Hawala: An International Development Tool?

By Catarina Santos


Roughly 38 percent of the two billion people in the world’s lowest economic percentile do not have bank accounts and therefore lack access to the global financial market.  Hawala, or “transfer” in Arabic, is a remittance system that runs parallel to formal financial system transactions. Although it is often associated with financing terrorist activities, narcotics trafficking and tax evasion, and is therefore illegal in most countries, hawala can be an important tool to facilitate the sending of remittances. This is especially the case for poorer populations in developing countries and for transactions by undocumented people. In fact, remittances received through hawala account for a third of Somalia’s gross domestic product (GDP).

Despite its ubiquity in many parts of the world, hawala remains under the radar. This article provides a background on how hawala functions, discusses why it can be an attractive alternative remittance system, and considers whether hawala should be regulated as a security threat or promoted as a development tool.

Background on hawala and how it works

Hawala started in South Asia around the 18th century, before Western banking practices reached the region. It evolved over the years and today is used mostly by migrant workers overseas for financial transactions domestically and internationally. This system distinguishes itself from the traditional remittance systems because it is largely based on trust and uses family connections and affiliations within communities to circulate money between “hawaladars,” or hawala dealers.

Why would migrants prefer to use this system over an official banking system? The main reasons are cost effectiveness, efficiency, reliability, lack of bureaucracy, and tax evasion. This system does not require identification documents or formal bank accounts, and does not leave a paper trail.  Users of this method are therefore often associated with undocumented people and people committing illegal activities.

Because hawala is a “cheap, fast, and reliable money transfer system,” it is extremely prevalent in countries such as India, where Interpol estimates that it represents close to  40 percent of the country’s gross domestic product (GDP). In Pakistan, about five to seven billion dollars in remittances, approximately 3 percent of the country’s GDP, enters the country annually through hawala. In 2005, the World Bank estimated that the total amount of remittances sent to developing countries was double the level of the official development assistance (ODA). Many migrants use hawala to send money to their home countries – transactions that are estimated at $390 billion a year. The below scenario, adapted from a report of the Financial Crimes Enforcement Network, explores how hawala networks function:

In this scenario, Abdul is a Pakistani living in New York and driving a taxi. He entered the United States on a tourist visa, which has since expired. From his job as a taxi driver, he has saved $5,000 that he wants to send to his brother, Mohammad, who is lives in Pakistan.


Using a Major Bank

Using Hawala


The bank requires that he open an account before doing business with him:

  • Abdul must provide documentation to verify his identity and legal status in the United States
  • The bank will sell him Pakistani rupees (Rs) at the official rate of 31 per dollar;
  • The bank will charge $25 to issue a bank draft.
Kamir, a fellow taxi driver and hawaladar, offers the following deal:

  • 5 percent commission for handling the transaction;
  • 35 Rs per dollar

Amount Received in Pakistan

Rs 154,225 Rs 166,250

Extra Costs

Delivery; an overnight courier service can cost as much as an additional $40 to reach Pakistan and take as long as a week to arrive None; delivery can happen as early as a few hours after the process is started and is included in the commission fee

This table is an original creation of the author, Catarina Santos, based on data from the Financial Crimes Enforcement Network report “The Hawala Alternative Remittance System and its Role in Money Laundry.”

As shown in the table above, the process of sending money via traditional banks would not only be more expensive for Abdul but could also raise issues around his migration status. If he uses the hawala system, his brother in Pakistan receives more money, and it is delivered faster and more reliably. The following diagram illustrates in more detail how hawala transactions work. Hawaladars settle their debt by matching “people who want to get money into the country with those who need to get it out,” so no money is actually transferred internationally.


This diagram is an original creation of the author, Catarina Santos using a map under Creative Commons Attribution-Share Alike 3.0 Unported, and photos under public license.

It is often the case that for domestic transactions in developing countries, hawaladars operate openly. For example, a local grocery shop in Kabul, Afghanistan, will have a staff person that is also a hawaladar full-time. However, this scenario has become less frequent since 9/11, as is explained below.

How hawala can be a tool for international development

Does hawala represent a security threat?  Like most remittance systems, it can be used to sponsor illicit activities. The fact that hawala has no paper trail and does not require proof of identity from lenders has led many individuals to use it to conduct money laundering and sponsor terrorist activities. Some examples of hawala use listed in the Financial Crimes Enforcement Network report are Al Qaeda’s funding for the attacks on 9/11 and the bombings in Bombay, India in 1993. Despite the security risks associated with this system, it is premature to disregard the potential hawala holds for international development.

Hawala networks can be used as a development tool. Since hawala is largely based on in-person transactions, it is able to reach remote areas that otherwise do not have access to formal banking systems. It is also important to emphasize that most hawala users have “low levels of literacy, no bank accounts or credit cards and sometimes no identification documents.” This becomes especially relevant in post-conflict states and countries where the formal economy is not established or accessible.

In Afghanistan and Somalia, small humanitarian aid and relief agencies have chosen to use hawala to deliver emergency response to remote areas because the costs of establishing other methods of money distribution are too high. It was the method chosen by Action Against Hunger (AAH), a global humanitarian organization operating in Afghanistan, because it was the only way that aid would reach the most remote areas. In Afghanistan, hawala was for a long time the safest and most established way to circulate money domestically, and especially in rural villages.

Additionally, as Transparency International highlighted on the Expert Answer in 2008, “remittances are very important sources of income for many impoverished households and may play an important role in promoting growth and development.” Remittances become a crucial form of subsistence for thousands of impoverished households, and can be used for investment in small businesses that otherwise might not have access to capital.

 How should hawala be regulated?

The Financial Action Task Force (FATF) and the International Monetary Fund (IMF) have released reports suggesting how hawala services can and should be regulated. While Western countries want to regulate this service given the existence of well-established banking and financial systems, the same cannot be said for fragile states. In the example of Afghanistan, the State Department said in 2015 that “there is no clear division between the hawala system and the formal financial sector.” Even banks will occasionally use hawaladars to “transmit funds to hard-to-reach areas.” In the absence of formal institutions, hawala enables people to have equal access to financial transactions.

That being said, since 9/11, most shops worldwide that provided hawala transactions have had to register their businesses, identify their clients and keep records of transactions. A helpful case to examine is that of Dahabshiil, the largest international money transfer firm in Africa. Dahabshiil initially provided an untracked hawala service butstarted keeping records of all transactions after 9/11, as required by law. In case clients do not possess passports or other forms of identification, the company relies on “tight-knit clan networks and references to prove identities” in order to keep track of all users.

This company represents a leading example of how to keep the benefits of the hawala system while at the same time deterring the illicit crimes associated with it. The idea of in-person money transaction is useful, and it should be regulated to the extent that every person sending and receiving money has to be identified and registered. The records should be kept private like any other private entity, and only disclosed in case of a criminal investigation.

Western money transfer companies have learned from the effectiveness of hawala and, with the help of technology, have cut the costs of international money transfers. For example, Transferwise, a London based company, matches people in the same country that want to send or receive money and then transfer the funds between their accounts. This type of innovative service, while allowing for fast-paced transactions, is limited to those with internet access and bank accounts. When pushing for tougher policies, it is important to bear in mind that to regulate transfer systems, the assumption is that there is a formal banking system available. That is only true for some parts of the world. Where there is no infrastructure, technology, or identification documents, hawala might be the only viable option.


Remittances are the main provider of subsistence for many impoverished households and a source of business capital, whether that comes through a formal banking system or not. Hawala provides many benefits for the developing world and even for migrants in developed nations that do not yet have access to formal banking. To reduce the risk of hawala for criminal activities, the hawaladars should keep a record of all the users, and have records ready to be disclosed in case of a criminal investigation. This is not a proactive but rather a reactive solution – it will not prevent money laundering; it would only allow the criminals to be identified after the crime is committed. Thus, there is much room for research on how hawala can be reformed to have less risk but still retain its clear benefits. Until then, where infrastructure and official banking systems are altogether nonexistent in developing countries, hawala remains an efficient system for money transfer.

One thought on “Hawala: An International Development Tool?

  1. Pingback: Hawala: Funding development or threatening security? – thoughtsofjill

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