I write this column from Afghanistan, about an ancient form of banking that has a sordid reputation in India but a splendid one in Kabul. In India, we regard hawala as criminal money-laundering. We think it uses crooked currency traders to smuggle vast quantities of foreign exchange out of the country.
Internationally too, hawala has recently acquired a bad name because it is used by Al Qaeda to finance operations in diverse countries.
And yet, in Afghanistan it is regarded as such an honest, reliable institution that it is going to be used by the government to promote the quality and integrity of governance. Finance minister Ashraf Ghani moans that large chunks of budgetary allocations sent from Kabul do not reach their destination.
At a recent meeting, he estimated that 10 to 30 per cent of the money was sucked out en route. To overcome this, he declared, he would use hawala operators to get the money safely to teachers, health workers and other such destinations. He said he had contacted the president of the Hawala Dealers’ Association (an old, established, entirely legal body in Afghanistan), and was arranging to use this centuries-old method of money delivery.
You might think that the Afghan finance minister is being perilously adventurous. You might think that other, more conservative institutions would refuse to even contemplate hawala. Well, wake up to reality. No less an institution than the World Bank has decided to use hawala in Afghanistan to reach beneficiaries in thousands of villages.
The World Bank is supporting the National Solidarity Programme of the Afghan government, which gives grants to village communities for projects of their own choice. The formal banking system in Afghanistan has collapsed, and could never reach
distant villages in any case. The official administrative machinery is moribund. So the government has asked the World Bank to permit the use of the hawala system to get money to village communities. The Bank has agreed. Up to $200 million of funds for communities may be handled by hawala operators. This will be not only the cheapest, most efficient delivery system but also the most honest.
The very word hawala is derived from an ancient Persian word for trust. The hawaladar (hawala operator) in Kabul is a figure of trust. For centuries hawaladars have created networks based on trust that facilitate money transfers across Afghanistan, indeed across the globe.
The system ensures compliance of money delivery by the use of force rather than the law courts. This is too much for liberals in the West to stomach: they equate the use of force with thuggery and extortion. But the fact is that the hawala system uses force to target embezzlers trying to cheat, not customers. Their use of force has never degenerated into thuggery, and indeed cannot: the very existence of the hawala system depends on public trust.
In India, Rajiv Gandhi once said that 85 per cent of all money for food-for-work programmes disappeared into various pockets. An exaggeration maybe, but it highlighted the fact that only a fraction of budgetary allocations reach intended beneficiaries. So, should India follow Afghanistan’s example, and harness the hawala system instead of simply denouncing it?
Hawala in India too was for centuries a respected institution. Only in recent times, with the imposition of banking and foreign exchange controls, has hawala become illegal. The RBI allows only institutions governed by its rules to function, supposedly in the interests of consumers.
Yet banking scandals are commonplace, and banks licensed by the RBI have been guilty of a multitude of crimes and sins. Hawala has never defrauded customers on anything like the scale that legal banks have.
Foreign exchange laws have made illegal transactions that for centuries were entirely legal. The change in law has converted hawaladars from money deliverers to blackmarketeers in currencies, and accounts for their sordid reputation.
Yet their conduct is analogous to that of Swiss bankers, who also have a reputation for probity while accepting deposits from tax evaders. Income tax was invented only 100 years ago or so, and Swiss bankers do not view evasion of this as criminal behaviour.
So, instead of denouncing hawaladars as criminals, can we harness them for productive use? Can we, like Afghanistan, devise community-based programmes where the funds are not swallowed up en route by administrative costs, kickbacks and theft?
Maybe Kerala should take the lead in this. Hawala operators in the state have for decades been a fast, honest and reliable way of getting money from relatives in the Gulf to households in every corner of Kerala. Why not use the same system to cheaply and honestly deliver government funds to village communities for community-based development? Bimal Jalan, please do not stand in the way.