Before SWIFT: Hawala, Credit Transfers and the Payment Networks of the Muslim Commercial World

Imagine being a merchant in a world without banks as we understand them.

You are in Basra. Your supplier is hundreds or thousands of miles away. Silver is heavy. Gold is valuable enough to attract thieves. Roads are dangerous. Ships sink. Political borders change. There is no SWIFT message, no correspondent bank, no Fedwire, no card network and no instant stablecoin settlement.

Yet trade still has to happen.

The history of payments is largely the history of solving this problem: how can value move without the same physical money making the entire journey?

Modern discussions of hawala often begin with anti-money-laundering rules. Regulators classify it as an informal value-transfer system. Compliance teams worry about opacity, settlement outside conventional banking channels and the possibility of abuse. Those concerns are real.

But they are only the modern chapter.

Long before bank wires, merchant communities across the Muslim world and neighboring regions used relationships of credit, agency, debt transfer and correspondent settlement to reduce the need to transport precious metal. Historical sources discuss hawala, suftaja and related instruments. Similar solutions emerged elsewhere under other names, including hundi in South Asia and “flying money” traditions in China.

The historical record is rich enough to show sophisticated payment logic—and incomplete enough that we should resist the internet's favorite claim that one civilization “invented the modern bank.”

The payment problem existed before Islam and beyond Islam

The basic economics are universal.

Suppose Merchant A in City A needs to pay Merchant B in City B. Physically sending coins has several costs:

• transport;

• theft risk;

• verification of weight and purity;

• currency conversion;

• time;

• guards and insurance-like arrangements;

• political and road risk.

A network solution is better.

Merchant A gives value to an intermediary in City A. That intermediary has a correspondent or debtor in City B. Merchant B is paid there. The intermediaries later settle among themselves through trade balances, reverse flows, goods, currency or periodic netting.

The money has not literally traveled from A to B. The obligation has.

That is the conceptual ancestor of a great deal of modern payments.

When a bank sends an international payment today, the same banknotes do not leave Istanbul, fly to New York and land in the recipient's account. Ledgers change. Correspondent claims change. Settlement assets move between institutions. Payments are ultimately coordinated changes in obligations.

That does not make modern correspondent banking “the same as hawala.” It shows that both respond to the same fundamental problem.

Hawalah in Islamic law is not identical to modern informal hawala

Terminology creates immediate confusion.

Classical Islamic jurisprudence uses hawalah for the transfer of a debt or obligation from one person to another under defined legal conditions.

A Prophetic tradition in Sahih al-Bukhari addresses the transfer of a creditor to a solvent person and is part of the classical jurisprudential foundation for hawalah. See Sahih al-Bukhari 2287.

Modern usage of “hawala,” especially in regulatory literature, often refers to an informal remittance system in which brokers transfer value across locations outside or parallel to conventional banking rails.

The concepts are historically related in language and obligation-transfer logic, but they should not be lazily treated as identical legal institutions.

That distinction is worth preserving throughout the article.

What the IMF says about the historical logic

The International Monetary Fund has studied informal funds-transfer systems in detail.

Its historical work makes two points that belong together.

First, these systems grew partly because distant trade needed monetary mechanisms when conventional banking either did not exist or was weak. Moving gold and precious metal across dangerous routes created obvious security problems. Value-transfer arrangements reduced the need to carry the settlement asset physically.

Second, the IMF explicitly cautions that the precise antecedents of hawala in the Middle East are not well documented.

That second sentence is important because payment history attracts confident myths.

You will often see claims that Arab merchants invented the check, invented bills of exchange, invented banking or created a direct unbroken predecessor of every modern payment instrument. Historical influence certainly traveled across commercial civilizations, and Islamic merchants used sophisticated credit instruments. But clean one-line genealogies are usually harder to prove than the internet suggests.

The responsible version is more interesting: merchant societies repeatedly discovered that trusted claims can travel more efficiently than metal.

Trust was infrastructure

Today we build payment trust with regulation, bank capital, cryptography, central-bank settlement, legal enforceability, identity systems and messaging standards.

A medieval trading network had different tools.

Reputation mattered enormously. Family and merchant networks mattered. Religious and commercial norms mattered. Repeat business mattered. Correspondents needed confidence that obligations would ultimately be honored.

This is not romantic. Trust-based networks can exclude outsiders and fail spectacularly when a counterparty disappears. But where state infrastructure is weak or distances are large, reputation can substitute for formal enforcement surprisingly well.

The same logic still appears in modern informal remittance networks. A hawaladar who cheats counterparties may lose access to the network that makes the business possible.

A simplified hawala transfer

Suppose Ahmed in Dubai wants to send US$1,000 equivalent to his sister Sara in Karachi.

A simplified modern transaction might work like this:

1. Ahmed gives US$1,000 equivalent to Hawaladar A in Dubai.

2. Hawaladar A contacts Hawaladar B in Karachi with payment instructions and an authentication method.

3. Sara collects the equivalent local currency from Hawaladar B.

4. Hawaladar A now owes value to Hawaladar B.

5. The brokers settle later through reverse remittance flows, trade transactions, bank transfers, cash, goods or netting with other obligations.

The striking feature is that Ahmed's original money does not necessarily cross the border.

The payment crosses the border because the brokers' balance sheet relationship changes.

This is why hawala can be fast even when interbank settlement is slow.

Netting is the quiet genius of payments

Suppose the Dubai broker owes Karachi US$100,000 equivalent after a week of transfers. But the Karachi broker also has customers sending US$70,000 equivalent in the opposite direction.

The brokers do not need to move US$170,000 gross.

They can offset flows and settle the US$30,000 net difference.

Modern financial markets do the same thing at vastly greater sophistication. Payment systems, card networks, securities clearing houses and foreign-exchange markets all use forms of netting to reduce settlement demands.

Again, this does not mean Visa is hawala. It means the mathematics of settlement keeps rediscovering the same truth: gross customer obligations can often be satisfied with much smaller net transfers among intermediaries.

Why informal systems survived modern banking

If regulated banks can move money globally, why does hawala still exist?

Because “better infrastructure” depends on the user's problem.

Informal value-transfer systems can remain attractive where:

• the formal banking system is expensive;

• recipients live far from branches;

• identification requirements are difficult for some customers to satisfy;

• exchange controls create parallel markets;

• conflict has damaged banks;

• settlement corridors are poorly served;

• users value speed, language and cultural familiarity;

• formal cross-border banking is slow or unreliable.

The IMF has highlighted speed, cost, cultural convenience and versatility as reasons informal systems can remain competitive.

These features also create regulatory concerns.

A system optimized for flexible settlement and limited paperwork can be exploited for tax evasion, sanctions violations, money laundering or terrorist financing. That does not make every hawala transaction criminal any more than misuse of a bank account makes banking criminal. It does mean regulators care deeply about licensing, customer due diligence, recordkeeping and suspicious-activity controls.

The compliance story should not erase the payment story

After September 11, 2001, public discussion in the West frequently treated hawala primarily as a shadowy mechanism for illicit finance.

That lens distorted public understanding.

Informal settlement can create genuine AML/CFT risk because transactions may occur outside conventional regulated channels. Regulators were right to focus on it. But hawala also exists because formal systems have sometimes failed to serve legitimate remittance users efficiently.

For a payments professional, that is an important design lesson.

When users repeatedly choose an informal rail, the question is not only “How do we prohibit it?” It is also “What is the formal system failing to provide?”

Price? Geographic reach? Settlement speed? Identity accessibility? Trust? Foreign-exchange availability?

Good regulation addresses the risk without pretending the demand is irrational.

Suftaja, bills and the danger of neat origin stories

Historical scholarship describes suftaja as an instrument used to transfer credit or purchasing power across locations, helping merchants avoid physically carrying money. Cambridge economic-history material, for example, discusses hawala and saftaja/suftaja as techniques used in long-distance trade across the Islamic world.

It is tempting to write that these were simply “the first checks.”

Do not.

A modern check is a particular negotiable instrument embedded in specific banking and commercial-law systems. Historical instruments differed by period, place and legal treatment. Similar economic functions do not prove direct legal descent.

The better comparison is functional:

• a traveler wants to avoid carrying cash;

• a merchant wants to settle at another location;

• a trusted party records an obligation;

• another party honors that obligation elsewhere;

• balances are settled later.

That pattern is enough to make the history fascinating without inventing a simplistic genealogy.

Commerce under Islamic law also depended on contracts, not just remittances

The Muslim commercial world used a broader legal toolkit: partnerships, agency, sales, leases, advances and credit arrangements.

This matters because payments do not exist independently of commerce.

A trader moving value from Cairo to Damascus might be settling a sale, funding a partnership, repaying a debt or financing inventory. The payment mechanism is only one layer of the transaction.

Modern payments professionals sometimes make the same mistake in reverse: treating the payment rail as the product. In reality, every payment exists because some underlying obligation is being discharged.

Islamic commercial jurisprudence understood that relationship by embedding payment, debt and transfer rules inside a wider law of contracts.

What modern fintech can learn from hawala

Not “remove compliance.”

The more useful lessons are architectural.

1. Local payout can be separated from cross-border settlement

A recipient can be paid locally while intermediaries settle later. Modern remittance networks, correspondent banking and stablecoin-based treasury models frequently use versions of this separation.

2. Netting matters

The amount customers transfer is not necessarily the amount intermediaries must settle.

3. Liquidity location matters as much as messaging

A perfect payment instruction is useless if no one has local currency where the recipient needs to be paid.

4. Trust networks can outperform expensive formal rails

Technology can digitize trust, but it cannot remove the need for it.

5. Regulation follows the intermediary that controls value

Whether value is represented by cash, bank balances or tokens, authorities care about who accepts funds, who owes whom and where settlement occurs.

These lessons make hawala history highly relevant to stablecoin payments. A stablecoin can allow two counterparties to settle a net obligation instantly across borders, but the hard problem of local on-ramp and off-ramp liquidity remains. In that sense, the technology changes the settlement asset while preserving an ancient network problem.

Hawala is not uniquely “Islamic finance” in the modern product sense

Another correction is necessary.

Modern informal hawala should not be marketed as though it were automatically a Sharia-certified financial product. It is a transfer mechanism. Its permissibility depends on how it operates, what obligations are created, what fees or exchange transactions occur and whether other prohibited elements are present.

Likewise, similar informal funds-transfer systems developed in non-Muslim societies.

The historical association with Muslim and South Asian trading networks is important. It is not a claim of theological exclusivity.

That distinction helps keep this article in the right intellectual category: payments history informed by Islamic commercial law, not a claim that every broker network is an Islamic financial institution.

The practical takeaway

The most interesting fact about hawala history is not that people found a way to “send money without banks.”

It is that payments have always been abstractions layered on top of trust and obligations.

Coins do not need to travel if claims can travel. Gross money does not need to move if counterparties can net. Settlement can occur after the recipient has already been paid. Local liquidity can be more important than the location of the sender's original funds.

Those principles sit underneath modern correspondent banking, remittance networks and many stablecoin payment designs.

The technology has changed beyond recognition. The problem has not:

Someone has value here. Someone else needs value there. How do we alter the right ledgers, manage the trust and settle the intermediaries without moving a wagon of silver across dangerous ground?

For a payments industry obsessed with novelty, that is a useful reminder.

Key terms used in this article

Further reading and primary references

1. IMF, Informal Funds Transfer Systems: An Analysis of the Informal Hawala System, Occasional Paper No. 222: IMF.

2. IMF, “Hawala: How does this informal funds transfer system work, and should it be regulated?” Finance & Development.

3. Sahih al-Bukhari 2287 on transfer to a solvent debtor: Sunnah.com.

4. Frank E. Vogel and Samuel L. Hayes III, Islamic Law and Finance: Religion, Risk, and Return.

5. Cambridge economic-history scholarship on premodern credit transfers, trade and bills of exchange; use for comparative history rather than simplistic origin claims.

Continue the series

Previous: Part 5: Who Decides What Is Sharia-Compliant?

Series hub: Money Under Islamic Law

Next: Part 7: Gharar, Maysir and Takaful

Later: Part 10: Stablecoins, Tokenization and Islamic Finance.