he absence of a direct banking system between India and Pakistan is forcing the two countries' traders to use the hawala route to conduct business. This, in turn, is causing huge losses in revenue for both the traders and the respective countries. India's security is also being compromised because of this.

A Memorandum of Understanding (MoU) between Reserve Bank of India and the State Bank of Pakistan was signed in November 2005, according to which, two branches of Indian banks would be opened in Pakistan, and two branches of Pakistani banks would be set up in India. But after more than nine years, the proposal is still stuck in the files.

Indian traders, who have been doing business with Pakistani traders, say that the hawala system is being operated from Dubai, Singapore and Afghanistan. According to them, one of the primary reasons behind the MoU not moving beyond the files is Dubai's strong hawala lobby, which is being supported by powerful individuals from both India and Pakistan. They say it is this lobby which is managing to get blocked the legal ways of doing trade between the two countries.

The two countries snapped banking ties after the 1965 war. Presently, there is no Indian bank in Pakistan and no Pakistani bank in India. Indian traders receive money through third party banking arrangements, primarily through the Dubai-based branch of Pakistan's Habib Bank. However, the traders use this as the last resort, as the process involves payment delays and an increase in cost. The other option available to the traders is to use the platform of the Tehran based multinational Asian Clearing Union (ACU). However, this too is not preferred by the traders, as payment settlements through ACU get delayed and take place at the end of a two-month settlement period.

Formal trade between India and Pakistan amounts to nearly US $3 billion. This was $250 million in 2003. Experts have stated that trade between the two nations can go up to $42 billion. According to people familiar with the issue, the two countries have realised less than 8% of the total bilateral trade potential in recent years.

Officials in the security establishment say that it is a known fact that the bulk of the trade between the two countries takes place through "irregular" channels. "In the absence of any direct banking system, hawala channels are the most preferred options for the traders, and this has been brought to the notice of the concerned authorities. However, the opening of banks and thus facilitating a proper banking channel does not come under our preview. This has to be decided by the government at the highest level," an official with the Ministry of Home Affairs said.

Queries sent to the RBI and the State Bank of Pakistan over their responses on the matter remained unanswered until the time the story went to press.

H.S. Tanwar, a prominent trader from Amritsar, stated that one particular lobby is controlling India-Pakistan trade. "People sitting in Dubai are in the business of receiving payments for facilitating the sending of Indian goods to Pakistan and then arranging for the payment of the goods through hawala," he stated.

According to Tanwar, influential businessmen in both countries were against implementing the 2005 banking agreement. "If a banking system is introduced, it will make all transactions transparent, which will hurt the interests of these businessmen who indulged in malpractices including under-billing and hawala. Then there is the Dubai hawala lobby, which does not want their lucrative business to get hit," said Tanwar.

D.K. Madaan, the head of the School of Social Sciences, Punjab University, said that it was the lack of a strong political will that was stopping the opening of the banking branches. "Despite high level meetings regularly being held over this issue, the matter has still not moved beyond the files. Neither do we have the facility of nostro and vostro (accounts) between the two countries, nor do we have a banking system, as a result of which traders are being forced to use the hawala route for their business," he said.

Many Indian traders who have been trading with Pakistani traders, have repeatedly written to successive Indian Prime Ministers and the Ministry of Finance and the Ministry of Commerce on the issue, but are yet to hear from the government.

According to Madaan, because of the absence of a systemic banking system, the under-billing of some Indian exporters is being adjusted with illegal drugs, fake currency and arms from Pakistan through hawala. "As a result, the government is not only losing customs revenue, but is also facing a serious threat to security. It is estimated that the unofficial trade between India and Pakistan stands at US $5 billion. This is routed through third countries like Afghanistan, Dubai, Hong Kong, Singapore, Colombo and the Gulf. Goods from Kolkata are being shipped to Karachi via Singapore and Colombo," he said.