In the last four months, his hawala revenues have dwindled from an average of 50,000 to 100,000 rupees a month ($800 to $1,600) to just 2,000 to 3,000 ($33 to $50). "My business has really suffered," says Siddiq. "My regular customers have all become scared. They don't come to me anymore." Reason: The war on terrorism is exacting a heavy toll on this commonly used Central Asian system.
Hawala -- a Hindi word for trust -- is an extensive international money-transfer system based around the triangle of Pakistan, Dubai, and parts of India. It moves money anywhere in the world within hours -- without any record of the transaction. It has long been the channel of choice for the estimated 4.5 million expatriate Pakistanis sending money back to their native country because it's fast, reliable, and cheap.
MONEY TRAIL. Hawala brokers ensure delivery within a matter of hours directly to the home of the client in the remotest of villages inside Pakistan. Banks charge higher fees -- up to two or three times as much -- and take up to several days to deliver the cash.
In a typical transaction, a customer in, say, Karachi, contacts a hawala broker and hands over the sum in Pakistani rupees to be wired to a relative in, say, Hong Kong. Because the system is based on personal references and trust, no receipts are issued. The broker then calls a fellow dealer in Dubai who in turn gets in touch with an associate in Hong Kong, who then calls the recipient and hands over the money in Hong Kong dollars. Each dealer makes a commission. While theoretically the system could operate in any country, most transactions either originate or end in Pakistan.
The U.S. government has alleged that hawala has also been the channel of choice for terrorist networks to move money across international borders. Since September 11, Washington has hit at the heart of that financing system by applying pressure to the United Arab Emirates government, whose central bank has since imposed reporting requirements. This has hit hawala hard: Dubai had been the "middleman" for the bulk of transactions, due to its freedom from regulation. The new reporting requirements have taken it out of the picture.
"75% GONE." Hawala brokers, having lost Dubai as a free-trade zone, have not found an alternative avenue to operate through. Indeed, thousands of dealers across Pakistan have watched their thriving businesses falter and in some cases collapse. Many have even undercut the interbank dollar rate to entice clients back. But to no avail.
"Hawala business is 75% gone now," says Malik Bostan, president of the Forex Association of Pakistan, a Karachi-based trade group. Says one hawala broker in the city: "Closing off the Dubai route has caused very big problems for us. I used to do four transactions a day, and now I'm down to four a week. I now have to think about doing some other business instead."
While the crackdown is bad news for hawala brokers, it's good news for Pakistan's starved economy. Oil and petroleum imports are essential. For this, the country needs American dollars and foreign exchange. Trouble is, the bulk of incoming dollars come through systems like hawala -- not through official banking sources -- so they all go underground. Bankers estimate that expatriate Pakistanis use hawala to send $11 billion a year into the country, while remittances through official banking channels average just $1 billion a year.
FLUSH WITH DOLLARS. Since the crackdown, however, official remittances have tripled. According to the the most recent figures available from the State Bank of Pakistan, monthly remittances in November climbed to $260 million, from an average of $80 million. Mohammed Yaseen, treasurer at Habib Bank, the country's second-largest bank, estimates that official remittances will rise from $1.07 billion last year to $2 billion by the end of fiscal 2002. Within the next two to three years, he says, they could hit $5 billion.
As official home remittances replace hawala, banks will become flush with American currency, because most transactions start out as dollars, while the recipients of the transferred money get rupees. This will help keep the rupee strong vs. the dollar. In the past, when foreign-exchange reserves have fallen low, Pakistani governments have frozen foreign currency accounts held within the country. And this, in turn, has caused massive declines in the rupee's value.
The State Bank of Pakistan has seized the opportunity to increase official remittances, and it has instituted banking reforms as well. "The initial impetus came from the U.S. crackdown," says Ishrat Husain, governor of the State Bank of Pakistan. "Banks have now...positioned themselves [to distribute remittances] very quickly to families in Pakistan." Habib Bank has automated its systems to maintain a database of all remittances and is introducing a handful of new products that will ensure delivery of cash within 24 hours.
No one expects hawala to make a comeback any time soon, and Pakistan's brokers are out looking for other sources of income. But the country's finance managers are all too happy to have this unregulated business fall by the wayside if it means bolstering the rupee and showing a more transparent economy to the world. Good news for Pakistan -- but more bad news for Mohammed Siddiq. By Naween Mangi in Karachi