(The similarities in usage of Hundis in India and Hawala system prevalent in the Middle East and North African countries are discussed in this post)
Hundis have been in usage in India from ancient times but usages are not uniform and they are different at different places. Being a part of the informal system, Hundi is not covered under Negotiable instrument Acts 1881.Therefore Hundi as a financial instrument is not treated as a negotiable instrument.
Hundis can be technically compared to bills of exchange drawn in an Oriental language/ Vernacular language. There are three parties to a hundi. The drawer of a hundi draws it on another person (drawee) who is ordered to pay the amount to a third party (holder). An endorsement in hundi is restrictive as such endorsee of a hundi for collection has no right to transfer it. Apparently, they are more similar to bills of exchange in the trade transaction. However, they are also used as a form of remittance instrument (like a cheque) to transfer money from place to place or as a form of credit instrument to borrow money (hundi may serve as an informal acknowledgment of a debt for a specified sum which may or may not serve as an evidence of debt in a court). Banks in India lend their customers of good standing by discounting Hundis. Practically, such facility is discounting of clean bills as the goods are already reached to buyer’s godown against acceptance of Hundi. The duly paid and discharged Hundi is called Khokha.
The Hawala or Hewala (meaning transfer or trust in Arabic) word prevalent in the Middle East and North African countries is equivalent to the word Hundi in India. Hawala is used as informal money transfer system by money brokers in those countries.
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