Action against money changer may affect hundi business

[Naveed Yaseen]

By Jawwad Rizvi
THE government’s action against one of the biggest money changers in the country is likely to affect the unregulated segment of economy which runs parallel to the documented economy.

Informal transfer of funds happens across the globe. However, this has greater impact on South Asian economies as a large number of workers from this region working abroad.

Migrant workers especially in East and Southeast Asia send money to their homes through informal channels called hundi or hawala.

Hundi is an informal way to send money but this activity is very organised. Hundi was used both as an instrument to remit funds from one place to another as well as to raise short-term credit which would be repaid on maturity at another place.

The discount or commission charged at the time of drawing a hundi, therefore, was always greater if a hundi had been bought for remitting the same sum of money.

There are three phases in a hundi transaction: the first mile, the intermediary stage and the last mile. The hundi is adopted and transformed through reciprocity. The system is composed of a web of interconnecting social relationships that support the transfer of migrants’ savings internationally.

The migrant workers’ usually use a cheap and convenient service which give them a chance to send a little bit extra money to their homes as compared to the formal channels in which they have to pay relatively higher. The informal economy of hundi or hawala amounts to billions of dollars annually across the globe.

In Pakistan, according to estimates, four billion were routed through the hundi system in the country every year against less then a billion through official channels. Historically, the hundi got a big international boost in the 70s and the 80s when million of Pakistani, Bangladeshi and Indian landed jobs abroad especially in the Middle East.

Interestingly, a crackdown against the informal economy of hundi was also planned during the tenure of the Pervez Musharraf regime as part of war against terror. However, no substantial steps were taken at that time. During the same time, the United Arab Emirates government issued strict instructions to money changers, asking them to keep record of people or institutions that transfer an amount of 2,000 UAE dirham or equivalent to other currencies. This time the government has launched a crackdown on hundi business due to huge outflow of US dollars from Pakistan during the last six to eight weeks.

According to official estimates, roughly five to seven billion dollars change hands in Pakistan through Hundi. Hundi system was well-knitted in the 80s and overshadowed formal banking system.

In the 70s, Pakistanis used to receive remittances in the range of $3 to $4 billion annually from overseas workers through normal banking channels but the figure dropped to as low as $450 million despite the fact that during all these years more and more Pakistanis went abroad.

The reasonable difference between the open market and the kerb market exchange rates are the major reason of the hundi system flourishing in Pakistan and the increase in number of people sending money via informal channels.

There are two parallel exchange rates existing in the country: one is the official bank rate and the other is the Kerb market rate. Prior to 9/11, there was a two per cent gap between the Central bank’s official exchange rate and the Kerb rate which promoted the informal sector.

Recent quick flow of hundi business was witnessed due to economic uncertainty in the country as well as slump in real estate and stocks markets. The investors took heavy positions and withdrew their money quickly from these markets and transferred funds to Middle East real estate businesses. Due to economic meltdown, rumours of bankruptcy and commercial banks defaults, people transferred huge amounts of foreign exchanges to aboard. Majority of people adopted informal system (hundi) for these transactions as the rates offered by the informal sector was higher then the formal sector and the delivery was quicker as well.

In Lahore, after Karachi, the FIA had started a crackdown against money changers involved in hundi business. Sources in the FIA revealed that the agency has arrested one money changer of Lahore, Saleem.

They said that a team was investigating and auditing his company’s trading records. They said that the FIA had clues that this person does almost $340 to $440 million hundi transactions in just one month. After Karachi crackdown, the offices of Khanani & Kalia International (KKI) remained closed in Lahore. However, the crackdown has spread panic among money changers and trading activities remained thin.

http://www.thenews.com.pk/daily_detail.asp?id=145659