Hawala, an ancient global financial honor-system

Hawala is a money-transfer system based primarily in Asia, Africa and the Middle East, based on independent brokers who phone one another and say, "I'm holding so much money in such and such a currency, please transfer an equivalent sum in local funds to such and such a person." The settlements are based on the honor system, and by some accounts, the network has its origins in the Silk Road. The system functions even in places where the rule of law and other elements normally considered crucial to a a functional financial system have collapsed.
The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place entirely on the honor system. As the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment. No records are produced of individual transactions; only a running tally of the amount owed one broker by the other is kept. Settlements of debts between hawala brokers can take a variety of forms, and need not take the form of direct cash transactions.

In addition to commissions, hawala brokers often earn their profits through bypassing official exchange rates. Generally the funds enter the system in the source country's currency and leave the system in the recipient country's currency. As settlements often take place without any foreign exchange transactions, they can be made at other than official exchange rates.

Hawala is attractive to customers because it provides a fast and convenient transfer of funds, usually with a far lower commission than that charged by banks. Its advantages are most pronounced when the receiving country applies distortive exchange rate regulations (as has been the case for many typical receiving countries such as Pakistan or Egypt) or when the banking system in the receiving country is less complex (e.g. due to differences in legal environment in places such as Afghanistan, Yemen, Somalia).

Furthermore, the transfers are informal and not effectively regulated by governments, which is a major advantage to customers with tax, currency control, immigration, or other legal concerns. For the same reasons, governments do not favor the system, and accusations have been made in recent years that terrorist funding often changes hands through hawala networks.

Link (Thanks, Jens!)


  1. From my friends who have used this system in the past, most have said the honor system is there because both a religious edict and the fact that until recently, these countries that used these were little more than loose collections of tribes and thus no law.

    Beyond that, there isn’t really a honor system any more than a loan shark. You may find this out physically, or your family may have to assume your debts. Lots of bad things could happen. The gov’ts stay out of the way to avoid this system from imploding and impeding their citizens from moving around the regions as they have done for thousands of years.

    From the religious aspect of this, I fully support the belief that one should help others in a honor system like this…and I know others that do this from family to family, but money brokers in any religion are only after one thing and they will do whatever it takes to keep that.

  2. @Clif Marsiglio:

    “…and I know others that do this from family to family, but money brokers in any religion are only after one thing and they will do whatever it takes to keep that.”

    Upgrayedd don’t care what your religious persuasion is. Jew, Hindu, Raelian, Democrat – he will find a way to come get his money!

  3. So how is a dispute settled? If Broker Alice reports her records show a 3-unit debt from Broker Bob, but Broker Bob reports his records show only a 2-unit debt, how is the correct debt arrived at in the absence of debt instruments?

    In a fundamentalist culture, perhaps fear of damnation is enough to keep Alice and Bob both honest (or at least forgiving of each other’s discrepancies). But I would bet that what usually happens is that the broker with the biggest, meanest enforcers is the one who is always right.

  4. i’m willing to bet that cash and/or barter transactions are way older than hawala. how old is islam anyway?

  5. Hawala is an persian word basically which means ‘reference’. This system has been used since ages (even when the present system of governments was not present) to facilitate trade between states. The rules were strict in those times (and even now in most of the cases). Defaulters pay heavy penalties in some other form if not in cash. By the way barter is something different from this and is undoubtedly the oldest form known of trading things. Cash was a replacement for barter. Hawala is related to foreign exchange and paying at different locations..


  6. The US had some parallel systems based on reputation and trust. Fax machines did really funky things to them because faxes are trust transfer devices.

  7. #3, Defaulting would given you a short term gain at the expense of long term income.

    It’s like stealing something from a your family when you are named on the will. There is the short term gain from the thing you stole but then the long term (greater) loss of the value of the stuff in the will, and don’t forget the social capital lost when one is disowned by the family.

  8. this ‘unregulated market’ got a lot of attention post 9/11.. interestingly, it was all a load of bs
    (see the wikipedia section on 9/11)

    my limited understanding is that Hawala is also to do with Islamic rules on usury.. AFAIK, these banks charge no interest, just a flat fee!

    Proudhon would love these guys!

    @adam weiss – that airtime currency market is crazy.. way to go LeapFrog Nations!

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