In 2015, Prime Minister Narendra Modi launched Digital India, aiming to make the lives of Indians easier through digital innovations. One key pillar of this has been digital payment, and today UPI and digital payments are ubiquitous, enabling people to buy what they want, when they want, without the need for cash changing hands. Before digital payments, credit cards had been an innovation that similarly empowered people to buy goods and services without cash, leading to a boom in consumption with the negative side-effects of credit card debt. In both cases, technology disrupted people’s lives and the economy by making payment possible without the exchange of cash.
Yet, even many years ago when there were no computers and no internet, thus no digital payments, ancient India was already brimming with advanced systems of payments. Two such inventions, Hawala and Hundis were instrumental to trade and expansion of the economy.
The Hawala system is a method of transferring money without physical cash movement and the word Hawala itself comes from the Arabic root which means “to transfer or “to trust”. Such a system has existed for several centuries and was generally found to be used by traders and merchants across the Indian subcontinent, the Middle East and North Africa. The core of Hawala is placing trust in a network of Hawaladars, brokers working on trust.
How Hawala works is simple but ingenious. When a person wants to send money, he goes to a Hawaladar in his area and hands him the amount that needs to be sent. The Hawaladar contacts his counterpart in the area where the recipient is located, and gives the instructions to deliver the amount which is equal to what the sender intended to send. A simple coded chit is used to record the transaction while the system runs smoothly, thanks to the trust reposed among Hawaladars. No cash moves across borders, and the money transfer takes place instantaneously.
What is even more striking about the Hawala system is how it is similar and almost identical to modern-day wire transfer systems. Both systems use middlemen to move funds without having to transfer the physical cash across borders. The trust-based nature of transactions within Hawala can be compared to the secure and verified channels banks operate within today. In addition, the fact that Hawala can work over large regions with little infrastructure foreshadows the cost-effectiveness of modern digital payment systems.
Another remarkable innovation from ancient India is the Hundi, a financial instrument that can be compared to modern bills of exchange or promissory notes. Hundis were widely used as a form of credit instrument in the trading community. These documents acted as written orders, binding one party to pay a certain sum of money to another party at a future date.
Hundis came in various forms, tailored to specific purposes. The Darshani Hundi was payable on demand, while the Muddati Hundi was payable after a specified period. Traders and merchants extensively used Hundis to settle accounts, finance trade, and provide credit. The reliability and efficiency of Hundis were such that they became a trusted medium for financial transactions, enabling the growth of commerce across regions.
The similarities between Hundis and modern financial instruments are evident. Today, promissory notes and bills of exchange are integral to the global financial system, facilitating trade and credit. Just as Hundis served as a guarantee of payment, modern financial instruments assure that obligations will be met, fostering trust and economic activity.
The impact of Hawala and Hundis on the ancient Indian economy cannot be overstated. These systems enabled merchants to conduct business across great distances with ease, reducing the risks associated with carrying large sums of money. They also provided a mechanism for financial inclusion, allowing individuals without access to formal banking systems to participate in the economy.
The legacy of these innovations is profound. They laid the groundwork for the development of complex financial systems and instruments that we see around us today. The principles of trust, efficiency, and adaptability that underpin Hawala and Hundis are mirrored in modern banking and digital payment systems. These practices also highlight the ingenuity and sophistication of economic thought in ancient India and acted as catalysts for trade and economic progress in ancient India.
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