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What is Hawala and How does it Work?

Hawala, also known as hundi or remittance, is a system of informal value transfer that is commonly used in the Middle East, North Africa, and the Horn of Africa. It is a type of alternative or parallel banking system that operates outside of traditional banking channels.

The hawala system is based on trust and personal relationships, rather than on the formal documentation and regulations that are used in the traditional banking system. In a hawala transaction, a sender gives money to a hawala broker, who then contacts another hawala broker in the recipient’s location and arranges for the money to be delivered. The recipient can then pick up the money from the second broker, or have it delivered to them.

One of the key features of the hawala system is that it does not involve the actual physical transfer of money. Instead, the transaction is recorded on a ledger or a “hawala adad” (promise), and the transfer of funds is settled at a later time through a network of hawala brokers who trust each other. This makes the system highly efficient and allows for the rapid transfer of funds across long distances.

The hawala system has been in use for centuries, and is believed to have originated in the Middle East. It has been used by traders and merchants to transfer money across borders, as well as by families and individuals to send money to their loved ones in distant locations.

Despite its long history and widespread use, hawala has also been associated with illicit activities such as money laundering and financing of terrorism. This is because the system operates outside of the traditional banking system, and its reliance on trust and personal relationships makes it difficult to track and regulate.

Despite these concerns, hawala remains an important part of the financial landscape in many parts of the world, particularly in areas where access to traditional banking services is limited. It provides a crucial service for millions of people who rely on it to transfer money to support their families and loved ones.

This page was last updated on January 3, 2023.