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Home / IAS Preparation / Hundi System

Hundi System: Meaning, Types, Advantages, Importance And More For UPSC!

Last Updated on Jan 07, 2024
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The hundi system, also known as the hawala system, is an old method of transferring money that has been used for a long time in different parts of the world. 

In this article, we will learn about Hundi System. This forms a significant part of the UPSC IAS exam. UPSC Prelims and UPSC Mains Paper I have many questions about this topic. It is also an important topic for UPSC History Optional and essential for the UGC NET History exam. Every year over 5-7 questions on political history are in the question paper.

What is Hundi?

Hundi is a way of transferring money without using banks or physical money. It relies on trust and involves trusted people called Hawaladars who help with the transactions. Hawaladars are respected members of the community who assist people in sending money to others in different places. In it, a person who wants to send money (remitter) goes to a hawaladar and gives them the money they want to send. The hawaladar then gives them a hundi, which is a written document that represents the value of the money being transferred. The remitter gives this hundi to the person receiving the money (payee) or to another hawaladar in the payee's location.

Also Read About Taxation System In India!

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Types Of Hundi

There are several types of Hundis. Let us look at them:

  • Shahi Hundi: This is the most common type. It involves directly transferring funds from one person to another, often across countries. The sender gives it to the recipient, who can claim the money from the receiver in the destination country.
  • Darshani Hundi: It works as a receipt for the money deposited with a hawaladar. It proves that the transaction took place and can be used to claim the money later. This type of hundi is often used for future or delayed payments.
  • Muddati Hundi: It is also called a time-bound hundi, sets a specific date for payment. The recipient can claim the money only after that date, ensuring that transactions are done on time, and the money is delivered securely.
  • Jawabi Hundi: It is issued in response to an existing it. It is used when a person wants to settle a debt or make a payment related to a previous Hundi transaction. The Jawabi hundi is a reply to the initial hundi.
  • Hundis Payable to Bearer: These are payable to the person who has the hundi, not a specific individual. They can be transferred from one person to another, making them flexible and convenient for transactions.
  • Hundis Payable to Order: These are payable only to a specific person mentioned on the hundi. It can be transferred to another person, but the final payment is made to the person named on the hundi.
  • Dhani Jog Hundi: In this type, the remitter instructs the hawaladar to pay the money to the receiver only after the remitter receives confirmation. This adds an extra layer of security and ensures that payment is made after verification.
  • Nam Jog Hundi: This type requires the receiver to provide a password or code shared with the sender before the funds are released. It ensures that the money goes to the intended recipient.

Read Here About Indian Currency System: Chaukyas, Rajputs, Cholas and Pandyas!

Advantages Of Using Hundi

Hundi is a good way to transfer money because it has many advantages. Let's learn about them:

  • Quick and Efficient: It transfers money quickly, so people can get their funds when they need them urgently.
  • Low Cost: It is affordable because it doesn't have high fees or charges as banks do.
  • Accessible: It is available to people who don't have access to traditional banks. It helps them take part in financial activities.
  • Private and Secret: It keeps personal information and transactions secret, so people's privacy is protected.
  • Trustworthy: It relies on trust. People trust Hawaladars to deliver their money safely to the right person.
  • Useful in Trade and Commerce: It is widely used in business. It helps settle payments with partners or suppliers in different places.
  • Useful for Borrowing and Lending: It is also used for borrowing and lending money. People can get funds from a hawaladar and agree on repayment terms.
  • Rules and Challenges: It faces challenges because it's not regulated like banks. To solve this, authorities have made rules to monitor and control hundi transactions.

In conclusion, it is a good way to transfer money. It's fast, affordable, and accessible to people who don't have banks. It keeps things private and is used in trade and borrowing. Although there are challenges, rules help make sure hundi is used properly and legally.

Importance Of Hundi

Hundi is important because it helps with quick and convenient money transfers. It's a way for people to get money fast when they really need it. It also helps those who don't have access to regular banks, especially in faraway places. This makes it easier for individuals and communities to take part in economic activities and meet their financial needs.

  • Trust and Confidentiality: Trust is a big part of the this system. It depends on trust between the people involved to make sure money goes to the right person. These transactions are often private and secret, which protects people's financial privacy. This trust and confidentiality make the system popular and important.
  • Flexibility and Convenience: Hundi lets people customize their payment terms. They can agree on conditions that work best for them. Also, it is convenient because it doesn't involve using physical money or doing lots of paperwork. Many people find this way of transferring money easy to use.
  • Cross-Border Trade and Remittances: It is really helpful for trading between different places, even in different countries. It's a safe and efficient way to pay for things when the parties are far apart. It is also used a lot for sending money to family members in other countries.
  • Cultural and Historical Significance: Hundi is meaningful in many cultures and has been used for a long time. It shows the importance of trust, reliability, and community support. Because it's been used for so long, it's considered a part of the traditions and values of those communities.

So, hundi is important because it allows for quick and convenient money transfers. It helps people in remote areas and those without access to banks. Trust, confidentiality, flexibility, and convenience are key aspects of hundi. It's also used for cross-border trade and remittances. Hundi has a cultural and historical significance that makes it special to many people.

Conclusion

The system is really important. It helps transfer funds easily and helps people who don't have many banking options. It creates a trusted network for handling money. It is flexible and convenient, and it also helps with trading and sending money across borders. It's important because it includes everyone and helps them be part of the economy. Understanding how important hundi is helping us see how it helps with money transactions, supports communities, and helps the economy grow.

Also Read About Economic Nationalism In India!

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Hundi FAQs

It is a way to transfer money without using banks or physical money.

In this system, a trusted person called a hawaladar helps transfer money. They give a written document representing the value of the money being sent.

The system's legality can vary in different countries. Some places may have different rules for it.

There are different types of Hundis, like Shahi, Darshani, Muddati, and Jawabi Hundi.

Using this system has advantages like quick and easy transactions, low cost, accessibility to remote areas, privacy, and its usefulness in trade and commerce.
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