I. OVERVIEW
In
wake of September 11 terrorist attacks on USA, attention was drawn to age-old, secretive, and globe-spanning banking system developed in Asia and known as "Hawala" (to change, in Arabic). It is based on a short term, discountable, negotiable, promissory note (or bill of exchange) called "Hundi". While not limited to Moslems, it has come to be identified with "Islamic Banking".
Islamic Law (Sharia'a) regulates commerce and finance in Fiqh Al Mua'malat, (transactions amongst people). Modern Islamic banks are overseen by Shari'a Supervisory Board of Islamic Banks and Institutions ("The Shari'a Committee").
The Shi'a "Islamic Laws according to Fatawa of Ayatullah al Uzama Syed Ali al-Husaini Seestani" has this to say about Hawala banking:
"2298. If a debtor directs his creditor to collect his debt from third person, and creditor accepts arrangement, third person will, on completion of all conditions to be explained later, become debtor. Thereafter, creditor cannot demand his debt from first debtor."
The prophet Muhammad (a cross border trader of goods and commodities by profession) encouraged free movement of goods and development of markets. Numerous Moslem scholars railed against hoarding and harmful speculation (market cornering and manipulation known as "Gharar"). Moslems were first to use promissory notes and assignment, or transfer of debts via bills of exchange ("Hawala"). Among modern banking instruments, only floating and, therefore, uncertain, interest payments ("Riba" and "Jahala"), futures contracts, and forfeiting are frowned upon. But agile Moslem traders easily and often circumvent these religious restrictions by creating "synthetic Murabaha (contracts)" identical to Western forward and futures contracts. Actually, only allowed transfer or trading of debts (as distinct from underlying commodities or goods) is under Hawala.
"Hawala" consists of transferring money (usually across borders and in order to avoid taxes or need to bribe officials) without physical or electronic transfer of funds. Money changers ("Hawaladar") receive cash in one country, no questions asked. Correspondent hawaladars in another country dispense an identical amount (minus minimal fees and commissions) to a recipient or, less often, to a bank account. E-mail, or letter ("Hundi") carrying couriers are used to convey necessary information (the amount of money, date it has to be paid on) between Hawaladars. The sender provides recipient with code words (or numbers, for instance serial numbers of currency notes), a digital encrypted message, or agreed signals (like handshakes), to be used to retrieve money. Big Hawaladars use a chain of middlemen in cities around globe.
But most Hawaladars are small businesses. Their Hawala activity is a sideline or moonlighting operation. "Chits" (verbal agreements) substitute for certain written records. In bigger operations there are human "memorizers" who serve as arbiters in case of dispute. The Hawala system requires unbounded trust. Hawaladars are often members of same family, village, clan, or ethnic group. It is a system older than West. The ancient Chinese had their own "Hawala" - "fei qian" (or "flying money"). Arab traders used it to avoid being robbed on Silk Road. Cheating is punished by effective ex-communication and "loss of honour" - equivalent of an economic death sentence. Physical violence is rarer but not unheard of. Violence sometimes also erupts between money recipients and robbers who are after huge quantities of physical cash sloshing about system. But these, too, are rare events, as rare as bank robberies. One result of this effective social regulation is that commodity traders in Asia shift hundreds of millions of US dollars per trade based solely on trust and verbal commitment of their counterparts.
