The EconomistNovember 28th 2020 Finance & economics 67P
acked tradingfloors are rare these
days. An exception is the Shahzada cur-
rency-exchange market in Kabul. Seven
days a week hundreds of men crowd into a
modest courtyard. Each has a bundle of
banknotes; some have piles several feet
deep. Prices—for American dollars, Iranian
rials and Pakistani rupees—ring out and
deals are done, on the spot, in cash. In the
small offices around the sides, money that
is changed can then be transferred to al-
most anywhere in the world. Cash is hand-
ed over and WhatsApp messages fly.
The money travels by hawala(from the
Arabic for “transfer”), a centuries-old sys-
tem. Transactions in opposite directions
are matched against each other through a
network of personal contacts. An Afghan in
London sending remittances home might
in turn finance a Kabuli merchant import-
ing Chinese goods purchased in Britain.
Banks may be used—but not formally. The
sender is given a serial number, which they
send (these days on WhatsApp) to the re-
cipient, who then picks up the money from
a contact of the hawalamerchant.
Hawalais the core of Afghanistan’s fi-
nancial system. One in six adult Afghans
has a bank account; there are just two
branches for every 100,000. Most remit-
tances—which some estimates reckon
amount to 15-18% of the country’s gdp each
year—flow through it. Even international
aid agencies use it. And Afghanistan is not
the only place where hawaladominates. In
Iraq, Somalia and Syria, the transfer system
is vital too. Hawalais used in India and
Pakistan to avoid slow and unwieldy
banks. And the presence of huge numbers
of migrants means it is well-established in
the Gulf, especially Dubai.
Yet hawalais under intense pressure.
Regulators around the world hate the sys-
tem, because of its opacity and its role in
helping to fund terrorism. And covid-19
has hammered many merchants, by drying
up cross-border trade and closing the small
shops and businesses that do transfers.
Hawala dominates in places like Af-
ghanistan because it is so efficient. Mar-
gins on even small international transfers
may be as low as 1%, far less than banks’
charges. Indeed, sending money from Af-
ghanistan to the West is often free, says Ha-
roun Rahimi of the American University of
Afghanistan. It is not only cheaper to use a
hawalamerchant than a bank, but quicker
and easier too. Transfers can typically bepicked up the same day. Customers do not
need to prove their identity, or explain why
the money is being sent. That is why it is es-
sential in places like Afghanistan and So-
malia, where large parts of the population
do not have identity documents.
But this is also precisely why regulators
dislike it. Western banks cut off anyone
they suspect is using an account to send
money to places that are considered high-
risk, such as Afghanistan or Somalia. In In-
dia and Pakistan hawalamerchants are ar-
rested for evading the countries’ capital
controls. In Afghanistan the central bank,
under foreign pressure to ensure transpa-
rency, has long sought to crack down on
traders. In 2018 they were banned from
holding deposits and making loans, and
were required to start collecting docu-
ments on their customers. Instead of com-
plying they went on strike, claiming that
the new rules would destroy their busi-
ness. Within a week the government had
backed down. “Shutting down hawalamar-
kets would paralyse the economy,” says Mr
Rahimi. Now an uneasy truce prevails.
Covid-19 has not helped hawalatraders,
many of whom also provide trade finance.
In his office at Shahzada, Haji Zarak, the
spokesman of the union of currency ex-
changers, says that the past year has been
the toughest ever. When coronavirus first
hit Afghanistan, the traders at the market
went down to three days a week to sociallydistance. But the bigger hit was to goods
trade. With borders closed, importers did
not need to move money around, or to bor-
row to cover liquidity gaps. The only coun-
try with which transactions have increased
is Turkey—which Mr Zarak suspects is
largely rich Afghans moving money out to
buy property, fearing a Taliban takeover. He
worries about a second wave. “If covid-19
comes back, we will be in trouble.”
What comes next for hawala? Some
think that it can, in effect, be taken over.
Abdul Bari Ahmadzai of Moore, a consul-
tancy that works on Hesab Pay, a mobile-
money app, says if regulators allow it, ha-
wala merchants could work as mobile-
money agents on the side. Transactions
around the country at least could be done
instantaneously on phones. In Somalia,
where telecoms operators are largely un-
regulated, that has already happened. Ac-
cording to the World Bank, around three-
quarters of Somalis use mobile money—
mostly denominated in dollars—and it is
more common than cash. Mr Bari reckons
the shift would in turn expand Afghans’ ac-
cess to banking, and gradually formalise
the financial sector.
Yet that outcome is far from guaran-
teed. Hawalamerchants will be nervous of
anything that requires them to start col-
lecting data or comply with other regula-
tions. And if they do not, Afghanistan’s few
formal banks have a lot to lose by working
with them. These already have only limited
access to the international banking sys-
tem. Huge amounts of money travel from
Afghanistan to neighbouring Iran, its main
source of imports. And as the number of
people on America’s sanctions list rises,
the risks for western banks dealing in the
region grows. They could decide to cut off
many Afghans entirely. If that happens, ha-
walacould be the only alternative left. 7KABUL
The world’s shrewdest financiers, hawalatraders, are being squeezedMoney transfersIntrepid banking
Cash converters