HOME REMITTANCES AND HAWALA SYSTEM:

HOME REMITTANCES:

“The transfer of money by a foreign worker to his/her home country.”

Along with savings and credit services, remittance services are among themost important financial services for low-income people. Many peoplewho receive remittances live in rural areas that lack or have limited accessto financial services, including efficient and reliable remittance services.Travelling to the nearest pay-out point is often time consuming andcostly, thus reducing the remittances received. Since each withdrawal hasa high personal overhead cost, saving some amount of the remittanceis not attractive.Recent studies have emphasized that migrant remittances and theirinvestment are hampered by inefficiencies and access barriers in financialservices both in sending and receiving countries. While estimates indicatethat one third of global remittances flow through informal transfer channels,those countries with weak financial sectors and systems tend to have thehighest remittance flows. Not only is this a regulatory concern (see Annex I),it also limits the opportunity for poor men and women to become betterEconomically integrated by gaining access to basic financial services.The lack of remittance services is due to policies and regulations for theprovision of financial services, as well as the lack of interest or awarenessAmong financial institutions. For institutions located at the receiving end ofThe “remittance corridor”, remittances offer the opportunity to develop newProducts and acquire new customers from low-income communities.Institutions are beginning to become aware of these market opportunitiesthat could make operations downmarket a viable option.Remittances offer financial institutions such opportunities. MigrantRemittances – especially those from high- and middle-income to low-incomecountries – have reached tremendous volumes. At the same time, there is asignificant and growing demand for remittance systems in domestic marketsthat would serve both individuals and businesses (micro, small and large)for payments of all kinds.

Remittance flows:Global flows:

Remittances – the transfer of funds between individuals – represent anincreasingly significant flow of capital to the developing world. The WorldBank has reported that migrant remittances to developing countries totalledmore than USD 160 billion in 2004, an increase of over 65% since 2001,when remittances stood at an estimated USD 96.5 billion. If informal andunderreported flows are included, estimates of migrant remittances are two tothree times higher (see Annex II). Compared to other forms of capitaltransfers and investments, the volume of remittances surpassed that of officialdevelopment assistance in the mid-1990s and is currently second only to thevolume of foreign direct investment.

The East Asia and the Pacific region and the Latin America and theCaribbean region receive approximately the same amount of remittances(USD 40.9 billion and USD 40.7 billion, respectively, each about 25% of thetotal amount of remittances to developing countries). While remittances tosub-Saharan Africa are the lowest (USD 7.7 billion, or 5%), they are alsoheavily underreported in the region, thus underestimating their significance.In each region, one or two countries account for much of the volume ofremittances. India, Mexico, and China, for example, lead the list of recipientcountries both in their respective regions and globally. While Moroccoaccounts for the highest volume of remittances in all of Africa, Nigeria leadsin sub-Saharan Africa. In many countries, including Albania, the DominicanRepublic, El Salvador, India, Yemen and Tonga, remittances are an essentialand often the single largest inflow of foreign capital, exceeding both officialdevelopment assistance and export revenues. The main areas from whichremittances are sent include the United States, parts of the Middle East andWestern Europe.

Intraregional and Domestic Flows:

Though dwarfed in volume by the flows from high-income countries in theNorth to developing countries in the South, other remittance flows may beequally or more important to recipients. Domestic remittances flow within acountry or a region, such as from urban to rural areas or from export-croppingregions to economically depressed areas. Intraregional remittances emanatefrom regional economic hubs to neighbouring or nearby countries, as fromthe Ivory Coast to Mali, South Africa to Botswana, Colombia to Nicaragua,India to Bangladesh, and Romania to Moldova.

Collective Remittances:

Collective remittances (also called communal remittances) are monies sentby diaspora groups such as migrant associations and church groups to theirhome communities. Unlike household or individual remittances, collectiveremittances are typically intended for community infrastructure, other localdevelopment initiatives, or the construction or improvement of churches andhave been widely studied (see Vargas-Lundius, 2004). Collective remittancescan best be described as diaspora charity or philanthropy. Though collectiveremittances are almost negligible in volume relative to overall migrantremittances, they may be critical to the recipient community.

THE SOCIAL, ECONOMIC AND POLITICAL IMPACT OF REMITTANCES:

Social Consequences: A very dangerous journey.

Brain, brawn and entrepreneurial drain.

Family separation and breakdown.

Disruption of labor markets.

The dependency syndrome.

Youth gangs.

Backlash in host countries.

Impact on remitters (poverty, schooling).

Positive Economic Consequences: Contribute to poverty alleviation, but not related to GDP growth rate. Not

economic growth program.

Increase demand (local purchases, tourism, transportation, telecoms, nostalgic trade.)

Support education, housing and business development.

Reduce exchange rate volatility, country risk.

Increase foreign exchange reserves (finance needed imports) & debt sustainability.

Constant (low volatility), long lasting (more than ten years). Countercyclical. Negatively correlated with FDI & other private flows.

Negative Economic Consequences: “Dutch disease”: loss of X competitiveness.

Higher interest rates in LC. De facto dollarization.

Weaken government’s will to maintain fiscal discipline (they may consume/borrow more).

Governments overspend hoping for growing flows.

Reduce labor force (migration & willingness to work).

Little correlation between GDP growth & volume of remittances. Idem for inflation.

Political Consequences:

Several countries have unilaterally granted dual citizenship (Mexico, Guatemala, Honduras, El Salvador, and Nicaragua).

Others (Mexico, Honduras) have allowed their migrants to vote in their elections (restricted to Presidential candidates).

Scant participation (0.5% for Mexico and Honduras).

Manipulation of the fear of deportation.

Influencing home politics thru relatives.

Influencing home politics thru fear of loss of remittances.

Influencing host country politics.

Is politics for migrants also “local”?

Will politics be affected through culture change?

General Remittances Diagram:

Remittances of Pakistan:

Hawala System:Hawala originated in India. It was born before the spread of Western banking in the 19th and 20th centuries. It has developed based on specific ethnic, cultural or historical factors.

“Hawala is an efficient value transfer system that has endured many civilizations and unstable regions.”This system has developed and spread

among different cultures: Fei-Ch’ien in China, Padala in the Philippines, Hui Kuan in Hong Kong, Hundi in India.

Where did it originate?

During the twelfth and thirteenth centuries, as a means of facilitating long distance trade mainly the Silk Road. It operated within a tight range of family Members based purely on trust. It has remained as the main system of money transmission in Asia up until the mid-twentieth century.

How does it Work?

1. Cash is given to the hawala dealer ( Could range from a corner store to a travelagency).2. No fees are discussed (usually they are factored in), only where and in what currency.3. The money transfer could range from a few minutes to a week depending on the relationship with the intermediaries.4. Hawala dealers combine daily, all their transactions into ledgers of their different counterparts.

What have the regulators done to Control the system?

Different approaches with different governments:

◦ FINCEN in the US requires hawala to be filed as Money Service Business (estimate 17% registered)

◦ FIU in Bahrain took the same approach (estimated 83% registered)

◦ UAE Central Bank invited but did not require registration.

◦ UK customs implemented CATCH.

PALOSA GROUP MEMBERS: 1) YASIR ALI BP-10-452) MISBAH UD DIN BP-10-013) AURANGZEB BP-10-424) TARIQ SHEHZAD BP-10-315) IRFAN BP-10-33