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Pakistan Cripples the Money Movers

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    Pakistan Cripples the Money Movers

    Partly brought on by external factors, but also by the bold moves made of the Pakistani government, we are now looking at billions being pumped into the the national coffers. Great news for Pakistan's future economic prosperity and potential.

    Pakistan Cripples the Money Movers

    As it stamps out the age-old hawala system of unrecorded international currency transfers, the country's economy stands to gain

    Let's call him Mohammed Siddiq -- not his real name but pretty common in Pakistan. In his 23 years as a hawala broker, Siddiq has never seen such a slowdown in business. He has been operating his unlicensed money-changing and transfer business in the heart of Karachi since he inherited it from his father at the age of 14. In the last four months, his hawala revenues have dwindled from an average of 50,000 to 100,000 rupees a month ($800 to $1,600) to just 2,000 to 3,000 ($33 to $50). "My business has really suffered," says Siddiq. "My regular customers have all become scared. They don't come to me anymore." Reason: The war on terrorism is exacting a heavy toll on this commonly used Central Asian system.

    Hawala -- a Hindi word for trust -- is an extensive international money-transfer system based around the triangle of Pakistan, Dubai, and parts of India. It moves money anywhere in the world within hours -- without any record of the transaction. It has long been the channel of choice for the estimated 4.5 million expatriate Pakistanis sending money back to their native country because it's fast, reliable, and cheap.

    MONEY TRAIL. Hawala brokers ensure delivery within a matter of hours directly to the home of the client in the remotest of villages inside Pakistan. Banks charge higher fees -- up to two or three times as much -- and take up to several days to deliver the cash. In a typical transaction, a customer in, say, Karachi, contacts a hawala broker and hands over the sum in Pakistani rupees to be wired to a relative in, say, Hong Kong. Because the system is based on personal references and trust, no receipts are issued. The broker then calls a fellow dealer in Dubai who in turn gets in touch with an associate in Hong Kong, who then calls the recipient and hands over the money in Hong Kong dollars. Each dealer makes a commission. While theoretically the system could operate in any country, most transactions either originate or end in Pakistan.

    The U.S. government has alleged that hawala has also been the channel of choice for terrorist networks to move money across international borders. Since September 11, Washington has hit at the heart of that financing system by applying pressure to the United Arab Emirates government, whose central bank has since imposed reporting requirements. This has hit hawala hard: Dubai had been the "middleman" for the bulk of transactions, due to its freedom from regulation. The new reporting requirements have taken it out of the picture.

    "75% GONE." Hawala brokers, having lost Dubai as a free-trade zone, have not found an alternative avenue to operate through. Indeed, thousands of dealers across Pakistan have watched their thriving businesses falter and in some cases collapse. Many have even undercut the interbank dollar rate to entice clients back. But to no avail. "Hawala business is 75% gone now," says Malik Bostan, president of the Forex Association of Pakistan, a Karachi-based trade group. Says one hawala broker in the city: "Closing off the Dubai route has caused very big problems for us. I used to do four transactions a day, and now I'm down to four a week. I now have to think about doing some other business instead."

    While the crackdown is bad news for hawala brokers, it's good news for Pakistan's starved economy. Oil and petroleum imports are essential. For this, the country needs American dollars and foreign exchange. Trouble is, the bulk of incoming dollars come through systems like hawala -- not through official banking sources -- so they all go underground. Bankers estimate that expatriate Pakistanis use hawala to send $11 billion a year into the country, while remittances through official banking channels average just $1 billion a year.

    FLUSH WITH DOLLARS. Since the crackdown, however, official remittances have tripled. According to the the most recent figures available from the State Bank of Pakistan, monthly remittances in November climbed to $260 million, from an average of $80 million. Mohammed Yaseen, treasurer at Habib Bank, the country's second-largest bank, estimates that official remittances will rise from $1.07 billion last year to $2 billion by the end of fiscal 2002. Within the next two to three years, he says, they could hit $5 billion.

    As official home remittances replace hawala, banks will become flush with American currency, because most transactions start out as dollars, while the recipients of the transferred money get rupees. This will help keep the rupee strong vs. the dollar. In the past, when foreign-exchange reserves have fallen low, Pakistani governments have frozen foreign currency accounts held within the country. And this, in turn, has caused massive declines in the rupee's value. The State Bank of Pakistan has seized the opportunity to increase official remittances, and it has instituted banking reforms as well. "The initial impetus came from the U.S. crackdown," says Ishrat Husain, governor of the State Bank of Pakistan. "Banks have now...positioned themselves [to distribute remittances] very quickly to families in Pakistan." Habib Bank has automated its systems to maintain a database of all remittances and is introducing a handful of new products that will ensure delivery of cash within 24 hours.

    No one expects hawala to make a comeback any time soon, and Pakistan's brokers are out looking for other sources of income. But the country's finance managers are all too happy to have this unregulated business fall by the wayside if it means bolstering the rupee and showing a more transparent economy to the world. Good news for Pakistan -- but more bad news for Mohammed Siddiq.

    Just what Dhp ordered . This is exactly what Pakistan requires. Inwards Investments will increase making Pakistan strive forwards to become a Huge economy within the Region.

    [This message has been edited by Dil he Pakistani (edited February 03, 2002).]


      If I am a [poor labourer in Saudi Arabia and want to send 10,000 Rs os saved money to my family..sending it through the fastest Bank Service in pakistan will take 1-3 days and I will end up paying an extra thousand and transfer fees...
      Closing down the hawala system will hit the poor hardest.
      How can a man die better than facing fearful odds for the ashes of his fathers and the Temple of his Gods?


        Zakk the End justifies the Means. Yes their will be some who will get less for their foreign exchange but Pakistans INTERNAL stability and Economic Development Are far MORE IMPORTANT. Pakistan needs foreign exchange through Official Channels to EXPAND and to invest within itself. If we STRIVE to have a STRONG economy than many of you guys can return to Pakistan for your employment.


          so dubai banks had to adjust to deal with this stuff. I hope that terrorists start saving their money in banks in switzerland and Luxembourg. Maybe then they will hafta start doing more reporting so we can find out funds Benazir type ppl have stashed away there.

          [This message has been edited by Fraudz (edited February 04, 2002).]
          The greatest trick the devil ever pulled was convincing the world he did not exist. And like that... he is gone.


            One of the Kings of Hawala namely Dawood is sitting right in Karachi, so Pakistan has all the expertise needed if they want to crack down on Hawala!!


              In my opinion, it is only going to fire back. There are thousands of hundi dealers working in the Gulf states. It is only going to make it more tempting for remitters to get favorable rates. The underground economy accounts for roughly 80%, there is tons of black money that people want to take out of Pakistan. If someone can get 70ruppees for a buck (official rate close to 55) why would one transfer money thru a bank?

              I think closing unregulated business is like banning alcohol and prostitution in Pakistan. We all know what happened. Pakistan has one of the highest drug addiction rates in the world along with a hooker on ever block.



                The things that really hinder the overseas Pakistanis to use legitimate means for sending foreign money are DELAY and amount of paper work required. On other hand HUNDI not only minimise delay but also give better return for foreign currency.

                If Govt of Pakistan really wants to compete with HUNDI, then they have make similar arrangements like HUNDI. For example, what stops State bank from providing franchise money dealers aboard?? If Govt can set-up such services for overseas Pakistanis delivering faster money transfer at open market rate I see can see an increase in revenue and blow to HUNDI market.


                  I wonder if the Wells Fargo franchise terms
                  are lenient. Money transfer under government
                  supervision looks like a growth business in
                  Muslim countries. Musharraf ought to help
                  set up some of these hawalas with proper
                  technolgy and office space. The business
                  must be as old as the hills. Pakistan must
                  act to keep banking indigenous or the big
                  conglomerates will muscle in. Does anyone
                  know people in the telecom and IT field?