisles between cubicles are too narrow even for a rickshaw, men sip coffee long since gone cold and stale, and chat among themselves across their shabby partitions. Nobody seems to be doing any work, until the phone rings. Then, numbers are furiously scribbled, followed by some busy dialing, whispered instruction, and tapping at the computer keyboard. Although it's far from obvious in the innocuous setting, these men are moving money — to exporters, drug traffickers, tax evaders, corrupt politicians. And terrorists."

Clearly it's time to shut down Citibank.