# Hawala

Hawala or hewala (Arabic: حِوالة ḥawāla, meaning transfer or sometimes trust), originating in India as havala (Hindi: हवाला), also known as havaleh in Persian, and xawala or xawilaad in Somali, is a popular and informal value transfer system based on the performance and honour of a huge network of money brokers (known as hawaladars). They operate outside of, or parallel to, traditional banking, financial channels and remittance systems. The system requires a minimum of two hawaladars that take care of the "transaction" without the movement of cash or telegraphic transfer. While hawaladars are spread throughout the world, they are primarily located in the Middle East, North Africa, the Horn of Africa and the Indian subcontinent. Hawala follows Islamic traditions but its use is not limited to Muslims.

## Origins

The hawala system originated in India. In 2003 Hawala as a legal concept was documented, finding evidence of Hawala reaching back to 1327, in a publication by Matthias Schramm and Markus Taube, with the title "Evolution and institutional foundation of the hawala financial system".
It has been speculated that "Hawala" itself influenced the development of the agency in common law and in civil laws, such as the aval in French law, the aval in Portuguese law, and the avallo in Italian law. The words aval and avallo bear a similarity to hawala, and the context of intensive trade between Italian cities and the Muslim world suggests a possible link. The transfer of debt was "not permissible under Roman law but became widely practiced in medieval Europe, especially in commercial transactions", potentially borrowing from hawala. Agency was also "an institution unknown to Roman law" as no "individual could conclude a binding contract on behalf of another as his agent". 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". The claims about the Islamic origins of hawala have later been challenged by Cinar.

## Regulation

Following the September 11 attacks in 2001, international organizations responsible for counterterrorism and enforcing laws against money laundering have directed their efforts on identifying problems within the hawala, as well as other remittance systems. The First International Conference on Hawala in May 2002 published the Regulatory Frameworks for Hawala and Other Remittance Systems. The International Monetary Fund (IMF) contributed a chapter, in which informal value transfer systems were considered. According to the IMF, countries with limited financial services experience macroeconomic consequences because residents rely heavily on informal fund transfer systems. Informal value transfer systems share common characteristics, including anonymity and lack of regulation or official scrutiny. Therefore informal value transfer systems may be susceptible to use by criminal organizations for money laundering and terrorist financing.

## Procedure

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars, without actually moving money. According to the author Sam Vaknin, there are large hawaladar operators with networks of middlemen in cities across many countries, but most hawaladars are small businesses who work at hawala as a sideline or moonlighting operation.
In general, the process of hawala operates as follows:
* Sending money: The sender provides a sum of money to a hawala agent known as the sending broker. This money is intended for the recipient in another city, often in a foreign country.
* Providing instructions: Along with the money, the sender provides a code or password (token) to the sending broker. This token serves as a key for the recipient to receive the money.
* Communicating the token: The sender informs the recipient of the token, either directly or through a different channel like a phone call or more recently, electronic messaging.
* Initiating transfer: The sending broker contacts another hawala agent, the receiving broker, located in the recipient's area. They inform the receiving broker about the money to be transferred and provide the token necessary for the recipient to collect the funds.
* Receiving money: The recipient approaches the Receiving broker, who disburses the transferred sum to them, usually after deducting a small commission.
* Trust mechanism: Hawala relies on a system of trust between brokers. The sending broker owes the receiving broker the amount disbursed to the recipient. This trust is established over time and through established relationships within the hawala network. Despite the absence of formal documentation, hawala transactions heavily depend on the reputation and reliability of the brokers involved.
* Maintaining integrity: The hawala network ensures integrity and trust by carefully vetting new brokers and maintaining strict adherence to established protocols and codes of conduct. Reputation within the network is paramount, and any breach of trust can result in severe consequences, including ostracism from the network.
The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honour 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. Trust and extensive use of connections are the components that distinguish it from other remittance systems. Hawaladar networks are often based on membership in the same family, village, clan or ethnic group, and cheating is punished by effective excommunication and the loss of honour, which lead to severe economic hardship.
Informal records are produced of individual transactions, and 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 (such as goods, services, properties, transfers of employees, etc.), 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 unprofitable exchange rate regulations or when the banking system in the receiving country is less complex (e.g., due to differences in the legal environment in places such as Afghanistan, Yemen, and Somalia). Moreover, in some parts of the world, it is the only option for legitimate fund transfers. It has been used even by aid organizations in areas in which it is the best-functioning institution.

## Regional variants

Dubai has been prominent for decades as a welcoming hub for hawala transactions worldwide.

### South Asia
#### Hundis

The hundi is a financial instrument that developed on the Indian sub-continent for use in trade and credit transactions. Hundis are used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in trade transactions. The Reserve Bank of India describes the Hundi as "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."

### Horn of Africa

According to the CIA, with the dissolution of Somalia's formal banking system, many informal money transfer operators arose to fill the void. It estimates that such hawaladars, xawilaad or xawala brokers are now responsible for the transfer of up to $1.6 billion per year in remittances to the country, most coming from working Somalis outside Somalia. Such funds have in turn had a stimulating effect on local business activity.

### West Africa

The 2012 Tuareg rebellion left Northern Mali without an official money transfer service for months. The coping mechanisms that appeared were patterned on the hawala system.