Hawala is an ancient, informal system for transferring money without physical currency crossing borders. It exists and operates outside of traditional banking channels. Hawala plays an important role in facilitating remittances in developing countries and areas where access to formal financial systems is limited. Although it has legitimate uses, hawala also can be used to launder money, evade taxes, and transfer proceeds from criminal activities. Understanding how hawala works provides insight into both its potential benefits and risks.

What Is Hawala and How Does It Work?

Hawala comes from an Arabic term meaning “transfer of debt from one person to another.” It’s sometimes referred to as underground banking or parallel banking. Hawala provides a fast and cost-effective way to transfer money without physical cash crossing borders. It operates parallel to traditional banking systems.

With hawala, money transfers happen based on communications between members of a network of hawala brokers, or hawaladars. Rather than moving cash, hawala transfers debts between brokers. It relies on trust and connections between brokers to settle accounts.

Here’s an example of how hawala works:

  • Person A in Country A gives cash to Hawaladar A to transfer to Person B in Country B.
  • Hawaladar A contacts Hawaladar B in Country B and requests they pay the agreed amount to Person B in local currency.
  • Hawaladar A now owes money to Hawaladar B, which will be settled later through various methods, either financial instruments or goods and services.
  • Person B receives the transferred money from Hawaladar B in Country B. No cash crossed borders.

Hawala eliminates the need to physically move cash over long distances. It also avoids expensive foreign exchange transactions and bank wire fees. Settlements between hawala brokers happen through future transactions, trades, over- and under-invoicing goods, or conventional banking methods.

Key Aspects of Hawala Transactions

Hawala has several notable features that differentiate it from formal banking systems:

Speed and Low Cost

By avoiding delays and fees involved with international transfers, hawala offers faster, cheaper money transfers. They take place within hours or days, while bank wires can take days or weeks and cost more in fees.

Minimal Paper Trail

Hawala does not involve promissory notes or official records for most transactions. There is often no paper trail, allowing for anonymity and discretion.

Honor System

Hawala relies on trust and reputation between brokers in a network. Brokers charge low fees and make money through high volumes of transactions and marginal profits on each payment.

Cultural Familiarity

In nations and regions where hawala is common, it is a culturally familiar way to transfer money with participants often coming from the same village, region, or ethnic group.

No Standardization

There are no standardized practices, systems, or rules in hawala networks. Each broker can apply their own methods for managing transactions and records.

Regulatory Avoidance

Hawala exists outside formal financial systems and ignores foreign exchange, anti-money laundering regulations, and taxation policies. This allows participants to avoid taxes, capital controls, and reportable transactions.


Most hawala transactions leave no paper trail or formal records for authorities to track or trace transaction originators and beneficiaries. This provides more anonymity than banks.

Mutual Benefits

Hawala benefits both brokers and customers. Brokers earn income on transactions while consumers transfer money cheaply, quickly, and discreetly.

Minimal Infrastructure Needed

Hawala brokers need little infrastructure to participate beyond a computer, phone, fax, or contacts in another region or nation, allowing them to operate from almost anywhere.

Built on Trust

Hawala relies on trust, family connections, regional relationships, and reputation between brokers. New brokers often must be vouched for and introduced through existing networks. Penalties for abuse of the system often come in the form of social consequences and loss of reputation rather than legal action.

Origin and History of Hawala

Hawala’s origins trace back hundreds of years to ancient monetary systems used in South Asia and the Middle East. Its use was recorded in trading between Arabia and the Horn of Africa in the 9th century.

Hawala initially facilitated trade finance and remittance payments to distant locations. It predates modern banking systems by centuries.

As migrant workers from India, Pakistan, Bangladesh, and the Philippines moved to work in oil-rich Gulf countries in the 1970s, hawala became important for transferring their earnings back home. Dubai became a hub.

Even as formal banking developed, hawala continued serving the black market and parallel economy. Its anonymity and regulatory avoidance made it popular for conducting illicit transactions related to smuggling, organized crime, and corruption.

Today, the hawala system facilitates global money movements and provides essential financial access where banking systems are weakest. Countries in the Middle East, Africa, and Asia comprise its major customer base today.

Numbers and Stats

  • Estimates suggest hawala transactions account for anywhere from 50-250 billion USD annually according to the IMF. However, measuring and tracking hawala financial flows precisely is impossible given its informal nature.
  • India, Pakistan, Bangladesh, China, and African migrant workers in the Middle East and Europe make up the bulk of hawala users sending wage earnings to family.
  • The UAE and Hong Kong are major hawala transaction hubs and settlements centers between networks due to their role in trade and gold markets.
  • Hawaladars often charge fees of 1-3% per transaction, significantly lower than banks that can charge 10% or more.
  • The hawala system is believed to circulate over $100 billion USD into India alone each year, primarily from Indian workers in the Middle East transferring earnings to families.

Why Hawala Persists and Is so Hard to Regulate

Hawala has proven persistent over decades despite anti-money laundering regulations against it. A few factors explain why it continues to thrive:

  • Cost Savings – Hawala avoids the high fees, delays, taxes and foreign exchange costs of international wires through banks. It offers cheap, fast transfers.
  • Anonymity – No paper trail exists for most basic transactions, providing anonymity compared to formal transfers through banks that require detailed records and compliance.
  • Cultural Familiarity – In regions where hawala is common, it is a familiar and accepted cultural practice used transparently between members of ethnic groups or villages who trust the local brokers.
  • Geographic Reach – Hawala serves many small villages, remote locations, and developing areas where banks have limited infrastructure, providing essential financial access.
  • Regulatory Avoidance – Hawala systems intentionally avoid foreign exchange, taxation, and reporting rules that govern formal banks, allowing avoidance of taxes, capital controls, and other limits.
  • Informal Nature – With no central organization, no unified system, and only loose networks of brokers, hawala has no core institution to regulate or shut down. Efforts to regulate one broker might only shift transactions to other brokers in the network.

Attempts to regulate hawala through requiring registration, reporting, and records have made small dents, but the system continues to operate unabated in many regions. Its informal nature means hawala networks can shift and adapt. Participants also hide transactions in trade invoices and falsified records. Ultimately, hawala fills important needs that formal banks have not adequately met in many developing countries.

Hawala facilitates both legitimate remittances and criminal activity:

  • Remittances – Hawala allows migrant workers and immigrants to quickly and cheaply send small amounts of money back to families in home countries. This helps poor villagers receive income from abroad.
  • Cross-Border Transactions – In nations with capital controls or currency restrictions, hawala allows businesses to make international transactions off the books and avoid controls.
  • Emergency Aid – Humanitarian organizations have used hawala networks to move aid money into places like Afghanistan, Somalia and Syria because of their reach where formal banking is limited.
  • Small Business – Hawala provides small and medium enterprises access to cross-border payments that facilitate trade and business relationships where banks are limited.

Illegal Uses

  • Money Laundering – Criminals exploit the anonymity of hawala networks to launder proceeds of corrupt or illegal activities by mixing illicit and legitimate transfers.
  • Terrorist Financing – Terror groups in the Middle East, Asia, and Africa rely on hawala networks to transfer funds internationally in a way that avoids scrutiny and detection by authorities.
  • Tax Evasion – The lack of record keeping and reporting in hawala transactions facilitates tax evasion, avoiding income and value-added taxes on transactions.
  • Capital Flight – In nations with capital controls or currency limits, hawala allows capital flight and avoidance of currency restrictions by moving money without central bank oversight.
  • Smuggling – Hawala enables smuggling of contraband by allowing smugglers to pay suppliers internationally and hide transactions from customs inspectors.

Combating Illicit Uses of Hawala

Efforts to combat illicit uses of hawala focus on a few approaches:

  • Registration – Requiring hawaladars formally register as money transfer businesses to provide transparency and accountability into brokers
  • Record-Keeping – Obligating hawaladars to maintain records on transactions, amounts, and customer identities to have an audit trail if abuse is suspected
  • Reporting – Mandating reporting of transactions over certain amounts to financial intelligence units to identify potential laundering or terrorism financing
  • Penalties – Enforcing administrative or criminal penalties on hawaladars found to be complicit in illegal transactions to deter abuse of the system
  • Cooperation – Fostering cooperation and partnerships between hawaladars, governments, and banks to identify and stop illicit transactions
  • Digitalization – Developing digital platforms and mobile money systems to formalize transfers through electronic methods instead of informal networks

However, these approaches have had limited success in many regions. Potential hawala restrictions also raise concerns about closing off essential financial access for poor, rural, or displaced people who rely on it for remittances. Finding the right regulatory balance remains a key challenge.

The Future of Hawala

Looking ahead, hawala likely has a mixed future. Growing anti-money laundering pressures and development of digital finance systems will likely formalize and digitize some hawala transactions. However, in failed states and rural villages where formal banking access remains poor, traditional person-to-person hawala networks may persist as an essential financial channel.

While hawala can enable criminal activity, it also provides a cultural, convenient, and accessible system for legitimate money movements where banking systems fail to reach. Understanding both its positive and negative uses in context provides insights into this ancient remittance method’s complex role linking developing economies to global financial systems, both legal and illegal. Regulating it poses an ongoing challenge with no easy solutions.


Hawala operates as an ancient yet surprisingly robust value transfer system in parallel to modern banking systems. This informal remittance method persists through cultural familiarity, cost savings, anonymity benefits, and serving populations where formal banking infrastructure remains inadequate. However, hawala’s avoidance of regulation also enables tax evasion and masks illicit money flows related to crime and terrorism. Hawala networks will likely continue adapting technologies and tactics to sustain this informal remittance system despite increasing regulatory attempts to control abuse. Understanding hawala provides important context into the challenges of regulation, international development, financial inclusion, and the intersection of globalization, technology, and traditional cultures. Evaluating this ancient remittance practice within its modern context offers insights into both the potential and pitfalls emerging at these complex crossroads of commerce and culture.