Hawala is, in Islamic commercial law, the contract by which a debtor transfers a debt he owes to a third party who undertakes to pay the creditor, which releases the original debtor. The same word designates informal remittance networks in which brokers called hawaladars settle their reciprocal balances without moving cash across borders, so one term covers both a legal debt transfer contract and a practice of money transfer.
Four elements: muhil, muhal, muhal alayh and muhal bihi
The muhil is the debtor who transfers, the muhal is the creditor who agrees to be paid elsewhere, the muhal alayh is the person undertaking to pay, and the muhal bihi is the debt itself. The contract forms only when all four are clearly identified.
The hadith behind the contract
According to a hadith reported by al-Bukhari, the Prophet said that delay in payment by a solvent person is injustice and that whoever is referred to a well-off debtor should accept the referral. Jurists derived the permissibility of hawala from it.
Whose consent does the transfer need?
The original debtor's consent is always required. For the creditor, schools differ: the Hanbali school obliges acceptance of a solvent payer, while others require the creditor's agreement. The Hanafi school also requires acceptance by the person who will pay.
Same amount, same currency, same maturity
The transferred debt must be certain and known, and most jurists require it to match, in kind and amount, the debt the payer owes the debtor. Transferring 1,000 in order to collect 1,100 would create a benefit comparable to riba.
A worked example of a hawala debt transfer
Take Amal, who owes Karim 5,000 for goods delivered last season, and Bassam, who owes Amal exactly 5,000 from a separate sale. Amal asks Karim to collect from Bassam instead of from himself. Amal is the muhil, Karim the muhal, Bassam the muhal alayh and the 5,000 the muhal bihi. Once Bassam agrees to pay and Karim accepts the referral, Amal's debt to Karim is extinguished and Bassam's debt to Amal is settled by the same stroke.
The example works because both debts are equal in amount, currency and due date. If Bassam owed Amal only 4,000, the transfer would cover 4,000 and the remaining 1,000 would stay between Amal and Karim. If Bassam's debt were payable in a year while Amal's fell due now, the parties would be mixing a transfer with a deferral, and many jurists would ask for the maturities to be aligned or the difference to be treated as a separate, interest-free arrangement.
Hawala and the end of recourse against the first debtor
Once a hawala is validly concluded, the original debtor is released and the creditor can no longer turn to him. The Hanafi school nevertheless allows recourse if the claim is lost, for example when the payer dies insolvent or denies the debt.
Restricted and absolute hawala
Hanafi jurists distinguish hawala muqayyada, tied to a debt or property the payer holds for the debtor, from hawala mutlaqa, where the payer commits without any link to an existing debt. The latter then looks more like a guarantee.
Cheques, transfers and cards: modern hawalas
Contemporary jurists often analyse a cheque as a hawala instruction addressed to the bank, and a bank transfer as moving a claim from one account to another. This reading helps confirm that no interest is attached to the collection period.
Transfer fees: a paid service, not interest
The intermediary that moves funds may charge fixed or percentage fees for its service. These fees must not vary according to any period of time granted to the client, otherwise they would become a payment for time.
What a written hawala record should state
A hawala between businesses is easier to defend when it is written down. The record should name the muhil, the muhal and the muhal alayh, describe the underlying debt by its origin, amount and currency, and state the date on which payment is due. It should also contain a clause in which the muhal declares that the muhil is released, because this sentence is what separates a debt transfer from a simple instruction to pay.
Signatures of all three parties matter in schools that require the consent of the payer and of the creditor. Where the school applied is not obvious, the safest drafting records each consent separately. Parties who expect the payer to hold funds on the muhil's behalf should say so, since that detail decides whether the transfer is restricted or absolute and therefore whether the creditor may later fall back on the original debtor.
Remittances with currency conversion: exchange first
When a sender pays in euros for delivery in dirhams, there is a currency exchange (sarf) requiring immediate settlement. Standards accept that the exchange is concluded at the counter, the receipt counting as possession, before the converted sum is transferred.
The hawaladar network as hawala in a broad sense
In the informal system money does not travel: brokers keep reciprocal accounts and settle them later through goods, other remittances or bank transfers. Legally, each operation combines agency, lending and debt transfer.
Why authorities monitor informal networks
FATF Recommendation 14 requires money or value transfer services to be licensed or registered and subject to anti-money laundering rules. An unregistered hawaladar exposes the sender to the risk of loss and to prosecution in many countries.
Before handing money to an intermediary
Check that the operator is authorised in your country, that the exchange rate and fees are stated in advance, and that a receipt identifies the beneficiary. A Sharia board can confirm the contract's compliance, but not the correspondent's solvency.
Risks of a hawala remittance and how senders limit them
The first risk in any hawala remittance is counterparty risk: the sender trusts a hawaladar who in turn trusts a correspondent abroad, and a failure anywhere along that chain can leave the beneficiary unpaid. Because the sender has handed funds over before the beneficiary receives anything, the sender bears this exposure unless the operator is regulated and held to safeguarding or complaint procedures.
The second risk is opacity. An exchange rate that is agreed orally, a fee hidden inside the rate, or a receipt that does not identify the beneficiary all make disputes hard to resolve. Senders can reduce the exposure by asking for the rate and the total amount to be delivered in writing, by keeping the transaction reference, and by sending in instalments rather than a single large sum when dealing with a new operator.
The third risk is legal. Operators that do not register, do not verify identities or do not keep records may breach the rules of the country where they operate, and funds can be frozen while an inquiry runs. A sender who uses an unlicensed intermediary may find that the money is stuck and that no court or complaints body will treat the claim as protected.
How a transfer through a hawaladar works
The informal network originated in the Middle East and the Indian subcontinent, where it has long been used for trade and remittances. It relies on trust and on agreements between brokers in different regions. A transfer generally proceeds as follows:
- The customer tells a hawaladar the amount to send and the identity of the recipient.
- The customer hands over the funds, and the hawaladar may charge a commission for the service.
- The hawaladar contacts a counterpart close to the recipient, by phone or message, to arrange the payment.
- That counterpart confirms that he will pay the beneficiary, who presents a code agreed in advance.
- The recipient confirms receipt to the sender.
- The two hawaladars then balance their mutual accounts, through later transfers or other adjustments.
Choosing between a hawaladar and a bank for a remittance
A licensed bank or money transfer operator offers traceability, standardised disclosure of rates and fees, and access to a complaints procedure. A hawaladar may be faster on certain corridors, may serve areas with few bank branches and may suit families who already know the broker personally. The trade-off is that protections depend on the broker's own integrity and on whether he is registered locally.
- Ask whether the hawaladar is registered or licensed where you send from.
- Ask for the exchange rate, the fee and the amount the beneficiary will receive before handing over any money.
- Keep the receipt, the reference code and the beneficiary's confirmation.
- Never use hawala to move funds whose origin you cannot document.
For a Muslim sender the juristic question and the regulatory question are separate: a transfer may be acceptable under the classical contract rules and still be unlawful in the sender's country if the operator is unlicensed. Both checks should be done before the funds leave.