Before there was forex, there was Hawala. Hawala is an informal currency exchange that has been around since the days of the Silk Road, when traders and financiers used it to trade and barter with merchants from other countries. At that time, most of the world's trade took place along this route. This system turned into Hawala, which means "transfer" or "wire" in Arabic banking terms. In the Middle East, Africa, and Asia, this type of system is used a lot. It was a big part of how trade between Europe and Asia grew. Over time, the system grew up and became a legal banking system in some Asian countries. However, in other places, it is still not regulated, and until recently, it was looked at as a way for terrorists to move money underground.
Today, the real Hawala transactions come from Indian and other Asian migrant workers who send money home to their families from oil-rich Middle Eastern countries like the United Arab Emirates and Saudi Arabia. Since there have been no rules about this system, it has been in place for hundreds of years, so the people in this area still use it. Why would anyone use a system that isn't safe? Trust, being on time, and saving money. Going to a bank to make a wire transfer can take a long time, and the fees are too high (opening an account and sending a wire can take between 7 and 14 business days, and the fees can be between $30 and $50 per transaction). On the other hand, the Hawala system can be used to send money the next business day, and the average fee is 5 percent of the amount being sent. But people's lack of trust is the biggest problem for banks and other institutions regulated by the government. People who use the Hawala system depend on a network of contacts and connections to do business. People who have used this network before would tell their friends and family to talk to the same people in the Hawala network. This is a very common way of thinking in Asia and other countries that aren't as well off. The Hawala system is also popular because many developing countries don't let money move in or out of the country. This system is worked around by the Hawala system, which doesn't really break the law. There are similar systems outside of India that work the same way. In China, they are called Fei-Ch'ien, Huikuan, Chop, Chit, or Flying Money. In the Philippines, they are called Padala. In India, they are called Hundi. In Hong Kong, they are called Hui Kuan and Phei Kwan (Thailand). Visit http://www.forexplane.com to learn more.
Before this accusation came under fire, most of the money transfers were done by migrants sending money back to their home countries to help their families. This was done in a way similar to how Western Union handles wire transfers, but with cash. Hawala is not a part of the forex system we all know today. So, the rates don't match the legal quotes for forex, which means that the true volume of forex is understated and not taken into account. There are no official groups that keep track of and watch over these things. This decentralised system makes it hard to get a good idea of the size of daily transactions. In contrast, stocks, bonds, and futures are all kept in one place and watched by a single entity in an exchange, which makes stocks easier to understand.
People have worried that these black markets make up a large part of the forex market as a whole. Even though it's hard to guess, the most liquid currencies aren't from these small countries. Instead, they are the US Dollar, the British Pound Sterling, the Euro, the Japanese Yen, and the Canadian Dollar, which are all economic powerhouses. The G-8 is made up of these eight major currencies (Canada, France, Germany, Italy, Japan, UK, and US, Russia is an honorary and not because of its economic power). Click here to see a graph: http://news.forexplane.com/Articles/Hawala/tabid/111/Default.aspx
The economic trades that result in these forex transactions are estimated to be worth $1.9 trillion per day, but retail traders only make up a small part of this market. As has been said, the forex market is more than just a place where immigrants send money back to their home countries or where tourists exchange currencies to pay for their trips abroad. The Financial Times website says that David Krutz is right (Published: October 9 2006 20:48) "Next year, the size of the foreign exchange market will have doubled in just three years. This is because more fund managers and pension funds are taking part in it. TowerGroup predicted that FX volumes would rise from $2.0 trillion in 2004 to $2.6 trillion this year and $3.6 trillion next year as foreign exchange became accepted as an asset class in its own right.
Even though Hawala and others are still around, they can't take the place of the forex as it is now. Also, as more countries become more modern and technology advances quickly, these systems will be able to help migrants less and less. But the biggest threat will be the anti-terrorist doctrine that the West is putting into place. This doctrine puts pressure on the governments that run the places where these systems thrive to control what they do.
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