Crowding Out Trust in the Informal Monetary Relationships: The Curious Case of the Hawala System

Abstract

Trust, along with other influential norms of cooperation, has been traditionally viewed as an important coordination mechanism stabilizing expectations of the participants in the informal economic exchanges. Drawing on the example of the informal value transfer system called hawala, this paper, however, shows that the role of safeguard against opportunism in the informal monetary settings is much more reliably performed by the instruments of social control. Norms of control embedded in community beliefs and common social practices among the hawala members entirely replace trusting attitudes, rendering them superfluous for the purpose of protecting financial interests of clients and intermediaries in this informal system of monetary exchanges.

Keywords::

• trust
• control
• hawala
• informal value transfer systems

JEL classifications::

• E42
• G21
• G28
• Z13

Notes

¹ The role of trust in the informal monetary (and broader, economic) exchanges can be conceptualized in two different ways. One approach, which appears to be favored by ethnographers and anthropologists, tends to assume the omnipresence of trust in all kinds of informal monetary dealings and therefore regards trust as an inherent attribute of the system of economic exchanges which are not regulated by formal institutions. From this standpoint, trust and reciprocity always serve as automatic constraints enabling the fulfillment of promises made by the members of informal communities. An alternative view of trust, to which most of economists seem to subscribe, considers trust to be a coordination mechanism, which may (or may not) be employed to secure commitments made by participants in the informal economic transactions. As an instrument of coordination and enforcement, trust does not necessarily become a primary choice of economic agents interested in blocking opportunistic intentions of their counterparts and can be superceded by the norms of control, as this paper seeks to demonstrate.

² In the hawala transactions, money does not physically move between various locations, which differentiates this system from some other ways of conducting international monetary transfers. Rather, hawala involves transmitting value or monetary promises among multiple parties (Shehu, 2003; Viles, 2008). The lack of physical movement of money, however, cannot be regarded as a feature unique to hawala, because many formal banking or postal transfer systems operate on the same principle (Passas, 2004b).

³ This is especially so in the countries where hawala is banned outright, and hence hawaladars have a strong incentive to get rid of any evidence of an illegal transaction, which they have helped to carry out, as soon as it is successfully closed. In other locations, however, hawala often has a legitimate status (examples include the UK, the USA, and the United Arab Emirates), and in these countries financial regulations require that hawaladars retain the data on effected transfers for longer periods of time (Passas, 2004a, 2004b).

⁴ Although collectively established norms indeed guide individual behavior within the hawala networks, they can by no means guarantee that fraud will never occur in the system. For example, in 1993, it was reported that one hawaladar from Dubai vanished without a trace with the remittances collected from the Filipino migrant workers (Shehu, 2003, p. 178). Obviously, social norms are not strong enough to fully block opportunistic behavior in all instances of the informal monetary operations.