Hawala is also known as hundi, and is basically designed as an informal system for value transfer that is based on the honor and the performance of a network of brokers throughout North Africa, Middle East, South Asia and the Horn of Africa. What makes Hawala unique is that it operates as an alternative to traditional banking channels and financial channels, operating outside of these normal channels as a parallel remittance system. It is important for you to understand how Hawala works in order to benefit from it as part of Islamic finance.
In the most basic form of Hawala, money can be transferred by way of special hawaladars, which are Hawala brokers. This defines a way by which you can transfer money without actually moving it. The most successful definition of what Hawala means is that it is transfer of money without movement of money, or money transfer sans money movement. It essentially entails a customer approaching a broker in a single city, then giving a sum of money to the broker that is going to be transferred to a recipient who is typically in another city, typically a foreign city for that matter. The first Hawala broker will then contact a Hawala broker in the recipient’s city, giving them disposition instructions for the funds, typically minus a rather small commission cost, and then the debt is promised to be settled later on.
One of the most unique features of this Hawala system is that there is no exchange of promissory instruments between these two Hawala brokers. The transaction, in other words, is going to take place completely based on the honor system. The system does not have to depend on the enforceability of these claims from a legal standpoint, and so this makes it possible for the system to operate even when there is no juridical or legal environment. The Hawala relies heavily upon trust as well as the extensive use of connections, and so regional affiliations and family relations go far in allowing this type of system to occur.
Another way that Hawala brokers can earn a profit in addition to the small commissions that they earn is that they can bypass the official exchange rates in order to earn some additional money. The funds in this system are typically going to enter the system in the originating country’s exchange rate, and then they leave in the currency of the recipient country, and so alterations to the exchange rate can allow the Hawala broker to realize a small profit with each transaction.