^Testimony — Yousef Page 1 of 3

U.S. SENATE COMMITTEE ON

BANKING. HOUSING, AND URBAN AFFAII
Subcommittee on International Trade and Finance

Hearing on "Hawala and Underground Terrorist Financing Mechanisms."

Prepared Statement of Dr. Tarik M. Yousef

Professor - Department of Economics
School of Foreign Service
Georgetown University

2:30 p.m., Wednesday, November 14,2001 - Dirksen 538

Mr. Chairman and Distinguished members of this Subcommittee:

I am pleased to testify before you today on the topic of the Hawala institution, its origin, how it
functions and what can be done to regulate it. The Hawala institution has drawn much attention recently
in the context of the US war on terrorism whose goals include interrupting and preventing the
mobilization of resources and transfer of funds through formal or informal channels to finance terrorist
activities in the US or elsewhere.

Let me first provide a context for understanding the place of the Hawala in the modern financial system
including in the Muslim world. I will do so by reference to my own personal experience. Prior to the last
decade, in all my travel and living experience in numerous countries in the Muslim world, I had never
observed others nor did I settle a personal or business transaction by any means other than cash. The
reasons are not hard to find. For historical and policy reasons, financial development in many
developing countries including the Muslim world has lagged behind the advanced OECD countries.

The late start with modernization in the post-WWII era has implied that the financial systems of most
countries in the Muslim world lack depth and sophistication and that the institutions of regulation and
supervision are not fully developed. More importantly, extensive government intervention in these
societies including through repressive financial policies, excessive taxation, foreign exchange and trade
restrictions and a banking system that is driven by the needs of governments have retarded the
emergence of modern financial systems.

Reflecting these conditions, cash remains the preferred medium for settling transactions and dominates
the composition of liquidity in many banking systems. Banking institutions* are concentrated in urban
centers and cater mainly to the needs of governments and elite segments of;so6iety. Modern habits of
banking have yet to affect the majority of populations especially in rural areas. Protection of personal
property is imperfect, enforcement of contracts is weak, government corruption is endemic and tax
evasion is widespread

The Hawala institution should be understood in this broader context as an informal means of

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