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.