Word of the week: hawala

January 27, 2010

Hawala is Arabic for “transfer.” 

Unfortunately, all too many definitions of hawala highlight the positive aspects of the “transfer,” like the Interpol report that highlights the “cost effectiveness” and “efficiency” of hawala.

And the definitions with more cynical views don’t even bother to tie the hawala back to Islam.  Princeton’s online lookup calls hawala, “an underground banking system based on trust whereby money can be made available internationally without actually moving it or leaving a record of the transaction.”

One of the only definitions I have come across (which I’ll add to our glossary soon) that succinctly describe what the hawala is, its benefits when used legally, and its inherent risk of terrorist or criminal activity comes from a report* issued by the Council on Foreign Relations defining hawala as:

[An] underground banking system, which allows money transfer without actual money movement, or any wire transfer.  There is nothing inherently illegitimate about the hawala system—it offers critically needed financial services in many remote corners of the globe and is used extensively by millions of law-abiding persons… But its nature makes it particularly susceptible to abuse by terrorists and other criminals (Greenberg).

I’d like to think that my own post on hawala here also helps clarify the concept.

What’s important to emphasize is that the hawala is just a type of transaction.  Nothing about hawala implies the source of the money being transferred.  That’s why it’s so absurd to blame hawala for “funding” terror.  What it does is conceal the funding trail.  But our own government officials don’t even seem to understand that.  More on that tomorrow.

*Greenberg, Maurice R.  Terrorist Financing.  Council on Foreign Relations:  New York, 2002.


  1. What you pointed is a politically correct definition in financial domain, yet not the factor that drives and give birth to IB as well as Hawala. I am not sure if i am overestimating hawala, or thinking something wrong.. but wanted to dump my thought to put my analysis on test, though i am falling short of words..

    I consider Islamic banking as Hawala v2.0, though many people claim that Hawala is not a part of Islamic banking, because they consider IB based transactions are ‘far more visible’ then Hawala transactions.. yet does involvement of a bit transparency turn a goose into swan ? .. or should I ask if changing the brand name also change what IB or hawala repersent ? .. if its all about transparency then we can also say “New Hawala, with 10% more transparency”.., rather then Islamic banking (I am ignoring sukuk’s and bonds like feature that IB has introduced recently using modern banking idea )..

    here is my analysis drawn from human rights stand point, and perhaps will also pin-point the driving force that allow Hawala to exist till today, as well as is laying foundation to IB.

    Abu Bakr b. Mase-ud al–Kasani in 1327 laid foundation of Hawala as an legalized Islamic money transfer institute.. do take into consideration ‘point 4’ from your flow chart.. and do notice the role idea of missing interest visible in it..

    political Muslim world took translation from Brand ‘Hawala’ to Brand ‘Islamic banking’ between 1925 and 1980… where initially all work of this translation were done in Pakistan ( and in pre-partition india) via iqbal, Mawdudi .. and later enhanced by a Egyptians ( especially Egyptians in Germany )… the model that Egyptian salafist developed in Germany was finally adopted by OIC nations .. laying the foundation of IB.

    this all was done to break dependencies from ‘christian’ controlled international banking, as visible from Islamic literature from Indian subcontinent… This gave a good enough reason for ‘Imperialist hating’ Mass to do not participate in main stream banking system back then (Even If it was available.) Though imperialism is gone, and international banking system is adopted by almost everyone.. but Muslim participation in it is still to its minimum… as the modern banking system still has a imperial seal on it, and not Islamic.

    its decades since ‘Muslim majority’ Pakistan has launched IB, yet till today majority of its foreign transaction take place via hawala.. source [article from 2001]


    The answer to generic question about why majority of Islamic world failed to adopt its own IB, that the fanatical Islamist sell like anything outside? answer of it does not lies inside Hawala or Islamic banking, rather in Islamist thought process…

    major reason behind surviving Hawala is a co-product of missing legal and financial infrastructure in 3rd world countries, and has less to do with transaction time or less rates… No one, i repeat, no one will ever love to translate his/her USD.5000 of white money, into PKR.239,500 of black money… Real reason is that hawala is the only available Legalized way to send money inside extremely religious Islamic society, because Hawala is in 100% alignment with what they call Islamic financial laws since ages, and they rejected to be part of main-stream banking, or haven’t been given chance to do so.

    Islamic text laid the foundation for Hawala, and also are laying the foundation of IB.. as Hawala has gained a bad brand name for sponsoring terrorism, the re-brand-ization became must to keep a face in outside world..

    as i said the its Islamic thought process that matters here… IB contribution to this world is really unique, and unpredicted by anyone.. no one ever had thought of well known historical metropolis like Karachi or Cairo will turn towards de-urbanization.. thanks to Islamic banking.

    In highly corrupted societies with lot of corruption, the society owns a guilt to contribute equally with corrupt officials working for social-civil structure.. Islamic banking provide a cure for this guilt, but not for the corruption.. thanks to their brilliant idea of legalizing the guilt coming out of evil corruption, all one need is to pay the tax in name of god to participate officially in corruption of society without any guilt felling to live with. Direct impact of working in such environment is high level of insecurity between business operatives and unions.. and promoting construction based on trust based financial networks with mutual financial interest create lobby as goal to be secured their interest in such system. This speed up the deurbanization.

    Now in such ‘faith dependent’ climate, jobs are not provided on bases of your experience or expertise.. rather on your links(and religion)….. to inject you inside a organization based on trust, you must approach via a trustworthy relation… creating the environment visible openly in Islamic society…

    this breaks up entire secularism of financial-industrial .. and one is left with two channels that funds Islamism..

    One itself via the taxes that one pay to live a ‘guiltless’ life, and other is generosity that the worker owns towards the trust network that offered him work..

    as trust network are formed for security, and be in contradiction with Islam is to invite insecurity.. the weight of generosity and the guilt feelings, both create a channel where peoples enroll to them get adherent of islamism by 100%..

    so in short, IB is for rich peoples who can deal with information and are part of main stream (Political) society.. Hawala is a simpler version of IB, to deal with underdeveloped uneducated peoples that are blind followers under their ignorance…

    • A few points, Puneet. (I hope it’s okay if I call you Puneet.)

      First, I see hawala as one element of broader Islamic financial law. Like many aspects of Islamic finance, much of the problem stems from the ban on riba, or interest. The prohibition on interest results in complicated financial instruments like sukuk and takaful that are designed to generate yields without involving interest. The result? Opaque instruments with higher than average default rates. (I think the ban on riba also contributes to Islam’s aggressive tax policies, but that would merit a whole essay unto itself…)

      The prohibition on riba also fuels hawala in my judgement. Because you can’t charge interest on a loan in Islam, naturally Muhammad declared that loans should be paid off as quickly as possible. Therefore the Hadith prioritized timely paying off of loans, because the lender is getting no extra compensation for making the loan. But how can you pay off a debt when you don’t have money on hand? You get somebody else to pay it for you. And somebody else pays the third party off. And a fourth party pays off the third party. And so on, and so on. Eventually, all these debt swaps result in a hawala network. It is Islamic law that has caused the hawala concept to endure throughout the centuries.

      That is precisely why I’m not a fan of most of the mainstream definitions of hawala, because they do not address the Islamic character of hawala’s existence. The chart that I included in my old post came from the Washington Post as I indicated. I felt it was important to include a graphic because hawala can be a tricky concept for newbies.

      I’m not sure I completely understand your argument that Islamic banking is Hawala 2.0, but your points are certainly valid & fair that the standard definitions & explanations of hawala don’t go far enough.

  2. sorry just completed the comment in hurry, and haven’t reviewed it.. forgive if i had made some grammatical mistake.. and feel free to ask if some confusion occurs, or if i am unclear somewhere…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: