Hawala Banking vs. MPESA

In the Middle East and Asia, there is a prominent alternative to the banking system used for money transfers.  In fact, there is a system in place in some countries that allows individuals to make quick money transfers, without having a stable bank account.  This program is often used by people in rural areas, where there is little access to banks or the government’s instability leads to a lack of trusted official financial services.  It may seem that I am discussing one of the new “m-banking” systems, such as Kenya’s popular MPESA system.  However, the system I am describing has been in place for hundreds of years.  This system is known as the Hawala system.

Hawala, is a system of money transfer inherently tied with the religion of Islam for hundreds of years.  The process of Hawala transfer begins when a person visits a private Hawala agent and asks that money is given to an acquaintance in another location.  The Hawala agent then contacts (in modern times calls) the second agent who gives the cash to the original customer’s acquaintance in another city.  All of this is done for a small fee for the customer and no money actually changes hands between the two agents.  The debt between the agents is kept track of on written or electronic logs, and then settled at a later date. (http://www.wnpt.org/productions/nextdoorneighbors/somali/money.html#1)

Hawala and MPESA have not yet been hurt by the development of
the new "disembodied hand in phone" transfer process.

This seems like a wonderful system, providing money transfers at low cost, without needing a bank account which can be difficult for poor peoples to acquire with their little amounts of capital/income and possibly weak credit/financial histories.  This process, as stated before, also sounds very similar to the “m-banking system” that has popped up in recent years.  The m-banking system MPESA of Kenya (as we discussed in class) allows customers to visit an agent or kiosk, similar to the agent in Hawala, and give cash in order to put that same amount on the customer’s phone.  That money can then be transferred via phone, allowing a second party to visit an agent in a second location and to receive cash from that station.

MPESA has been given support from the west, including from the UK’s Department for International Development.  Meanwhile, the strikingly similar Hawala system has been under attack from the west, since the events of 9/11.  The primary concern is that Hawala, which is largely unregulated, will be used by terrorists to transfer cash secretly in order to fund attacks.  Recently, after a bomb went of in Mumbai in July, India has increased its pressure on Hawala systems in its own country and systems that may be bringing money in from neighbor Pakistan.  An Indian Security Analyst stated “While much of this money is normally earned money being transferred in a clandestine manner to avoid taxes, a large chunk of it is transferred by various terror groups and mafia organizations, which in South and West Asia and Russia are often interlinked with terror groups.” 

The common western opinion of Hawala,
as shown in this finely crafted picture I wound on the interwebs.

            Americans, at the same time, are worried about Hawala systems in Afghanistan.  A government audit recently found that some of the money going to Afghanistan in financial aid, may be unregulated and may be ending up in the pockets of insurgent groups, after a series of Hawala transfers.

            But, this backlash against Hawala has led to negative outcomes that come along with possible protection of terrorism.  After 9/11, U.S. pressure caused the closure of the Al-Barakaat Hawala network in Somalia.  This had instant repercussions, and the Somali economy tanked.  As a result, in 2005, the World Bank and U.N. stepped in to help restore the informal Hawala system to Somalia.

            So what causes the difference in western support for “m-banking” and “Hawala.”  In my opinion, part of this has to do with general support by the west for things seen as technologically advanced.  Increased technology in the Middle East, leads to increased information and technology in the region, which may ultimately lead to a more westernized and democratic region.   Hawala’s traditional origins, on the other hand, seem backwards and foreign.  Nevertheless, it seems silly to me to invest greatly in the facilities needed for “m-banking” if another system that serves largely the same purpose is already in place.

As you can clearly see, MPESA makes everybody happy;
except the cow, he doesn't seem to care much.

            The only relevant difference between Hawala and MPESA is regulation.  Hawala is largely unregulated, and this leads to fears of terrorist involvement.  MPESA, on the other hand, is regulated to some extent.  The Central Bank of Kenya has begun to regulate the MPESA process, which brings allows for more faith from the international community.  My question is, why can’t we see increased regulation of the Hawala system in Afghanistan and India, instead of a crackdown on its very existence.  By supporting Hawala transfers, the West could help with the economic development of Afghanistan, just as has happened in Kenya, and perhaps, actually increase the stability of the region.  However, as long as the stigma of terrorism hangs overhead, it will be difficulty for this to happen.  Thus, MPESA will likely remain the favorite son of the West, while Hawala is forced into oblivion.