Hi Lawry,
Well . . . thanks for the tutorial. I guess I was wrong about hawala's lack
of scalability. That's made the subject even more interesting than
Friedman's original article.
Friedman's article didn't mention one unfortunate fact about India which
rather militates against his case. It's a highly bureaucratic country (a
residue of the long-time British occupation) and it's difficult to get a
new business established, especially in anything that's to do with basic
industries (e.g. retail stores, electricity). However, mobile phones
escaped much of the usual regulation and lengthy procedures because they
were considered to be a luxury.
Best,
Keith
At 15:49 03/11/2010 -0400, you wrote:
Hi, Keith,
Actually, hawala operates on a wide scale. It is a network of financial
networks and spans many countries. That is, hawala can process
transactions into areas they don't do business with directly through third
party hawala. The network can also aggregate large sums that individual
hawala stores can't cover. Millions of people use it reliably for large
and small transactions and movement of cash. Hawala are used for personal
transactions as well as commercial ones, i.e. between individuals who are
related, as well as companies that are carrying out normal business
transactions. Many hawala 'stores' exist and compete with each other. For
example, in a city like Washington, some three or four-dozen hawala
operate. I'm not clear why you say it isn't scalable?
And then there are the numerous financial transfer organizations --
store-fronts -- that labor immigrants in the US use to remit funds to
central and south America, among others. In Washington, I would guess that
these number in the many hundreds, though I imagine that there is
considerable aggregation behind the store-fronts.
It is true hawala exist on trust, and those that fail this disappear
pretty quickly. The key here is that a hawala's success depends on repeat
business, e.g. bi-weekly or monthly transfers. Any failure to transfer the
money will be immediately noticed and the word would go out throughout the
community using the hawala very rapidly. Don't all banks operate on a
basic level of trust? As did the Templar system. As does, the system
described by Friedman. The only difference, as far as I can tell, is the
use of mobile phones to register and track the transactions, and the
software needed to support the phone transactions.
Western Union is another example of this kind of geographically dispersed
financial network. The corporate brand that stands for Western Union's
reliability is no greater than that of a hawala, and for the same reason:
it works, works quickly, easily, and well. Like hawala, any failure of
Western Union to deliver the commissioned funds will be immediately
noticed by the depositors and this ensures that Western Union maintain its
reliability or lose its business.
Using mobile phones is a nifty improvement (as is mobile phone banking)
but I don't see it as the grand innovation that Friedman posits. The use
of mobile phones to process transactions does not diminish the need for
trust, nor does it create a larger or more 'scalable' system than that
already provided by the hawala .
Perhaps Friedman doesn't appreciate the size, flexibility, reach, and
reliability of hawala, as he dismisses it as a 'hand-to-hand' operation,
when it is, as I hope I've been able to explain here, far from that.
Cheers,
Lawry
On Nov 3, 2010, at 3:13 PM, Keith Hudson wrote:
Hi Lawry,
The EKO system that Friedman describes is a different beast from hawala.
It's scalable, while hawala isn't. Hawala only operates in small networks
where the individuals can trust one another completely -- usually between
relatives or via a village elder, but they don't spread much wider than
that. The money flowing through the EKO system is recordable at every
stage and doesn't depend on personal trust so it could spread very widely
indeed -- as it is already showing signs of doing.
Western governments have been able to lean on the phone companies in
order to prevent this development so far. Over here, it could greatly
stimulate the grey economy developing more widely.
Keith
At 11:35 03/11/2010 -0400, you wrote:
Friedman entirely misses the point. The system he describes is quite
old. It is the hawala system -- which in this article he
mischaracterizes as "hand-to-hand" -- pure and simple, with transactions
recorded via mobile phones. Hawala was always a "virtual bank." His
larger speculation may have merit, but his example doesn't support his
speculation.
Interestingly, the Knights Templar created for Europe a similar system
and, together with what could be considered one of the world's first
institutionalized, non-governmental intelligence networks, became
extremely powerful. The Templars in creating their "virtual" banking
system, copied the Muslim hawala system, which predated it by some centuries.
Had I read the Hindustan Times article Friedman cites, I would instead
have ruminated on the significance of mobile access at the top of
Everest, and what it symbolizes for humankind.
Cheers,
Lawry
On Nov 3, 2010, at 7:26 AM, Keith Hudson wrote:
Here is one of the most interesting articles I have read in a long time
-- from today's NYT.
Keith
<<<<<
DO BELIEVE IN HYPE
Thomas L. Friedman
The Hindustan Times carried a small news item the other day that,
depending on your perspective, is good news or a sign of the
apocalypse. It reported that a Nepali telecommunications firm had just
started providing third-generation mobile network service, or 3G, at
the summit of Mount Everest, the world's tallest mountain, to allow
thousands of climbers and trekkers who throng the region every year
access to high-speed Internet and video calls using their mobile phones.
I can hear it already: Hi, mom! You'll never guess where Im calling
from . . .
This is just one small node in what is the single most important trend
unfolding in the world today: globalization -- the distribution of
cheap tools of communication and innovation that are wiring together
the world's citizens, governments, businesses, terrorists and now
mountaintops -- is going to a whole new level. In India alone, some 15
million new cellphone users are being added each month.
Having traveled to both China and India in the last few weeks, here's a
scary thought I have: What if -- for all the hype about China, India
and globalization -- they're actually underhyped? What if these
sleeping giants are just finishing a 20-year process of getting the
basic technological and educational infrastructure in place to become
innovation hubs and that we haven't seen anything yet?
Heres an example of why I ask these questions. It's a typical Indian
start-up I visited in a garage in South Delhi, EKO India Financial
Services. Its founders, Abhishek Sinha and his brother Abhinav, began
with a small insight -- that low-wage Indian migrant workers flocking
to Delhi from poorer states like Bihar had no place to put their
savings and no secure way to send money home to their families. India
has relatively few bank branches for a country of its size, so many
migrants stuff money in their mattresses or send cash home through
traditional hawala,or hand-to-hand networks.
The brothers had an idea. In every Indian neighborhood or village
there's usually a mom-and-pop kiosk that sells drinks, cigarettes,
candy and a few groceries. Why not turn each one into a virtual bank?
So they created a software program whereby a migrant worker in Delhi
using his cellphone, and proof of identity, could open a bank account
registered on his cellphone text system. Mom-and-pop shopkeepers would
act as the friendly neighborhood local banker and do the same.
Then the worker in New Delhi could give a kiosk owner in his slum 1,000
rupees (about $20), the shopkeeper would record it on his phone and
text receipt of the deposit to the systems mother bank, the State Bank
of India. Then the workers wife back in Bihar could just go to the
mom-and-pop kiosk in her village, also tied into the system, and make a
withdrawal using her cellphone. The shopkeeper there would give her the
1,000 rupees sent by her husband. Each shopkeeper would earn a small
fee from each transaction. Besides money transfers, workers could also
use the system to bank their savings.
Since opening 18 months ago, their virtual bank now has 180,000 users
doing more than 7,000 transactions a day through 500 branches--
mom-and-pop kiosks -- in Delhi and 200 more in Bihar and Jharkhand, the
hometowns of many maids and migrants. EKO gets a tiny commission from
the Bank of India for each transaction and two months ago started to
turn a small profit.
Abhishek, who was inspired by a similar program in Brazil, said the
kiosk owners are already trusted people in each communityand are
already in the habit of extending credit to their poor customers: So we
said, "Why not leverage them?" We are the agents of the bank, and these
retailers are our subagents.The cheapest cellphone today has enough
computing power to become a digital mattress and digital bank for the poor.
The whole system is being run out of a little house and garage with a
dozen employees, a bunch of laptops, servers and the Internet. The core
idea, says Abhishek, is to close the last mile -- the gap where
government services end and the consumer begins.There is a huge
business in bridging that last mile for millions of poor Indians --
who, without it, can't get proper health care, education or insurance.
What is striking about the small EKO team is that it includes graduates
from India's most prestigious institutes of technology who were working
in America but decided to come home for the action, while the chief
operating officer,Matteo Chiampo, is an Italian technologist who left a
good job in Boston to work here where the excitement is, he said.
India today is this unusual combination of a country with millions of
people making $2 and $3 a day, but with a growing economy, an
increasing amount of cheap connectivity and a rising number of skilled
technologists looking to make their fortune by inventing low-cost
solutions to every problem you can imagine. In the next decade, I
predict, we will see some really disruptive business models coming out
of here -- to a neighborhood near you. If you thought the rate of
change was fast thanks to the garage innovators of Silicon Valley, wait
until the garages of Delhi, Mumbai and Bangalore get fully up to speed.
I sure hope we're ready.
>>>>
Keith Hudson, Saltford, England
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Keith Hudson, Saltford, England
Keith Hudson, Saltford, England
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