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What is hawala

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.
What is Hawala 

Hawala (from Arabic, meaning "transfer"), or hundi, banking systems pose unique challenges to anti-fraud investigators. So what is hawala banking, exactly? It is best described as an alternative remittance system running in parallel with the established regulated banking system. It is unregulated but legal in some jurisdictions and illegal in others. It is very difficult to detect and yet as headlines show is an effective method of utilising criminal funds for illicit purposes. The first “western bank” in India was the Bank of Hindostan, established in Calcutta around 1770 --however, for hundreds of years prior to this the hawala/hundi systems of remittance have operated. There are many such systems operating around the world, and each has different variations on a theme due to cultural differences -- for example, fei-ch’ien (China), hui kuan (Hong Kong), hundi (India), hawala (Middle East), padala (Philippines) and phei kwan (Thailand). These systems have proved useful for transferring money to those where there is a lack of regulated facilities (such as in Afghanistan, for example).

How hawala works

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. It is the transfer of money without actually moving it. In fact, a successful definition of the hawala system that is used is "money transfer without money movement".

Hawala example transaction; see text for an explanation

The figure shows how Hawala works: (1) a customer (A, left-hand side) approaches a hawala broker (X) in one city and gives a sum of money (red arrow) that is to be transferred to a recipient (B, right-hand side) in another, usually foreign, city. Along with the money, he usually specifies something like a password that will lead to the money being paid out (blue arrows). (2b) The hawala broker X calls another hawala broker M in the recipient's city, and informs M about the agreed password, or gives other disposition instructions of the funds. Then, the intended recipient (B), who also has been informed by A about the password (2a), now approaches M and tells him the agreed password (3a). If the password is correct, then M releases the transferred sum to B (3b), usually minus a small commission. X now basically owes M the money that M had paid out to B; thus M has to trust X‍ '​s promise 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 the absence of a legal and juridical environment. Trust and extensive use of connections, such as family relations and regional affiliations, are the components that distinguish it from other remittance systems.

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 (as has been the case for many typical receiving countries such as 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). Moreover, in some parts of the world it is the only option for legitimate fund transfers, and has even been used by aid organizations in areas where it is the best-functioning institution.[3]

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Harry November 03 2015 at 10:26 AM

Thanks SendThatCash this was helpful been wondering What is hawala for long time and I came across this.

Joshua September 03 2015 at 06:58 PM

Extremely useful post thanks for posting SendThatCash!!

Arshad August 06 2015 at 02:18 PM

Excellent post it was very helpful learning more about Hawala and how it works. I saw it being use once and never understood how it was regulated.