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Monday, October 5, 2009

Hundi versus banking system

Hundi versus banking system
EDITORIAL (October 04 2009): Despite the recent crackdown against money-changing companies, involved in illegal cash transfers from abroad through hawala/hundi networks, there has been no let-up in such transfers, a survey conducted by Business Recorder has revealed. The survey has identified causes of why the Pakistani expatriate community continues to place predominant reliance on the hundi/hawala networks, despite the availability of legal banking channels.According to the findings of the survey, the hawala/hundi system remains the fastest and the most reliable mode of money transfer, with cash delivery made at the recipient's doorstep, even in far-flung areas with no bank branch for miles around. Secondly, the exchange rate offered by the banks is less favourable than that offered in the open market, which constitutes an added attraction for both the sender and the recipient.During the investigation against Khanani and Kalia International (KKI), it came to light that money-changers had transferred around 10 billion dollars out of the country in the last five years, with the average daily transfer being $10 million! This figure provides a measure of the vastness of the hundi/hawala network and the harm it is causing the national economy.It is rightly argued that hundi/hawala money transfer has become a major impediment in improving the country's forex reserves, due to only the limited transfer of funds by overseas Pakistanis through legal channels. The hundi system allows its operators, based in foreign countries, to keep the hard currency, and transfer the amount to the recipient in Pakistan in the local currency.This has blocked a major part of the remittances from reaching the country. The operators of the hundi/hawala networks are, in effect, operating a parallel banking system, whose acceptability hinges essentially on its efficiency and credibility, backed up by relatively lower charges. After 9/11 and the start of US-led war on global terrorism, cash transfers have understandably come under increased focus of investigation, particularly transfers made through illegal channels such as hawala/hundi networks.Another focus of law enforcers has been the movement of drug money, which is known to have been used in financing terrorist networks. Laws have been enacted, not only to combat all undocumented cash transfers, but also to allow compulsory investigation into all suspicious transactions. In this connection, the Pakistan government has activated the cyber crime wing to track down and apprehend those involved in the illegal business, which is a step in the right direction.The Anti-Money Laundering Ordinance 2007 has empowered the Financial Monitoring Unit (FMU) of the State Bank of Pakistan to collect the necessary record and information from any person linked to the transaction for investigating suspicious currency transactions. Necessary amendments have been made in the ordinance to block suspected transactions.A change has been made in the Anti-Money Laundering Ordinance to make it mandatory for the reporting entities, including financial institutions, non-financial businesses and professions to report suspected transactions within seven days to the FMU. All these are useful safeguards against the illegal transfer of money.However, major attractions of the hundi/hawala system include; one, prompt cash delivery at the doorstep; two, procedural simplification, unlike the complicated banking system involving increasing documentation; and three, reliability of cash delivery.As our report has pointed out, unless and until the legal banking system is suitably simplified, people will continue to prefer the hundi system to legal banking channels. A major plus point of the hundi/hawala system is that instead of the recipient coming to collect the cash, a representative of the network delivers at the recipient's doorstep. This is a great facility, especially for women recipients. The formal banking system should also provide this service through mobile banking.Secondly, there is a need to introduce practicable modifications in the banking system, as much as feasible without compromising on the essentials, which will help induct the amount of dynamism needed by the banking system to be able to compete with the hundi/hawala networks. Preference should therefore be given to procedural simplification in the banking system and the introduction of the mobile banking units to enhance the facility's outreach and accessibility.Thirdly, the rural network of Pakistan Post should be pressed into service to cater to the needs of the recipients living in far-off areas. Making the banking system more service-oriented and customer-friendly can go a long way in containing the spread of hawala/hundi networks. Let the banking system, with its immense manpower and financial resources, compete with the hundi/hawala networks, and drive them out of business through provision of better service.
Copyright Business Recorder, 2009

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