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Hawala is Arabic for transfer. A person (remitter) in country A sends some money denominated in country A’s currency to a person in country B without the use of normal mode of remittance i.e. banks and financial institutions is called “Hawala”. Hawala is often defined as a process of movement of money without actually moving it. In under developed countries, like Pakistan, where the foreign exchange difference is pretty large, Hawala system has grown itself as an institution running parallel to banks and other financial institutions. Although it is illegal to involve in remittance through Hawala, the pros of using hawala far exceed the cost and there is also a rare chance of getting caught. The very foundation of Hawala is trust that people show in the brokers of Hawala and these hawaladars have maintained their image which has helped it in becoming such a large network in Pakistan. The money remitted through Hawala never finds its way to the central bank and thus never shows up in the foreign exchange reserves of the country to which the money is remitted.

Hawala Process:
                             Usually the hawaladar is an entity (a person) with business extending to multiple countries. For example, a hawaladar in USA would have a business centre in USA and in Pakistan and other countries. A remitter in USA would give certain amount of money (in dollars) to hawaladar and would specify a person in the receiving country to which the money is to be transferred at a specified rate. Hawaladar charges a fee for his service. The remitter has done his part of the job and the money is now in hands of hawaladar. Hawaladr would direct his offices in Pakistan to give certain amount of money to a specified person in Pakistani Rupees. Hawaladars settle the balance between themselves by sending goods or reimbursinf any creditors of each other in their respective countries.

Benefits of Hawala Over Normal Procedure:
  •       Normal procedure takes about 72 hours while Hawala takes 24 hours to transfer money
  •       Broker fee is substantially low as compared to bank fee
  •       Hawala offers better exchange rate

Impacts on Pakistan 
                                It has been seen that the money remitted to Pakistan through Hawala is approximately equal to the exports of Pakistan. If the money were to be transferred through legal systems via banks, this would have made its way to the foreign exchange reserves and our current account deficit would have been a surplus instead.

Initiatives taken by Government:
                                       Pakistan Remittance Initiative (PRI) is a joint initiative taken by State Bank of Pakistan, Ministries of Finance and Ministries of overseas Pakistanis. This initiative has been taken in order to facilitate the flow of remittance into Pakistan. Overseas Pakistanis or people living abroad can remit their funds through this service free of charge and free of taxes. Under this initiative, SBP will encourage financial institutions to increase their marketing so as to attract more remitters towards legal procedure. In return those institutions will get incentives. Incentives shall start from bringing at least US$ 100 million from one particularjurisdiction in one year. 0.5% reimbursement of the marketing expense for remittance between 100m-400m.0.75% of marketing expense reimbursement to those who remit 400m-800m from a particular jurisdiction.Currently it takes at least 72 hours for Pakistani expats to bank-transfer money to Pakistan. In the government’s project involving the State Bank of Pakistan, it will take only 24 hours to make a remittance.

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