Hawala

In the hawala system, money is transferred via a network of hawala brokers, or hawaladars. A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date.

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. Often 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 make money through exchange rate speculation. Generally the funds enter the system the source country's currency and leave the system in the recipient country's currency.

Hawala is a attractive to customers because it provides fast, convenient transfer of funds, usually with a lower commission than that charged by banks. 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 disfavor the system, and accusations have been made in recent years that terrorist funding often changes hands through hawala networks.