Business, Legal & Accounting Glossary

Definition: Hawala

What is the dictionary definition of Hawala?

Dictionary Definition

A long-established informal system of money transfer from India and the Middle East, still in use by migrant workers.

Full Definition of Hawala

Hawala can be referred to as international financial networks unregulated by government or any administering authority. They exist all over the globe and utilized mainly by individuals to channelize cash. Cash can be transferred to domestic as well as international destinations. A majority of hawala brokers are based in Africa, Asia and the Middle East.

Hawala (also known as hundi) is an informal value transfer system used primarily in the Middle East, Africa and Asia.

Its origins are not entirely clear, but it is believed to have been used first in the financing of long-distance trade in the early medieval period on trading routes such as the Silk Road, the Eastern Mediterranean and the Indian Ocean. Hawala is mentioned in texts of Islamic jurisprudence as early as the 8th century. 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.

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 honour system. As the system does not depend on the legal enforceability of claims, it can operate even in a defunct legal and juridical environment. No records are produced of individual transactions; only a running tally of the amount owed one broker by the other 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 (black) market rates rather than official rates.

Hawala is attractive to customers because it provides a fast, convenient and safe 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 underdeveloped (e.g. due to weak 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 disfavour the system, and accusations have been made in recent years that terrorist funding often changes hands through hawala networks.

After the September 11, 2001 attacks, the American government suspected that hawala brokers may have had 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 on the twin towers were not sent through the hawala system, but rather by inter-bank wire transfer to the 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 malfeasance 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 “successes” have brought the authorities any closer to identifying and arresting a significant number of terrorists or drug smugglers.

Hawala Method

Hawala transfers are done through operators. When a person wishes to transfer money, hawala operator in that location contacts his counterparts in the destination location. This communication is made through telephone or email. Minutes after a call (or email), the destination operator confirms that he has the requisite amount of money in hand. Money transfer involves sharing of a password between donor, recipient and two hawala operators. Recipient of money must provide destination hawala operator with a password to access money. Money is transferred by trust alone. No promissory instruments are exchanged. Cash debt between two operators is settled at a later date.


Hawala has been around since ancient times. The financial process traces back its roots to classical Islamic law and finds mention in 8th-century Islamic jurisprudence texts. At that time, transfer of debts were not permitted under Roman law. Hawala started as a part of commercial transactions between Europe and the Muslim world in the Middle Ages. It financed longer trade routes between Asia and Europe. Hawala was brushed back to near non-existence with the advent of 20th-century banking. Hawala network is now mostly used by migrant workers who wish to transfer their money to families back home.


Hawala system has many attractions compared to official traditional money transfer networks. It is swifter and cheaper than systems performing equivalent functions. Fees charged by hawala operators are lower than remitting banks or companies. This is due to minimal overhead costs. Absence of bureaucracy makes the process very fast. Funds are delivered to a recipient within 24 hours.

Illegal Activities

9/11 terrorist attacks have warned world governments of the danger of unregulated financial transactions like hawala. Efforts are made worldwide to prohibit money laundering. Many hawala operators have been arrested and hawala networks closed down. It is illegal in many countries and in some United States states.

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Hawala. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/hawala/ (accessed: September 24, 2021).
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Hawala. PayrollHeaven.com. Retrieved September 24, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/hawala/

Definition Sources

Definitions for Hawala are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th April, 2020 | 5 Views.