1

A hundi is a financial instrument that developed on the Indian sub-continent for use in trade
and credit transactions. Hundis are used as a form of remittance instrument to transfer money from
place to place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in
trade transactions. The Reserve Bank of India describes the Hundi as "an unconditional order in
writing made by a person directing another to pay a certain sum of money to a person named in the
order."
[1]
The operation of the Hundi system has many parallels with the Hawala system also widely
used in Africa, the Indian sub-continent and the Middle East.
History[edit]

Government issued hundis included a watermark to prevent forgery.
Hundis have a very long history in the sub-continent. Written records show their use at least as far
back as the sixteenth century. The merchant Banarasi Das, born 1586, received a hundi for 200
rupees from his father to enable him to borrow money to start trading.
[2]

During the colonial era, the British government regarded the hundi system as indigenous or
traditional, but not informal. They were reluctant to interfere with it as it formed such an important
part of the Indian economy and they also wished to tax the transactions taking place within the
system.
[3]
Official hundi forms were produced incorporating revenue stamps bearing the image of
British monarchs, including Queen Victoria, and disputes between merchants often entered the court
system, so in no way was the system an underground one even though it did not take place through
normal banking channels.
Types of Hundi
Sahyog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount to a
third merchant. In this case the merchant on whom the hundi is drawn is of some 'credit worthiness'
in the market and is known in the bazaar. A sahyog hundi passes from one hand to another till it
reaches the final recipient, who, after reasonable enquiries, presents it to the drawee for acceptance
of the payment. Sahyog means co-operation in Hindi and Gujrati, the predominant languages of
traders. The hundi is so named because it required the co-operation of multiple parties to ensure
that the hundi has an acceptable risk and fairly good likelihood of being paid, in the absence of a
formalized credit monitoring and reporting framework.
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Darshani Hundi: This is a hundi payable on sight. It must be presented for payment within a
reasonable time after its receipt by the holder. Thus, it is similar to a demand bill.
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is
similar to a time bill.
There are few other varieties; the Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami hundi,
Firman-jog hundi, etc.
Nam-jog hundi - such a hundi is payable only to the person whose name is mentioned on the
Hundi. Such a hundi cannot be endorsed in favour of any other person and is akin to a bill on
which a restrictive endorsement has been made.
Furman-jog Hundi - such a hundi can be paid either to the person whose name is mentioned in
the hundi or to any person so ordered by him. Such a hundi is similar to a cheque payable on
order and no endorsement is required on such a hundi.
Dhani-jog Hundi - when the hundi is payable to the holder or bearer,it is known as a dhani jog
hundi. It is similar to an instrument payable to bearer.
Jokhim-Hundi - normally a hundi is unconditional but a jokhim hundi is conditional in the sense
that the drawer promises to pay the amount of the hundi only on the satisfaction of a certain
condition. Such a hundi is not negotiable, and the prevalence of such hundis is very rare these
days because banks and insurance companies refuse to accept such hundis.
Jawabi Hundi - if money is transferred from one place to another through the hundi and the
person receiving the payment on is to give an acknowledgement (jawab) for same, then such a
hundi is known as a Jawabi Hundi.
Khaka Hundi - a hundi which has already been paid is known as a Khaka Hundi.
Khoti Hundi - In case there is any kind of defect in the hundi or in case the hundi has been
forged, then such a hundi is known as a khoti hundi.





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Hawala
From Wikipedia, the free encyclopedia
For the community in the Persian Gulf states, see Huwala.
Hawala or Hewala (Arabic: , meaning transfer), also known as hundi, is an informal value
transfer system based on the performance and honour of a huge network of money brokers,
primarily located in the Middle East, North Africa, the Horn of Africa, and the Indian subcontinent,
operating outside of, or parallel to, traditional banking, financial channels, and remittance systems.

Origins[edit]
Hawala itself influenced the development of the agency in common law and in civil laws, such as
the aval in French law and the avallo in Italian law. The words aval and avallo were themselves
derived from hawala.
[1]
The transfer of debt, which was "not permissible under Roman law but
became widely practiced in medieval Europe, especially in commercial transactions", was due to the
large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages".
The agency was also "an institution unknown to Roman law" as no "individual could conclude a
binding contract on behalf of another as his agent". In Roman law, the "contractor himself was
considered the party to the contract and it took a second contract between the person who acted on
behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the
contract to him". On the other hand, Islamic law and the later common law "had no difficulty in
accepting agency as one of its institutions in the field of contracts and of obligations in general".
[2]

Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital
trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-
fledged money market instrument, which was only gradually replaced by the instruments of the
formal banking system in the first half of the 20th century. Today, hawala is probably used mostly for
migrant workers' remittances to their countries of origin.
How hawala works[edit]
In the most basic variant of the hawala system, money is transferred via a network of hawala
brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a successful
definition of the hawala system that is used is "money transfer without money movement".

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Hawala example transaction; see text for an explanation
The figure shows how Hawala works: (1) a customer (A, left-hand side) approaches a hawala broker
(X) in one city and gives a sum of money (red arrow) that is to be transferred to a recipient (B, right-
hand side) in another, usually foreign, city. Along with the money, he usually specifies something like
a password that will lead to the money being paid out (blue arrows). (2b) The hawala broker X calls
another hawala broker M in the recipient's city, and informs M about the agreed password, or gives
other disposition instructions of the funds. Then, the intended recipient (B), who also has been
informed by A about the password (2a), now approaches M and tells him the agreed password (3a).
If the password is correct, then M releases the transferred sum to B (3b), usually minus a small
commission. X now basically owes M the money that M had paid out to B; thus M has to trust X's
promise to settle the debt at a later date.
The unique feature of the system is that no promissory instruments are exchanged between the
hawala brokers; the transaction takes place entirely on the honour system. As the system does not
depend on the legal enforceability of claims, it can operate even in the absence of a legal and
juridical environment. Trust and extensive use of connections, such as family relations and regional
affiliations, are the components that distinguish it from other remittance systems.
Informal records are produced of individual transactions, and a running tally of the amount owed by
one broker to another is kept. Settlements of debts between hawala brokers can take a variety of
forms (such as goods, services, properties, transfers of employees, etc.), and need not take the form
of direct cash transactions.
In addition to commissions, hawala brokers often earn their profits through bypassing
official exchange rates. Generally, the funds enter the system in the source country's currency and
leave the system in the recipient country's currency. As settlements often take place without any
foreign exchange transactions, they can be made at other than official exchange rates.
Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually
with a far lower commission than that charged by banks. Its advantages are most pronounced when
the receiving country applies unprofitable exchange rate regulations (as has been the case for many
typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving
country is less complex (e.g., due to differences in legal environment in places such as Afghanistan,
Yemen, Somalia). Moreover, in some parts of the world it is the only option for legitimate fund
transfers, and has even been used by aid organizations in areas where it is the best-functioning
institution.
[3]




5

Badla trading involved buying stocks with borrowed money with the stock exchange acting as
an intermediary at an interest rate determined by the demand for the underlying stock and
a maturity not greater than 70 days. Like a traditional futures contract, badla is a form of leverage;
unlike futures, the brokernot the buyer or selleris responsible for the maintenance of
the marked-to-market margin.
[4]

Example
The mechanism of badla finance can be explained as follows: Suppose A has to buy 100 shares of a
company at Rs 50 each. But he doesn't have enough money now. But the value of shares is very
less now, so in order to buy the shares at current prices, A can do a badla transaction. Now there is
a badla financier B who has enough money to purchase the shares, so on A's request, B purchases
the shares and gives the money to his broker. The broker gives the money to exchange and the
shares are transferred to B. But the exchange keeps the shares with itself on behalf of B. Now, say
one month later, when A has enough money, he gives this money to B and takes the shares. The
money that A gives to B is slightly higher than the total value of the shares. This difference between
the two values is the interest as badla finance is treated as a loan from B to A. The rate of interest is
decided by the exchange and it changes from time to time.