The Curious History of the Hawala Money Transfer System

You’ve probably sent or received a money transfer at some point. It’s commonplace.

When we think about it, we don’t bother to think about how these transfers are accomplished. If we think about it a bit we consider that transfers are possible because of the technological and communications infrastructure that has been created.

But before the internet or electricity existed, how was money sent from one place to another? Aren’t you curious to know?

International money transfers seem simple enough, but it’s actually a very complex and fascinating story. Can you imagine how someone sent goods or money to another country in the 8th century? Surely they would use very different methods than we see today.

It seems obvious to us to say that technology has marked the historical evolution of transfers. The phenomenon has also been driven by the constant social movements that have taken people from one continent to another. It is technology that has connected us more and more, making money transfers around the world easier and easier, But it has been a long and very rich process historically speaking.

Hawala System

Is it possible to send money without the need for the money itself to move physically? Perhaps today this question seems absurd to you and you will say “yes, of course it is possible”. In fact, mankind has been acting this way for a long time. Let’s talk about the system where it all began: the so-called Hawala system.

Moving money abroad without the need for the money to move physically is not a modern concept, but an ancient one. The first historical references to it can be found in the 8th century in South Asia.

The term “hawala” has roots in the Arabic language and means the same thing almost everywhere in the world: transfer. It is a way of transferring goods or money informally. 

The Hawala system requires no banks, no currency exchange sites, no tedious forms, and no transfer fees. The minimum necessary for the system to work is that there is a sender, a receiver and at least two people in between, as intermediaries in the process.

This transfer system has a long history and centuries of operation. It emerged even before traditional banking and has survived century after century mainly because of its apparent simplicity, but also because of the benefits it brings to those who use it.

Millions of dollars and other currencies are moved around the world each year through the Hawala transfer system, although neither the total amounts nor the people who operate it are known exactly. One of the key features of the system is that there is virtually no record of the transactions or the users who use the hawala system.

This opacity of transfers can lend itself to money laundering operations and transfers related to illegal activities such as drug trafficking, human trafficking or the financing of terrorism, for example. It should be made clear that the Hawala system does not exist for these purposes, but it is sometimes used for them. It must be said.

The Hawala system is defined as a traditional method that operates informally and in parallel to any existing banking system. At its core, it is based on and relies on trust shared between intermediaries.

But how does the system work? It’s actually quite simple. Let’s take an example.

Let’s say you are in Atlanta and need to send money to a friend in South Africa. All you have to do is contact an intermediary in the Hawala system – known as a hawaladar – and give him or her the amount of money you want to send along with a password that only you and the recipient of the money know. In this way, the hawaladar will also know the password.

This intermediary will contact another intermediary in the destination country of the transaction, in this case, South Africa. This second intermediary will deliver the transfer to the recipient in the local currency, but will first ask for the password, as a security measure. The whole transaction could be completed in a matter of hours.

But what do the intermediaries gain? They get a small commission agreed in advance, which is traditionally much lower than the commissions of traditional banks.

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