# What Is Hawala? Money Transfer Without Money Movement

![Hawala: Transferring money internationally through a network of money lending brokers.](https://www.investopedia.com/thmb/hCrMT-jgkZA25NSJE88umkS25mc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/hawala.asp-Final-a43a514625b34ab5ad5c5245d04a4ac8.png)

*— Investopedia / Theresa Chiechi*

## What Is Hawala?

Hawala, an ancient method of money transfer originating in South Asia, enables the movement of funds without the physical transfer of currency. Known for its reliance on trust rather than official [promissory notes](https://www.investopedia.com/terms/p/promissorynote.asp), it operates outside traditional banking systems, particularly benefiting those in regions with limited access to formal financial networks. By facilitating swift, cost-effective remittances, hawala serves as an alternative [remittance](https://www.investopedia.com/terms/r/remittance.asp) channel, especially for migrants and expatriates. However, its unregulated nature also attracts illicit activities, leading many countries to impose strict regulations or outright bans.

### Key Takeaways

*   Hawala is an informal money transfer system, operating outside traditional banking, that relies heavily on trust and personal networks to move funds without actual money changing hands.
*   Originally developed in South Asia, hawala remains a popular alternative for sending remittances due to its low fees, speed, and accessibility, particularly in regions lacking formal banking infrastructure.
*   While beneficial for quick, low-cost financial transactions, hawala systems also pose risks as they can be exploited for money laundering, tax evasion, and financing terrorism due to their lack of formal records.
*   Many countries, such as the U.S. and India, have laws against hawala due to regulatory and anti-money laundering concerns, though it remains legal under strict regulations in places like Dubai.
*   Fintech solutions have started to incorporate elements of the hawala model to aid financial inclusion in underbanked regions through mobile banking and payment platforms.

## The Origins and Functioning of Hawala

Hawala originated in South Asia during the 8th century 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](https://www.investopedia.com/terms/w/wiretransfer.asp), money transfer in hawala is arranged through a network of "hawaladars" or hawala dealers.

Hawala dealers keep an informal journal to record all credit and [debit transactions](https://www.investopedia.com/ask/answers/050415/what-happens-when-my-bank-account-debited.asp) on their accounts. Debt between hawala dealers can be settled in cash, property, or services. A hawaladar who doesn't keep their end of the deal in the [implied contractual](https://www.investopedia.com/terms/i/implied_contract.asp) system of hawala will be tagged as one who has lost their honor and will be excommunicated from the network or region.

> **Fast Fact**
>
> Hawala is thought to come from the Arabic word for "assignment" or "bill of exchange" or the Hindi word for "reference."

Migrant workers often use hawala to send remittances home to their families and friends. Hawala helps transfer money between countries where banking services are costly or hard to access.

Hawala is convenient and fast, with lower fees compared to banks. To encourage [foreign exchange](https://www.investopedia.com/terms/f/foreign-exchange.asp) 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.

## Advantages of Using Hawala for Money Transfers

Hawala allows people to transfer money even if they don't have formal banking relationships or access to established financial networks. For people without a government-issued ID or bank account, hawala networks may be the only way to send [remittances](https://www.investopedia.com/terms/f/foreign-remittance.asp), particularly if the destination is in another country. In other circumstances, it may be cheaper or faster than dealing with the paperwork of official channels.

For this reason, hawala networks are frequently used in countries where there are strict [capital controls](https://www.investopedia.com/terms/c/capital_conrol.asp) or sanctions on the flow of money. Traders and expatriates from sanctioned countries, like Iran, might use hawala networks to make payments to their counterparties in neighboring countries.

## How Hawala Transacts: An Illustrated Example

How does hawala work? Let’s say Maryam needs to send $200 to Amir, who lives in another country. She will approach a hawaladar, Nasir, and give him the amount of money she wants Amir to receive, including the details of the transaction: the name of the recipient, city, and password.

Nasir contacts a hawala dealer in the recipient’s city, Muhammed, and asks him to give Amir $200 on the condition that Amir correctly states the password. Muhammed transfers the money to Amir from his own account, minus commission, and Nasir will owe Muhammed $200.

The transaction initiated by Maryam and concluded by Amir’s receipt of the funds takes only one to two days or, in some instances, just a few hours. No money is moved and no [IOUs](https://www.investopedia.com/terms/i/iou.asp) are signed and exchanged by Nasir and Muhammed, as the hawala system is backed only by trust, honor, family connections, or regional relationships.

> **Warning**
>
> Hawala provides anonymity in its transactions, as official records aren't kept and the source of money that is transferred can't be tracked. Because money laundering aims to hide the source of cash that is generated from illegal activities, hawala is often used as a system for money laundering.

## Hawala’s Role in Illicit Activities

Hawala's appealing features for legitimate users also attract illegal activities. Thus, hawala is frequently referred to as [underground banking](https://www.investopedia.com/terms/s/shadow-banking-system.asp). This is because money launderers and terrorists take advantage of this system to transfer funds from one location to another.

Corrupt politicians and wealthy individuals use hawala to hide assets and avoid taxes. Cash generated from business transactions that aren't recorded can't be taxed.

Hawala is also used to fund terrorism, which makes it more difficult to stop terrorism. A large portion of discovering terrorist cells involves tracing the movement of money, as terrorist organizations are funded and need money to buy weapons and feed their people. Hawala transactions make this movement of money easy as there is no paper trail from the source of funds to the terrorist organization.

## How Governments Are Regulating Hawala

Because hawala transfers aren't routed through banks and, hence, aren't regulated by governmental and financial bodies, many countries have been led to re-examine their regulatory policies in regard to hawala.

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. India prohibits informal hawala transactions and people from entering into them by strictly defining the types of transactions not allowed, which include the creation or procurement of any asset outside India.

In Pakistan, informal Hawala transactions are prohibited as well. The country specifies what entities are allowed to make remittances and currency exchanges. There are laws in place that require money changers to register and comply with regulations to become foreign exchange companies within two years and if they don't register, they aren't allowed to operate.

Afghanistan's more than 300 money exchangers have organized themselves into a self-regulatory body that has created rules and regulations that all members must comply with. It has been more difficult for the country to bring unregistered money exchangers into the fold to prevent illegal activities through hawala exchanges.

> **Important**
>
> Some countries have banned hawala because it's hard to regulate.

Many countries have laws to curb illegal activities associated with informal systems like hawala.

## Hawala’s Influence on Modern Fintech Solutions

Some [fintech](https://www.investopedia.com/terms/f/fintech.asp) 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](https://www.investopedia.com/terms/m/mpesa.asp), are revolutionizing the financial system in certain African countries by promoting financial inclusion through the hawala system of financial services.

## Is Hawala Illegal?

Hawala trades are illegal in the U.S. and many other countries because financial regulations require money services businesses to obtain appropriate licenses and follow anti-money laundering laws.

## What Is Hawala Money?

Hawala money is funds that are transferred using the hawala system, in which no actual movement of funds from one account to another account happens, no paper trail is created, and no promissory notes exist.

## What Is the Punishment for Hawala in India?

The punishment for hawala in India is:

*   A monetary penalty of up to three times the sum involved with a cap of 200,000 Indian rupees (about $2,400).
*   Confiscation of the currency, security, or other money and property related to the violation.
*   Imprisonment, if the penalty is not paid.  
    

## Is Hawala Legal in Dubai?

Hawala is legal in Dubai as long as the hawala provider is registered with the United Arab Emirates Central Bank and abides by the regulations that exist.

## The Bottom Line

Hawala is an informal funds transfer system that allows for the shifting of money from one person to another without the actual movement of money. It is a simple process that requires no documentation and, therefore, is an anonymous system of moving money. This has been beneficial for many poor countries where individuals move abroad to work and send money home, avoiding costly [transfer](https://www.investopedia.com/terms/t/transfer.asp) fees and other required documentation.

Because of its anonymity, hawala also has been a means for illegal activity to take place, such as money laundering and the financing of terrorism. For this reason, many countries prohibit hawala or have placed regulations on it.

> **Article Sources**
>
> 1.  Dow Jones. "[Hawala: Ancient Money Transfer System Poses Very Modern Risks](https://www.dowjones.com/professional/risk/resources/risk-blog/hawala-risks)."
>     
> 2.  Pathak, Rachana. "[The Obstacles of Regulating the Hawala: A Cultural Norm or Terrorist Hotbed](https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1948&context=ilj)?" _Fordham International Law Journal,_ vol. 27, issue 6. 2003, pp. 2010.
>     
> 3.  International Monetary Fund. "[Hawala](https://www.imf.org/external/pubs/ft/fandd/2002/12/elqorchi.htm)."
>     
> 4.  IMF eLibary. "[VI Legal and Regulatory Aspects of the Informal Hawala System](https://www.elibrary.imf.org/view/IMF084/03590-9781589062269/03590-9781589062269/C6.xml?language=en&redirect=true)."
>     
> 5.  Directorate of Enforcement. "[PMLA](https://enforcementdirectorate.gov.in/pmla)." Download "The Prevention of Money Laundering Act, 2022."
>     
> 6.  CTV News. "[Hawala: The Underground Network That Saves Money 'Without a Trace](https://www.ctvnews.ca/business/hawala-the-underground-network-that-moves-money-without-a-trace-1.4536406?cache=yes).'
>     
> 7.  IPleaders. "[Hawala: A Parallel Economy](https://blog.ipleaders.in/hawala-parallel-economy/#:~:text=Penalties%20include%3A,non%2Dpayment%20of%20the%20penalty)."
>     
> 8.  The National. "[UAE Central Bank Unveils Awareness Campaign for Hawala Remittances](https://www.thenationalnews.com/business/money/2022/07/14/uae-central-bank-unveils-awareness-campaign-for-hawala-remittances/#:~:text=The%20regulator%20permits%20legitimate%20hawala,into%20the%20regulated%20financial%20system.)."