Hawala (also known as hundi) is an informal value transfer system based on performance and honor of a huge network of money brokers which are primarily located in the Middle East, Africa and Asia.


Hawala has its origins in classical Islamic law, and is mentioned in texts of Islamic jurisprudence as early as the 8th century. "Hawala" itself later influenced the development of the agency in common law and in civil laws such as the "aval" in French law and the "avallo" in Italian law. The words "aval" and "avallo" were themselves derived from "Hawala". The transfer of debt, which was "not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions", was due to the large extent of the "trade conducted by the Italian cities with the Muslim world in the Middle Ages." The agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent." In Roman law, the "contractor himself was considered the party to the contract and it took a second contract between the person who acted on behalf of a principal and the latter in order to transfer the rights and the obligations deriving from the contract to him." On the other hand, Islamic law and the later common law "had no difficulty in accepting agency as one of its institutions in the field of contracts and of obligations in general." [citation|title=Islamic Law: Its Relation to Other Legal Systems|first=Gamal Moursi|last=Badr|journal=The American Journal of Comparative Law|volume=26|issue=2 - Proceedings of an International Conference on Comparative Law, Salt Lake City, Utah, February 24-25, 1977|date=Spring, 1978|pages=187-198 [196-8] ]

Hawala is believed to have arisen in the financing of long-distance trade around the emerging capital trade centers in the early medieval period. In South Asia, it appears to have developed into a fully-fledged money market instrument, which was only gradually replaced by the instruments of the formal banking system in the first half of the 20th century. Today hawala is probably used mostly for migrant workers' remittances to their countries of origin.

How Hawala Works

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or "hawaladars". A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.

The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment.No records are produced of individual transactions; only a running tally of the amount owed by one broker to another is kept. Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.

Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies distortive exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is less complex (e.g. due to differences in legal environment in places such as Afghanistan, Yemen, Somalia).

Furthermore, the transfers are informal and not effectively regulated by governments, which is a major advantage to customers with tax, currency control, immigration, or other legal concerns. For the same reasons, governments do not favor the system, and accusations have been made in recent years that terrorist funding often changes hands through hawala networks.

Hundis (The Bill of Exchange)

On a similar note, Hundis referred to legal financial instruments evolved on the Indian sub-continent. These were used in trade and credit transactions; they were used as remittance instruments for the purpose of transfer of funds from one place to another. In the era of bygone kings and the British Raj these Hundis served as Travellers Cheques. They were also used as credit instruments for borrowing and as bills of exchange for trade transactions.Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Being a part of an informal system, hundis now have no legal status and were not covered under the Negotiable Instruments Act, 1881. They were mostly used as cheques by indigenous bankers.


The word angadia means courier (in Hindi) but it is also used for people who act as Hawaladars within the country (India). These people mostly act as a parallel banking system for businessmen. They charge a commission of around 0.2-0.5% per transaction from transferring money from one city to another.

Hawala after September 11, 2001

After the September 11 terrorist attacks, the American government suspected that some hawala brokers may have helped terrorist organizations to transfer money to fund their activities. The 9/11 Commission Report has since confirmed that the bulk of the funds used to finance the assault were not sent through the hawala system, but rather by inter-bank wire transfer to a SunTrust Bank in Florida, where two of the conspirators had opened a personal account. However as a result of intense pressure from the US authorities, widespread efforts are currently being made to introduce systematic anti-money laundering initiatives on a global scale, the better to curb the activities of the financiers of terrorism and those engaged in laundering the profits of drug smuggling. Whether these initiatives will have the desired effect of curbing such activities has yet to be seen; although a number of hawala networks have been closed down and a number of hawaladars have been successfully prosecuted for money laundering, there is little sign that these actions have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers.

In November, 2001, the Bush administration froze the assets of Al Barakat, a Somali remittance hawala company used primarily by the large Somali Diaspora. Many of its agents in several countries were initially arrested, though later freed after no concrete evidence against them was found. In August 2006 the last Al Barakat representatives were taken off the U.S. terror list, though some assets remain frozen.cite news
title=US ends Somali banking blacklist
date=August 28 2006

Hawala has been made illegal in some US states [http://www.treas.gov/offices/enforcement/key-issues/hawala/FinCEN-Hawala-rpt.pdf] and other countries Fact|date=March 2007 as it is seen to be a form of money laundering and can be used to move wealth anonymously.

ee also

* Hawala scandal, 1990s political scandal in India
* Islamic Banking
* Riba
*The Ripple monetary system is a software project for a peer-to-peer distributed social network service with a monetary honor system based on trust that already exists between people in real-world social networks.


Further reading

* "Hawala. An Informal Payment System and Its Use to Finance Terrorism" by Sebastian R. Müller (Dec. 2006), ISBN 3-8655-0656-9

External links

* and U.S. Treasury Dept. Financial Crimes Enforcement Network (FinCEN) [http://www.treas.gov/offices/enforcement/key-issues/hawala/FinCEN-Hawala-rpt.pdf]
* Ballard, Roger. [http://www.arts.manchester.ac.uk/casas/papers/hawala.html A collection of academic papers exploring the operation of contemporary hawala networks, and the role they play in the transmission of migrant workers' remittances from Europe to South Asia]
* CBC's [http://www.cbc.ca/news/background/banking/hawala.html "Money-transfer systems, hawala style"]
* Wilson, John F. et al, [http://www.johnfwilson.net/resources/Hawala+Occasional+Paper+_3.24.03_.pdf "Informal Funds Transfer Systems: An Analysis of the Hawala System", International Monetary Fund, October, 2003]
* [http://news.bbc.co.uk/1/hi/england/bradford/6564841.stm Hawala fraud] on "BBC News", April 2007
* [http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/Publications/448813-1164651372704/UNDC_Ch6.pdf] "The Nexus of Drug Trafficking and Hawala in Afhanistan" Dr. Edwina A. Thompson, for The World Bank and the United Nations Office on Drugs and Crime (UNODC)

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