What is Hawala?
Hawala is a form of remittance transfer based on trust and personal relationships rather than a formal banking system. The Hawala system has existed for centuries, though it has gained more attention in recent years.
How does the hawala system work?
In the Hawala system, funds are transferred between individuals or businesses without any money actually changing hands. Instead of making a direct transaction, one person pays an intermediary (known as a hawaladar) in their home country who then contacts another hawaladar in the recipient's country.
The second hawaladar delivers the funds to the recipient or transfers them into their bank account after deducting a commission fee from both parties. This makes Hawala an illegally efficient and cost-effective way to send money from country to country as it bypasses traditional international payment channels and currency conversion fees.
Potential risks associated with Hawala
Hawala operates outside of formal banking systems, there is no official record of transactions and this can be seen as both beneficial and dangerous for those using it. On one hand, it does provide anonymity for those who may have personal or political reasons for wanting secrecy when transferring money but on the other hand it also means that people can evade taxes or launder money more easily than through traditional methods.
Another potential problem with Hawala is that if one hawaladar fails to deliver the promised funds, then there is no legal recourse unless both parties agree to resolve their dispute through some other means such as arbitration.