Remittances gone wild?

It's now easy as pie to send money home. Anyone familiar with labor markets in the Arab Gulf knows that there is a heavy reliance on foreign workers. And that many of these workers send a large portion of the pay home to their families. This supports a large formal and informal money transfer system.

There are new, simple, inexpensive ways of transferring money. Will they be adopted here, and if so how rapidly will they transform the way remittances are made?

From Wired:

Just a decade ago, the idea of moving money that quickly and cheaply would have been ridiculous. Checks took ages to clear. Transferring money from one bank account to another could take days, as banks leisurely handed off funds, levying fees nearly every step of the way. Credit cards made it a little easier to pass money to a friend — provided that friend owned a credit card reader and didn’t mind paying a few percentage points in fees or waiting a couple of days for the payment to process.

Ivey got around that problem by using PayPal. Since 1998, PayPal had enabled people to transfer money to each other instantly. For the most part, its powers were confined to eBay, the online auction company that purchased PayPal in 2002. But last summer, PayPal began giving a small group of developers access to its code, allowing them to work with its super-sophisticated transaction framework. Ivey immediately used it to link users’ Twitter accounts to their PayPal accounts, and his new company, Twitpay, took off. Today, the service has almost 15,000 users.

That may not sound like much, but it sends a message: Moving money, once a function managed only by the biggest companies in the world, is now a feature available to any code jockey. Ivey is just one of hundreds of engineers and entrepreneurs who are attacking the payment ecosystem, seeking out ways small and large to tear down the stronghold the banks and credit card companies have built.

You'll notice that the article emphasizes how these innovations will affect the formal money transfer market. I'm more interested in how they may affect the informal but potent hawala system of money transfers between workers in the Arab Gulf and their families in Pakistan, India, etc.

As Dubai thrives, an eye on political reform :: csmonitor.com

Fellow blogger, Secret Dubai, sends this link (above).

Key quotes:

Now jammed with gleaming skyscrapers, modern roads, and international corporations, Dubai, almost uniquely among Arab states, has created a modern, diverse economy. It is proof that political liberalization and natural resources are not pre-requisites for development, analysts say.
. . .
Yet despite its material success, due largely to the foreign workers who make up more than 80 percent of the population, the UAE remains politically medieval. Political power is based on family and wealth alone. With no significant directly elected public body, it is arguably less democratic than even neighboring Saudi Arabia.

In December, the UAE's president promised to create a democratically elected parliament. Political analysts say that concrete action will be needed as an increasingly educated populace demands greater political participation and accountability.
. . .
So far, however, the UAE has avoided the attacks on Western targets by Islamic radicals that have taken place in other Gulf states - to the annoyance of some Islamic militants who use the anonymity of the Internet to vent their rage.
"What I've seen on the Internet forums is some impatience as to why they're not targeting the Emirates on the grounds of it being a fairly Western society," says Stephen Ulph, a senior fellow at the Jamestown Foundation, citing Internet postings from Spring 2005.

"They accused the rulers of permitting the construction of churches, of actions contradicting sharia, and of allowing women to wear jewelry," says Mr. Ulph. The Islamists also posted a photograph of the aircraft carrier USS Kittyhawk refueling in the city's Jebel Ali port.

"One reason the Emirates have been left untouched is that Dubai is still a useful place for the illicit transfer of funds - for example through the hawala system," says Ulph, referring to the traditional paperless money-transfer system believed to play a key role in terrorist financing.
. . .
Although traditional pastimes such as camel-racing and falconry still survive, young locals who aspire to be 'Western' are increasingly turning to drinking, drug- taking, and prostitution - although even kissing in public is technically illegal.

Recent articles in The Gulf News, the country's leading English-language paper, report other societal woes. Last week, the paper reported that the divorce rate is now 48 percent - one of the world's highest - while the letters page is full of complaints against rising crime, endless traffic jams, and spiraling house prices.

Since few own, perhaps that should be housing prices, not house prices. As far as "turning to prostitution" surely that means young men turning to the services of prostitutes. What is true is that local papers rarely state that it is young locals who are misbehaving - but the CS Monitor just did. This story about Abu Dhabi hooligans is likely about locals.

I don't perceive a great demand for rapid political reform. Few want to risk what appears to be a conservative system that has, by appearances, worked. They look to the example of Kuwait where the elected officials appear to be too willing to take the welfare state to unsustainable,even catastrophic levels, in order to get reelected.

Hawala system and the quake :: Khaleej Times

Quote:

DUBAI — The sudden demand for relief goods being purchased here by payment in cash for the earthquake victims in Pakistan has created a shortage of dirham in the currency market, causing operational problems for the hawala dealers who transfer money to Pakistan, specially to the remote areas through non-banking channels.

Foreign exchange dealers and remittance houses told Khaleej Times yesterday that due to shortage of dirhams, remitting money through hawala had become not much attractive than transferring funds through official banking channels.

The hawala rate yesterday was Pak Rs16.25 per dirham for remote areas of Pakistan and 16.40 for the cities, not much higher than the rate of Rs16.22 for one dirham if a person is willing to remit the money through official channels.

The UAE Exchange Centre LLC, one of the leading foreign exchange and funds transfer /remittances companies, has set up free remittance facility for Pakistanis sending money by using Express Money Product to Pakistan.

According to Sudhir Kumar Shetty, chief operating officer, global operations and general manager of UAE Exchange said: “We are witnessing a growth of 40 per cent for the last few days in the remittance facility to Pakistan. All transactions can be done through express money transactions to Muslim Commercial banks for easy and fast transactions."

White Hawala and Black Hawala
------QUOTE------
“A sum of £6.1 million was transferred from the UK to an account of an international bank in Dubai. A small amount from this went to a hawala operator in Dubai, and since he was a registered hawala operator we could trace him,” said Al Moalem.

“Getting the hawaladhars registered with the Central Bank has advantages.”

He said the hawala system is widely used in the UAE and the labour class deserves to have an inexpensive system of remittance.

“But there are those who misuse it. You have the ‘black’ and ‘white’ hawala operators. So our aim is to put the bad ones down.”
------END QUOTE------

Emphasis added.

UPDATE: Even long-term readers of The Emirates Economist have expressed frustration that I did not supply information about hawala. In fact, if you check the archive you will find I have covered this before in my inaugural posting. You can confirm this by going to the first week of the archives. Better yet, give the technorati search in the sidebar a whirl. Using the default first radio button, it will provide the cosmos of all extant Emirates Economist posts mentioning hawala . Or explore the cosmos cosmos of all blog references to hawala via the second button. Add the technorati searchlet to your sidebar by going to http://www.technorati.com/members/searchlet.html

Hawala is not subject to any official regulations or controls. Funds flow around the globe among the different hawala dealers (payers) based on trust. This informal method of funds transfer dates back to the days of gold trading and smuggling in the Indian subcontinent region.

This article is a decent description of how hawala works. It should be emphasized, however, that most hawala transactions are motivated only by efficiency considerations, not to transact nafarious business outside the scrutiny of government.