Hawala - the traditional banking system

Blog No. #409

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Hello Everyone,

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Hawal is one of the traditional banking systems which is still very much active in major Indian cities. Those people who do not have access to a bank or any other money transferring systems use Hawala. Hawala is very much anonymity and trust-based system so one does not have to carry much of the paperwork or pass legal procedures to send money to their people. For instance, you can say Hawala is somewhat similar to blockchains but it is a trust-based system whereas blockchain transaction works on proof of work or POW. Frequent sharing or passing of the money can be done without the need of internet. Previously in absence of internet or government, this was the system which is adopted by the economic structure of many villages or states.

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Before we start with an example, one must note that this system is alive on trust and the relationships. So let's understand how this system works,

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Sender:- Tom
Location - Mumbai
Sends Via Broker A

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Receiver:- Sue
Location - Delhi
Receives Via Broker B

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Scenario

Tom who lives in Mumbai wants to send $100 to Sue who lives in Delhi. Tom will talk to one of the Hawala Agent whom he trusts or knows. Tom will send the details of Sue and the money to Broker A (Hawala agent). Broker A will call the next agent located in Delhi. Broker A will ask Broker B to send $100 to Sue. Till now there is no moving of money but the transaction is taking place. Broker B will send the money to Sue and that's how Broker A owes money to Broker B. To add more, password thing is often used to verify the transaction.

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So there is no actual moving of money in Hawala system, instead, agents transact with the help of money they have and that's how trust and relationship come in the play. Broker B trusts on Broker A that on someday A will pay him $100.

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I believe that you got a glimpse on the Hawala system works and why trust is important. The transaction is carried out by trusted agents and entities only.

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Example:-

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I want to send 100 Rupees to my friend Gopal living in Prayagraj. I will ask the agent "Rahul" to send this money and give him money and details. The agent will talk to another agent "Aakash" located in Prayagraj and say him/her to pay Gopal 100 Rupees. Till now my money is only in the hand of Rahul and Akash pays Gopal because of the trust that Rahul will pay him 100 Rupees.