Remittance and Cost of Trust
It is widely known that the fees for overseas remittance are ridiculously high. Not only is a commission fee charged by each bank (sending bank, intermediary bank, and beneficiary bank), but also telegraphic and exchange fees are levied. You will see a single amount of “commission fee” showing on your bill issued by the sending bank, but it in fact includes 5 different types of fees!
* Telegraphic fee: A fee when a cable message from one bank is sent to another for the transfer of money.
- Cost of Trust
In General, overseas remittance services are conducted through banks in spite of high cost.
WHY?
One of the reasons is that the bank is the most trustworthy institution in the finance field. Therefore, people may experience a sense of comfort if the additional fees you must pay is the expense occurred as “cost of trust”. However, this is still a very expensive option. This brings a question to thought of “What about before banks existed, how have people been transferring their money cross borders? And how was the cost of trust paid then?”
- Hawala System
Hawala, meaning transfer or sometimes trust in Arabic, is a popular and informal value transfer system in the Islamic community of based entirely on family connections, regional relationships, or simply trust. It is known that this system started in the 8th century and works as below:
1. A “remitter” approaches Hawala broker (Broker A) in his/her country and gives Broker A a sum of money, the password, and instructions to pay a “receiver” in another country.
2. The remitter delivers the password to a receiver
3. Broker A contacts Broker B, who is located in a receiver’s country, and gives Broker B instructions with the password.
4. The receiver, who has received the password information, gives this information to Broker B, and is given the money.
5. Broker A now owes Broker B the specific amount of money — the debt between brokers will most likely be settled at a later date.
You may think that the Hawala system has disappeared with the appearance of banks. However, Hawala is still ALIVE! In addition to being able to use the remittance service during holidays and weekends, Islamic people could remit their money even in the countryside without banks because Hawala brokers always exist in the Islamic communities. Hawala, however, is an unofficial network system based on trust between brokers, which is illegal in some countries and cannot be guaranteed for safe remittances and can also be used as an illegal fund transfer channel. In addition, trust costs in the hawala system were paid in a somewhat violent manner. It is common practice for all the trading partners to engage in credit transactions with a sense of community called “Muslim Brotherhood”, followed by strong retaliations such as murder if the transaction is not carried out.
- The dilemma between high fee remittances and illegal remittances
As the banks advancing in the 1970s, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) was established to facilitate the flow of funds between countries and to prevent the inflow of illegal funds. The SWIFT, which provides a network of connections between banks and other financial institutions around the world, has created a “SWIFT Code” to exchange global financial transaction information in a secure environment. More than 11,000 banks over 200 countries have transacted foreign exchange through the SWIFT network. However, in order to create such a “safe and global environment,” an intermediary bank has emerged, resulting in additional costs and of course, the remittance process has become more complex. This is inevitable because every bank in the world cannot be matched one to one and so the networks between banks become complicated. If you leave the SWIFT Network, it is virtually impossible to transact foreign currencies with other countries. Thus, overseas remittances have been monopolized by SWIFT, and the cost of trust (overseas remittance fees) for safety is quite expensive.
When various interests are conflicted, it is not easy to satisfy all the parties. In this case, the overseas remittance where the majority of foreign remitters, including foreign workers, are hesitating between “high fee remittance” and “illegal remittance”.
The REMIIT project has designed a platform (network) relieving both the cost of trust and the complexity of the network as well as being legitimate for remittance.
