Informal Funds Transfer Systems : An Analysis of the Informal Hawala System

Mohammed El Qorchi, Samuel Maimbo, and John Wilson

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781589062269
• Year: 2003

NONE

Contents

Foreword

Preface

I Overview

Background, Definitions, and Recommendations

Implications for Work of the World Bank and the IMF

II Introduction

III Features of the Informal Hawala System

Definitions and Conceptual Framework

Operational Characteristics

IV Origin and Modern Uses of IFT Systems

Historical Perspective

Legitimate Uses

Illegitimate Uses

V Economic Analysis of Informal Hawala Transactions

Settlement Procedures

Balance of Payments

Macroeconomic Implications

Quantitative Dimensions

VI Legal and Regulatory Aspects of the Informal Hawala System

Hawala-Recipient Countries

Hawala-Remitting Countries

VII Conclusions

Appendixes

I Types of Settlement for Hawala Intermediaries’ Remittances

II Formulation and Simulation of the Quantification Model

III Regulatory Frameworks for Money Exchange and Remittance Business

IV Examples

Bibliography

Boxes

4.1. Hundi in India

4.2. Terrorism Financed by Informal Hawala: A Hypothetical Example

Appendix Boxes

A1.1. Informal Hawala: Levels of Financial Consolidation

A4.1. U.A.E. Money Transfer Form for Money Changers

A4.2. Registration Requirements for Money Service Operators in the United Kingdom

Text Tables

3.1. Prototype Informal Hawala Remittance Transaction

5.1. Types of International Funds Transfer Systems

Appendix Tables

A1.1. Settlement via Reverse Hawala Transaction from Country B to Country A

A1.2. Bilateral Financial Settlement Through Bank in Country A

A1.3. Bilateral Settlement via Exports to Country B

A1.4. Clearing by Means of International Services for HB Paid for by HA

A1.5. Clearing by Means of Nonbank Capital Flows

A2.1. Parameter Values Used in Informal Hawala Estimates

A2.2. Summary of Estimated Private Remittances, 1981–2000

A2.3. Recorded Private Current Transfers

A2.4. Black Market Exchange Rate Premiums

A2.5. Simulated Shares of Informal Hawala in Total Private Transfers

A3.1. Pakistan

A3.2. United Arab Emirates

Text Figures

3.1. Prototype Informal Hawala Transaction

5.1. Balance of Payments Entries in Remitting and Recipient Countries

Appendix Figures

A2.1. Estimation Function for Hawala Share in Total Private Remittances

A2.2. Recorded Private Transfers

A2.3. Estimated Hawala Share in Total Private Remittances

A2.4. Estimated Value of Hawala Transfers

The following symbols have been used throughout this paper:

… to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

– between years or months (e.g., 2000–01 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 2000/01) to indicate a fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Appendix I Types of Settlement for Hawala Intermediaries’ Remittances

Table A1.1. Settlement via Reverse Hawala Transaction from Country B to Country A

Table A1.2. Bilateral Financial Settlement Through Bank in Country A

Note: HA deposits $ in HB’s bank account; bank intermediation assumed. Bank A is in country A; exchange controls may impede settlement in country B.

Table A1.3. Bilateral Settlement via Exports to Country B

Note: HA pays for exports shipped to HB.

Table A1.4. Clearing by Means of International Services for HB Paid for by HA

Note: HB purchases services from country A; these services paid for by HA, e.g., Pakistan Hajj sponsorship scheme; HB’s net worth declines due to services expenditure.

Table A1.5. Clearing by Means of Nonbank Capital Flows

¹ HA purchases securities, real estate, and so on, in the name of HB, using cash provided by hawala customer.

² HB thereby exchanges claim on HA for external portfolio assets.

Box A1.1 Informal Hawala: Levels of Financial Consolidation

Likelihood of “offsetting” reverse transactions is small.

Country A likely has open capital markets and no currency controls.

Country B may have restricted capital markets and foreign exchange controls.

Higher level “financial” intermediary assumes that balances and amounts increase.

Some empirical evidence of such consolidation.

Intermediaries likely residents/entities in countries A and B.

No empirical evidence on number of “consolidation” levels.

Goods market: for example, exports/imports; smuggling.

Financial market: accounts with financial institutions.

Miscellaneous international transactions: for example, capital flight; foreign property purchase.

At this point, all parties are cleared and settled.

Likelihood of interaction with formal financial system increases, but hawala background obscure.

Chance of exchange control violations especially in recipient countries.

Appendix II Formulation and Simulation of the Quantification Model

This study used a simple model of hawala remittances constructed for 15 recipient countries that met certain conditions for informal activity, principally (1) appreciable numbers of nonresident nationals, (2) a history of parallel exchange markets with statistically available data on parallel rates, and (3) available statistics on recorded private transfers. For present purposes, the countries selected were Algeria, Bangladesh, Ecuador, El Salvador, Guatemala, India, Indonesia, the Islamic Republic of Iran, Pakistan, the Philippines, Sri Lanka, Sudan, Tanzania, Turkey, and Zimbabwe.³⁹ In each case the model was applied to cover experience from 1981 to 2000, using officially compiled balance of payments data on inward private transfers and information on parallel market exchange rates, if any, as well as applying the information mentioned above.

The model has the following form for each country examined. The estimated share of hawala remittances in total private transfers is specified as

where

The model is specified as a cubic function on the assumption that the “hawala share” of total remittances starts at some generally nonzero level if/when B = 0, and rises through a certain range of values for B, reaching a peak at some value beyond which RI/R stabilizes at MAX (RI/R)* < 1. Obviously, this is just a way of saying that hawala transfers cannot exceed total remittances, measured and unmeasured.⁴⁰

Assumptions play a large role in this model, because RI cannot be measured directly, and there is no obvious way to assess an error structure in estimation.

To further parameterize the structure, we assume that the inflection point in the curve traced by this model occurs at a value of B* = X, and the maximum value of the hawala share, say (RI/R)* = MAX, is reached at Y = 2X.⁴¹ For values of B > Y, it is assumed that RI/R stabilizes at MAX. That is, at least some small portion of total transfers will continue to go through recorded channels, no matter how strong the exchange rate incentive to use unofficial ones.

The contour of this reaction function (that is,RI/R responding to exchange market incentives) seems to be plausible, but the model has to be imposed on available data. Results are obtained by selecting values of the intercept MIN and MAX and X, according to country characteristics and exchange rate experience. For instance, many observers have noted that hawala is deeply entrenched in Pakistan, which suggests the choice value of MIN for Pakistan is well above zero and that of MAX would be high, say around 0.9. That is, the assumptions for Pakistan suggest that hawala remittances may be substantial, even if B is not exceptionally high, and high levels of B may not be needed for hawala remittances to account for a large share of the total.

Another factor to be considered—in choosing “X,” in particular—is the exchange rate history of each country in the sample. In some countries there may be parallel markets, but without large or sustained divergences over time between official and black market rates. In others, for example, Algeria or the Islamic Republic of Iran, there is a long history of parallel exchange rates that are far above official rates. This difference in experience raises the analytical problem of how such countries respond compared to those in which divergences have not been so extreme or protracted. If there is, say, a 100 percent divergence in exchange rates, would a country in which 100 percent might be “below average” have the same degree of hawala remittance activity as a country where this same divergence might be above average? For purposes of this exercise, at least, we assume that “peak levels” of hawala activity occur at higher levels of exchange rate divergence (B) in countries with a history of large divergences than for those with a history of small divergences. Thus, peak activity (RI/R) for Algeria, for example, might be reached at a level of B that is well above the maximum for the Philippines.

Figure A2.1 shows the general form of the simulation function. In this figure, MIN = 0.1, MAX = 0.9, X = 50, and Y = 100.

Figure A2.1. Estimating Function for Hawala Share in Total Private Remittances

Parameter choices for the 15 countries included in our sample are shown in Table A2.1.

Table A2.1. Parameter Values Used in Informal Hawala Estimates

¹ Expressed as RI/R.

² Bla...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Preface
• I Overview
• II Introduction
• III Features of the Informal Hawala System
• IV Origin and Modern Uses of IFT Systems
• V Economic Analysis of Informal Hawala Transactions
• VI Legal and Regulatory Aspects of the Informal Hawala System
• VII Conclusions
• Appendixes
• Bibliography
• Boxes
• Footnotes