Hawala, a massive global remittance system,
pre-dates modern banking and plays a vital role in many developing
economies. A director of Mi-Pay, Simon Cavill, shared with EPI the
company‘s vision of using Hawala principles to enable mobile phone
operators to offer a low cost global remittance
service.
pre-dates modern banking and plays a vital role in many developing
economies. A director of Mi-Pay, Simon Cavill, shared with EPI the
company‘s vision of using Hawala principles to enable mobile phone
operators to offer a low cost global remittance
service.
Hawala has thrived in the Middle East as an
informal yet efficient and cheap means of remitting fundsacross
international borders for over a thousand years. Known as Hundi in
India, Padala in the Philippines and Fei chien in China, it is a
market driven by what aid agency the World Bank estimates to be a
global migrant workforce of 200 million people. Though the size of
this informal market is unknown, the World Bank notes that if
informal remittances into developing economies were included the
officially recorded figure of $240 billion in 2007 would have been
“significantly” larger. Indicative of the market’s possible size,
non-profit US research organisation the Center for Contemporary
Conflict notes that the official estimate of informal remittances
in Pakistan is about $5 billion annually, of which a third emanate
from migrant workers abroad. This compares with recorded inbound
remittances of $6.1 billion in 2007 reported by the World
Bank.
informal yet efficient and cheap means of remitting fundsacross
international borders for over a thousand years. Known as Hundi in
India, Padala in the Philippines and Fei chien in China, it is a
market driven by what aid agency the World Bank estimates to be a
global migrant workforce of 200 million people. Though the size of
this informal market is unknown, the World Bank notes that if
informal remittances into developing economies were included the
officially recorded figure of $240 billion in 2007 would have been
“significantly” larger. Indicative of the market’s possible size,
non-profit US research organisation the Center for Contemporary
Conflict notes that the official estimate of informal remittances
in Pakistan is about $5 billion annually, of which a third emanate
from migrant workers abroad. This compares with recorded inbound
remittances of $6.1 billion in 2007 reported by the World
Bank.
Hawala in its many guises is an efficient
market. This has attracted the attention of UK payments service
provider Mi-Pay that has adopted the approach of “if you can’t beat
them join them,” its chief technology officer, Simon Cavill told
EPI. Mi-Pay’s strategy is to harness mobile phone service provider
networks to replicate the essence of Hawala.
market. This has attracted the attention of UK payments service
provider Mi-Pay that has adopted the approach of “if you can’t beat
them join them,” its chief technology officer, Simon Cavill told
EPI. Mi-Pay’s strategy is to harness mobile phone service provider
networks to replicate the essence of Hawala.
Cavill explained that a key factor behind
Hawala is that money is transferred between sender and recipient
without physically moving cash across local or national boundaries.
The sender will approach an agent – a hawaladar – whom they either
know personally or has been recommended.
Hawala is that money is transferred between sender and recipient
without physically moving cash across local or national boundaries.
The sender will approach an agent – a hawaladar – whom they either
know personally or has been recommended.
Once a deal is negotiated, the sender hands
over the cash to the agent who then contacts an agent in the
recipient’s locality. The agent is instructed to issue the required
amount of cash in local currency to the recipient. In addition, the
sender will usually contact the recipient and tell them from whom
to get the cash and the agreed amount. This process, said Cavill,
takes place in a matter of hours and is totally reliant on trust
between the various parties. Costs are low – about 1 percent of the
transaction value. He added that the sending agent can settle the
transaction in a number of ways. This includes instructing a local
contact or bank to settle the debt owed to the recipient’s agent in
local currency from his own locally held cash reserves thus keeping
the original, usually hard currency such as dollars, euros or
sterling, offshore.
over the cash to the agent who then contacts an agent in the
recipient’s locality. The agent is instructed to issue the required
amount of cash in local currency to the recipient. In addition, the
sender will usually contact the recipient and tell them from whom
to get the cash and the agreed amount. This process, said Cavill,
takes place in a matter of hours and is totally reliant on trust
between the various parties. Costs are low – about 1 percent of the
transaction value. He added that the sending agent can settle the
transaction in a number of ways. This includes instructing a local
contact or bank to settle the debt owed to the recipient’s agent in
local currency from his own locally held cash reserves thus keeping
the original, usually hard currency such as dollars, euros or
sterling, offshore.
For many migrant workers formal money transfer
services represent an unattractive alternative to Hawala. For
example, said Cavill, they are costly and require users to provide
various forms of identification to conform to anti-money laundering
regulations.
services represent an unattractive alternative to Hawala. For
example, said Cavill, they are costly and require users to provide
various forms of identification to conform to anti-money laundering
regulations.
The position of formal versus Hawala markets
was highlighted by a recent study by the UK’s Department for
International Development. According to the department many
foreigners find the formal remittance process “difficult and
insecure”; their biggest concern is whether money will arrive
safely, followed by excessive charges and delays to relatives
receiving the money. Charges also vary widely and the total cost to
send £100 ($195) to some countries can range from less than £4 to
as much as £40. The actual transfer process may also take up to
five days to complete. Cavill added that while senders can use
cash, cards or bank account transfers as a source to send the money
transfer, in many cases the recipient will also need to have a bank
account or in some cases a prepaid card and access to an ATM to
receive the funds. And even where formal payment facilities are
available this does not always eliminate Hawala from the remittance
process.
was highlighted by a recent study by the UK’s Department for
International Development. According to the department many
foreigners find the formal remittance process “difficult and
insecure”; their biggest concern is whether money will arrive
safely, followed by excessive charges and delays to relatives
receiving the money. Charges also vary widely and the total cost to
send £100 ($195) to some countries can range from less than £4 to
as much as £40. The actual transfer process may also take up to
five days to complete. Cavill added that while senders can use
cash, cards or bank account transfers as a source to send the money
transfer, in many cases the recipient will also need to have a bank
account or in some cases a prepaid card and access to an ATM to
receive the funds. And even where formal payment facilities are
available this does not always eliminate Hawala from the remittance
process.
“We have seen how workers in the Middle East,
who are increasingly having their salaries transferred onto prepaid
cards, will quite often queue up at the ATM and withdraw the whole
sum in local currency,” said Cavell. “They then place a large
amount of it in an envelope to be sent home through a Hawala
service that gives the recipient cash in hand.”
who are increasingly having their salaries transferred onto prepaid
cards, will quite often queue up at the ATM and withdraw the whole
sum in local currency,” said Cavell. “They then place a large
amount of it in an envelope to be sent home through a Hawala
service that gives the recipient cash in hand.”
Card-based systems only work where there is the
appropriate card acceptance network or ATM to retrieve cash and in
many countries banking services are not available to lower income
communities, he continued. What even poor communities do have is
access to a mobile phone, either their own or shared. As a result,
said Cavill, mobile-initiated money transfer “is widely hyped as
one of the next big things simply because of the availability of
the mobile device.” However, he stressed “having a phone is not
enough on its own.”
appropriate card acceptance network or ATM to retrieve cash and in
many countries banking services are not available to lower income
communities, he continued. What even poor communities do have is
access to a mobile phone, either their own or shared. As a result,
said Cavill, mobile-initiated money transfer “is widely hyped as
one of the next big things simply because of the availability of
the mobile device.” However, he stressed “having a phone is not
enough on its own.”
Many people live in cash-based economies where
the transfer needs to be in a cash format at both ends, Cavill
explained. In addition recipients in rural locations commonly have
great difficulty in getting access to their remitted cash through
the banks and remittance specialists such as Western Union because
they need to travel into a town or city to get it.
the transfer needs to be in a cash format at both ends, Cavill
explained. In addition recipients in rural locations commonly have
great difficulty in getting access to their remitted cash through
the banks and remittance specialists such as Western Union because
they need to travel into a town or city to get it.
Another consideration, he added, are low levels
of education and literacy which mean that mobile phone remittance
services are not easily understood. However, Mi-Pay believes
strongly that mobile phones do a have a key role to play in the
remittance market by creating a legal and regulated version of
Hawala.
of education and literacy which mean that mobile phone remittance
services are not easily understood. However, Mi-Pay believes
strongly that mobile phones do a have a key role to play in the
remittance market by creating a legal and regulated version of
Hawala.
“We see the mobile phone operators in recipient
countries as being the potential key to enabling mobile-driven
money transfers on a truly global basis,” said Cavill. He explained
that the key reason is that unlike almost any other service, mobile
operators and their distributors have outlets everywhere selling
pre-pay phone vouchers. These outlets take cash from consumers and
feed it back up a well-established supply chain to the mobile
service operator. In Mi-Pay’s solution, instead of channeling cash
back to the operator the cash can be used as a source of money to
pay recipients of remittances.
countries as being the potential key to enabling mobile-driven
money transfers on a truly global basis,” said Cavill. He explained
that the key reason is that unlike almost any other service, mobile
operators and their distributors have outlets everywhere selling
pre-pay phone vouchers. These outlets take cash from consumers and
feed it back up a well-established supply chain to the mobile
service operator. In Mi-Pay’s solution, instead of channeling cash
back to the operator the cash can be used as a source of money to
pay recipients of remittances.
Mobile operators know precisely how much cash
is in the hands of their vendors and it is thus relatively simple
to enable the mobile operator or their distributor to act as a cash
remittance service, said Cavill. Mi-Pay’s solution is currently
being tested in East Africa.
is in the hands of their vendors and it is thus relatively simple
to enable the mobile operator or their distributor to act as a cash
remittance service, said Cavill. Mi-Pay’s solution is currently
being tested in East Africa.
Explaining the basics of Mi-Pay’s solution, he
said that a transaction by a remitter in a foreign country could,
for example, be initiated by a transfer of funds electronically to
a mobile service via its website. The operator then sends an SMS to
the recipient containing details of the transfer and a single use
PIN to be used as authorisation for an air-time vendor to pay over
the cash.As in a Hawala transaction the mobile operator has
satisfied remitter and recipient without any transfer of funds and
retains “hard currency” in its home country. On service costs
Cavell said that while it would be difficult to match the Hawala
“we can get close.”
said that a transaction by a remitter in a foreign country could,
for example, be initiated by a transfer of funds electronically to
a mobile service via its website. The operator then sends an SMS to
the recipient containing details of the transfer and a single use
PIN to be used as authorisation for an air-time vendor to pay over
the cash.As in a Hawala transaction the mobile operator has
satisfied remitter and recipient without any transfer of funds and
retains “hard currency” in its home country. On service costs
Cavell said that while it would be difficult to match the Hawala
“we can get close.”
“It’s a situation where everyone benefits,”
said Cavell, because the vendor can double his commission income
and consumers can retrieve remittances from their local vendor
without having to travel. He added that by becoming a trusted
financial partner, mobile phone service operators have the
potential to dramatically increase their profitability whilst at
the same time creating a platform that can be used to introduce
many new financial services to subscribers.
said Cavell, because the vendor can double his commission income
and consumers can retrieve remittances from their local vendor
without having to travel. He added that by becoming a trusted
financial partner, mobile phone service operators have the
potential to dramatically increase their profitability whilst at
the same time creating a platform that can be used to introduce
many new financial services to subscribers.
A potential new service would be to enable a
migrant worker in a foreign country to top up a family member’s
air-time, said Cavill. This could take the form of an automatic
top-up when a specified minimum balance is reached.“Air-time is
becoming currency,” said Cavell. “For good reason the question is
being asked: is air-time becoming the euro of the developing
world
migrant worker in a foreign country to top up a family member’s
air-time, said Cavill. This could take the form of an automatic
top-up when a specified minimum balance is reached.“Air-time is
becoming currency,” said Cavell. “For good reason the question is
being asked: is air-time becoming the euro of the developing
world
