What is 'Hawala '

Hawala is a method of transferring money without any actual movement. One definition from Interpol is that Hawala is "money transfer without money movement." Hawala is an alternative remittance channel that exists outside of traditional banking systems. Transactions between Hawala brokers are done without promissory notes because the system is heavily based on trust.

Hawala, also known as hundi, means transfer or remittance.


Hawala originated in South Asia during ancient times, and is used throughout the world today, particularly in the Islamic community, as an alternative means of conducting funds transfers. Unlike the conventional method of transferring money across borders through bank wire transfers, money transfer in hawala is arranged through a network of hawaladars, or hawala dealers.

How does hawala work? Let’s say Mary needs to send $200 to John who lives in another town. She will approach a hawaladar, Eric, and give him the amount of money she wants John to receive including the details of the transaction – name of recipient, city, and password. Eric contacts another hawala dealer, Tom, in the recipient’s city and asks him to give John $200, on the condition that John correctly states the password. Tom transfers the money to John from his own account minus commission, and Eric will owe Tom $200. The transaction initiated by Mary and concluded by John’s receipt of the funds takes only one to two days, and in some instances, few hours. No money is moved, and no IOUs are signed and exchanged by Eric and Tom as the hawala system is backed only by trust, honor, family connections, or regional relationships.

Hawala dealers keep an informal journal to record all credit and debit transactions on their accounts. Debt between hawala dealers can be settled in cash, property, or services. A hawaladar who does not keep his end of the deal in the implied contractual system of hawala will be tagged as one who has lost his honor and will be ex-communicated from the network or region.

Migrant workers who send remittances frequently to relatives and friends in their countries of origin find the hawala system advantageous. Hawala facilitates the flow of money between poor countries where formal banking is too expensive or difficult to access. In addition to the convenience and speed of conducting hawala, the commission rates are usually low compared to the high rates that banks charge. To encourage foreign exchange transfers through hawala, dealers sometimes exempt expatriates from paying fees. The system is also easy to use as one only needs to find a trusted hawaladar to transfer money.

Hawala as Underground Banking

The very features that make hawala an attractive avenue for legitimate patrons, also make it attractive for illegitimate uses. Thus, hawala is frequently referred to as underground banking. This is because money launderers and terrorists also take advantage of this system to transfer funds from one location to another. Hawala provides anonymity in its transactions as official records are not kept, and the source of money that is transferred cannot be traced. In addition, corrupt politicians and the wealthy who would prefer to evade taxes use hawala to anonymize their wealth and activities.

Since hawala transfers are not routed through banks and, hence, not regulated by governmental and financial bodies, many countries have been led to re-examine their regulatory policies in regard to hawala. Some countries have made hawala illegal due to the absence of bureaucracy in the system. For example, in India, the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA) are the two major legislative systems that deter the use of hawala in the country.

Some FinTech companies are implementing the hawala system in providing financial services to the unbanked and underbanked populations of the world. Mobile banking and payment platforms, such as Paga and M-Pesa, are revolutionizing the financial system in certain countries in Africa by promoting financial inclusion through the hawala system of providing financial services.

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