Hundi is a written financial instrument developed in the Indian subcontinent, used by merchants and indigenous bankers to transfer funds between towns, to borrow, and to finance trade. A hundi was an order or promise to pay a sum, drawn in a local language and script, that could often be passed from hand to hand. It is among the oldest credit instruments still in use, and the Reserve Bank of India notes that it was most widespread in the twelfth century.
In modern usage, especially in Pakistan and Bangladesh, "hundi" is also the everyday name for informal cross-border money transfers outside the banking system, which elsewhere are called hawala. The historical paper instrument and the present-day informal transfer share a name and a tradition of trust, but they are not the same thing.
Hundi in plain terms
Imagine a cloth trader in one city who needs to pay a supplier in a city hundreds of miles away, along roads where carrying coins is dangerous. Instead of sending money, he visits a local banker, hands over cash and receives a signed note addressed to the banker's partner in the other city. The supplier presents the note there and is paid. No coins travel; only a piece of paper does.
If the supplier does not need the money yet, he can sign the note over to someone he owes, who signs it over again, much as a cheque might be passed on. Because everyone knew the bankers' names and reputations, the note was trusted almost like cash. That web of trust is the heart of the hundi.
History
Hundis were issued by indigenous bankers, often called shroffs or sahukars, and by merchant communities with branches across the subcontinent. During the Mughal period, European travellers described bills of exchange drawn between major commercial centres, and Indian bankers issued hundis on foreign ports to finance sea trade. These instruments were the main way to move funds over long distances until modern banks spread in the nineteenth century. Banks of the colonial era also bought and sold hundis, and the instrument served many of the purposes that a letter of credit serves in trade today.
When British India codified commercial paper in the Negotiable Instruments Act of 1881, the Act preserved local usage for instruments written in an oriental language, so hundis continued to be governed largely by custom. Their use declined through the twentieth century as banks, cheques and later electronic payments became widespread, although some traditional merchant communities still draw local hundis for short-term credit denominated in Indian rupees.
Types of hundi
Traditional hundis were classified by when and to whom they were payable:
- Darshani hundi. A sight bill, payable when presented, according to local custom.
- Muddati hundi. A usance bill, payable after a set period or on a fixed date, much like a time bill of exchange.
- Shah-jog hundi. Payable only to a "shah", a respectable person known in the market, which gave the holder a measure of protection.
- Firman-jog hundi. Payable to a named person or to that person's order, and so negotiable by endorsement.
- Jokhmi hundi. A documentary bill linked to goods in transit, comparable to a bill drawn against a bill of lading, with payment conditional on the goods arriving.
How hundi differs from hawala
A traditional hundi was a document: it named a payer and payee, could carry a maturity date and could be negotiated, so it worked as both a payment order and a credit instrument for trade finance. Hawala, which takes its name from the Arabic hawalah, an assignment of debt in Islamic law, is a transfer arrangement in which a sender pays a hawaladar and a counterpart pays the recipient, with balances settled later; typically no negotiable paper changes hands.
The modern informal hundi of Pakistan and Bangladesh works like hawala. Migrant workers abroad hand money to an agent, and relatives at home receive local currency, often quickly and at a better rate than the official channel offers. Operators settle their balances through trade invoices, cash couriers or offsetting transfers, a practice that critics associate with black hawala when it serves criminal funds. Both are forms of an informal value transfer system.
Legal status today
In India, foreign exchange transactions outside authorised channels breach the Foreign Exchange Management Act 1999, and the Income Tax Act 1961 has a specific provision, section 69D, on amounts borrowed or repaid on a hundi other than by account-payee cheque. In Pakistan, informal hundi and hawala transfers are offences under the Foreign Exchange Regulation Act 1947, and authorities have run repeated crackdowns to push remittances into banks and support the Pakistani rupee. Bangladesh similarly treats hundi as illegal.
The Financial Action Task Force (FATF) recommends that providers of money or value transfer services, including hawala and hundi operators, be licensed or registered and supervised. Authorities link unregistered networks to money laundering and tax evasion, while researchers point out that most users are ordinary families, drawn by lower costs, speed and reach in places banks do not serve well.