The expanding UAE banking sector continues to show robust earnings, with finance houses devising increasingly sophisticated products to compete for market share. But despite innovations in products and services, an age old financial practice is increasingly popular: the traditional remittance system of hawala used by foreign workers to send money home.
An influx of low-paid migrant workers to the UAE to meet the accelerating needs of the construction and service industries has boosted the flows of cash sent through this system, which predates the modern banking system.
No cash is actually transferred through the Hawala remittance system. It is based on a relationship of trust between a trader and his contact in a client's home country who pays out the cash. The contact is repaid by recalling the debt or favour, which is determined by the nature of their relationship. Its use is not limited to low-income workers, but they dominate the hawala client base because it is a quick and inexpensive way to send cash.
“People from the villages are not educated and they follow their friends,” says a Dubai-based foreign exchange trader. “It is faster, cheaper and often people can get credit through [hawala] exchanges.”
Paid in cash and excluded from the official banking system, large numbers of workers are using this informal, yet legal, money transfer system to send money back to their families.
“There is no other way for them to send money,” says one Deira-based hawala trader from his 12th-floor office overlooking Nasser Square. From this noisy space he services clients sending cash back to Iran and Afghanistan.
The customer profile of hawala use in the UAE reflects the breakdown of nationalities of migrant workers, as well as the flexibility of their home currency regimes. Indians, Pakistanis and Nepalese are the most prevalent users.
The practice is not unique to the Emirates, being used by any expatriate who wants to send money home cheaply and quickly. But the size of the UAE's South Asian expatriate community means the market for informal money transfers is huge.
“Hawala is definitely growing,” says Hannah Scobie, chairperson of the Euro--pean Economics & Financial Centre. “If you look at the size of transfers and the size of the immigrant population, it is growing everywhere.”
Estimates for the amount of money transferred through hawala from the UAE are as high as $10bn a year. Up to 90 per cent of the money transfers to India use this system.
Hawala use reflects the patchy reach of the banking system in these migrant workers' home countries. It is most common where the recipients of remittances do not have access to a bank account.
In Nepal, more than 50 per cent of remittances are estimated to be sent through hawala, largely because of geography and restricted branch networks. “Contacts deliver the cash to your doorstep,” says the foreign exchange trader.
Because transfers are untraceable and it serves as a means to avoid tax and currency controls, hawala is associated with the black economy. As remittance levels rise, this is an increasing concern. “There is increasing awareness of the issues among the government and the private sector,” says Valerie Schilling, principal administrator of the Financial Action Task Force. “The UAE is not of particular concern but it has a significant financial centre and if you have that there is the opportunity to launder money, and for terrorist financing.”
Hawala contravenes key anti-money laundering tenets that demand money traders know their customers, the source of the funds, where they are going and the purpose of the transfer. Official remittance firms are obligated to report suspicious transactions. None of these apply to hawala. The Central Bank of the UAE has taken steps to regulate the practice by encouraging traders to register themselves. However, its ability to monitor hawala is limited.
“What can the state do?” asks Eckhart Woertz, programme manager, economics, of the Gulf Research Center. “All it takes is a mobile phone and some kind of shop to operate from for the business to take place.”
A decline in the commercial value of transferring funds through the system is more likely to lead to its demise. A key appeal to low paid workers of the hawala system is that traders charge lower fees than official remittance businesses. But the differential is shrinking. Under pressure, hawala traders have reduced their own fees from one rupee a dollar to 50 paise.
The UAE Labour Ministry's announcement in mid-December that in the new year all workers should be paid electronically will, if enforced, force low-paid workers to open bank accounts. However, banks, which are not enthusiastic about hawala, are even less keen to service low-waged customers.
$10bn is the value of money transferred through Hawala in the UAE annually.
Hawala: how it works
Hawala is a means by which a person in one country can send cash to another without a record of the transaction. No cash changes hands. It is a money transfer system based on trust and requires an established relationship between the person or business providing the transfer service and the entity or individual in the target destination that can deliver the cash to the recipient. These are usually relationships built on business or family ties.
The client approaches a trader to send money on his behalf for a small fee. The trader relies on volumes to make his money. He arranges for his contact in the client's home country to take the sum to the recipient. The recipient, who may live in a remote area or need the cash urgently, can receive the cash quickly. The contact in the home country can be reimbursed in many forms, including goods sent from the first trader, the cancellation of a debt or cash from another source.
The system is paperless and depends on the reliability of the trader and his contact.
“Our customers trust us,” says a Deira-based hawala trader. “We have exchanges in Iran and Afghanistan, where we have been running businesses for 10 years and we have a name in the market.”
Business comes by word of mouth and an office or exchange is not necessary for a hawala transaction to take place. It can even take the form of a transfer of funds between family members split between the UAE and their home country.
A hawala business can also ride on the back of other commercial operations, which may be the root of the relationship between the two traders. The sums to be sent are only limited by the size of the pools of cash available to the trader in the recipient's country.
“You can use the back of a hairdressing salon as a location to make informal transfers,” says Hannah Scobie, chairperson of the European Economics & Financial Centre.
A common use of hawala is in real estate tran-sactions in India as it allows both vendors and sellers to circumvent currency controls and taxes.
A non-resident Indian living in the UAE may not disclose to the Indian government the full value of land or property being purchased in India for tax reasons. But he still has to pay the difference in price to the vendor.
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