The Arabic word hawala translates to payment or debt transfer and is the name of an informal money transfer system, traditionally used in the Muslim world, that is both criticized vehemently and relied heavily upon. It has been used to fund terror but remains an essential part of the economies of numerous developing countries.

Existing in various forms and to various degrees throughout the world, informal funds transfer (IFT) systems are used to transfer money both domestically and internationally between two parties. Hawala refers to the financial payment system that is used primarily in the Middle East, North Africa and the Indian subcontinent to transfer funds between two locations via a network of money brokers called “hawaladars.”

The hawala money transfer system predates modern banking. In fact, its origins can be traced back as far as the early Middle Ages during which time Middle Eastern merchants operated in territory that was characterized by the complete absence of formal legal systems of order. This made complex business dealings unpredictable and expensive. Additionally, the contemporary Middle and Near East were composed of an amalgamation of small tribal regions that were only loosely associated by their adherence to Islam, making it hard to complete business transactions over distances. The hawala system arose to facilitate long-distance transactions and provide stability and consistency to the economic system of the ancient Middle East. The original hawala system operated as follows:

Person A approaches hawaladar A and gives him money to send to person B. Hawaladar A knows that his associate, hawaladar B, lives near person B so he sends a bill of receipt, rather than a large quantity of cash, to hawaladar B, who proceeds to contact and give the requisite amount of money to person B. Hawaldars A and B can balance their accounts by making a similar, reverse transaction with different clients, or hawaladar A can send the money on foot, but protected, to hawaladar B. The hawaladars make a profit by charging a small fee.

In this way, businesses were able to execute monetary transactions over large distances without, in many cases, physically moving money from one place to another. In the modern era, the hawala system is primarily used by foreign workers to send remittances home to their families, and requires the two parties exchanging money to also exchange a “remittance code,” over phone or email, in place of a bill of receipt. Thus, large quantities of money can be transferred in periods of less than 24 hours. The speed of money transfer, along with the informal, hassle-free, and non-bureaucratic nature of hawala (customers usually do not require an account or identification) makes it an attractive option to foreign workers looking to send money home. The hawala system can also be a much less costly option than modern banking due to hawaladars’ low overhead costs. This continues to allow their fees to be very competitive. In addition, because hawaladars only periodically balance their accounts, there is no physical movement of cash and no official foreign exchange transactions take place, allowing hawala operators to often provide better exchange rates than banks.

In developing countries such as Somalia, years of violence and economic upheaval have resulted in the lack of a formal banking infrastructure and a dependence upon the hawala system. Roughly 80 percent of the Somali population receives approximately $1.2 billion annually in remittances from the country’s diaspora. The money is largely used by the families of expatriate workers to cover basic needs and living expenses and vastly exceeds international aid flows in the region. Another developing country which has historically depended upon the hawala system is Afghanistan. A 2003 World Bank report on hawala in Afghanistan cited that the majority of the nation’s international aid institutions and NGOs use the hawala system to transfer money into and around the country to fund humanitarian efforts. Edwina Thompson, in her 2005 book studying the Afghan drug industry, estimated that up to $1.5 billion in remittances flowed into Afghanistan through hawala networks, highlighting their dependence on the system.

Unfortunately, just as relief money flows through Afghanistan’s hawala networks, so to does $1.7 billion in revenue from the country’s Opium trade according to Thompson. Throughout the rest of the Middle East, the system has been linked with similar black market activities such as the funding of terror and money laundering. Isolated from modern banking institutions, the Islamic State of Iraq and the Levant (ISIL) has relied heavily on the hawala system to move money domestically and abroad. Hawaladars are willing to facilitate these money transfers for a fee of 10 percent, twice the amount charged before ISIL’s rise. Thus, millions of dollars move in and out of the Islamic State every day, significantly undermining the efforts of the international community to isolate the group from its finances and disrupt its economy. ISIL uses the hawala system to import and pay for food for its subjects and supplies for its fighters. The group also collects revenue via a 10 percent religious tax (known as “zakat”) levied on funds moving out of the territory. The hawala system has also been linked to the funding of other terrorist organizations throughout the Middle East and North Africa such as Al-Qaeda and its affiliate Al-Shabaab.

In the aftermath of the terrorist attacks of September 11, 2001, the hawala system has been the subject of intense criticism and scrutiny from international lawmakers and financial regulators because of its potential use in the financing of terrorism. Being an informal, trust based money transfer system, hawala is very hard to track and regulate. Most hawaladars do not question who money is going to or what it is for, they merely move it. Thus, there is not much accountability on the part of service providers, and there is almost zero accountability for clients. These links have led to a crackdown on hawala organizations across Europe and the United States. More stringent regulations requiring hawaladars to keep records of transfers and the identities of clients as well as penalties upon banks associated with suspect hawaladars have been imposed. This causes problems as the hawala system remains very hard to track and rather than risk the consequences of being associated with the funding of terrorism, some western banks isolate themselves entirely from the hawala system. Consequently, it has become hard for legitimate hawaladars to operate efficiently as their access to bank accounts has been reduced and their bureaucratic costs have risen to meet regulations.

The pivotal role that the hawala system plays in the economies of many developing nations means that any attempts to regulate it could end in economic disaster. Despite their necessity, remittances to Somalia have been impeded by suspicion of the hawala system. Periodic shutdowns of hawala organizations, such as that implemented by Kenya in early 2015, run the risk of spurring economic and humanitarian crisis. In the wake of a terrorist attack on the country’s Garissa University College in April of 2015, the Kenyan government shut down 13 hawala firms through which most remittance money going from Europe and the US to Somalia was transferred. This shutdown lasted until June 2015 and cut off, for that period of time, the millions of dollars in daily inflows to the Somali region that remittances provided, causing the Somali currency to lose 25 percent of its value and increasing the quantity of black market transactions in the country.

The juxtaposition between necessity and exploitation is a central issue in the hawala system as it currently exists throughout the Middle East. The system simultaneously assists in the development of third world countries and is used to fund black market activities that keep such nations in a perpetually “developmental” state. The hawala system’s fluid, personal nature is such that too much regulation renders it obsolete, while too little removes any form of accountability. The next step in solving the problem of hawala seems to be the development and, more importantly, the ubiquitous imposition of effective regulations on the system. Once this step has been taken, a fundamental obstruction to economic growth in countries such as Somalia and Afghanistan will have been removed.

When the spark of revolt first ignited with the fruit vendor in Tunisia, investors already understood the impact the conflict would have on their investments. They started transferring their money to more secure locations, often to banks in neighboring countries. Lebanon banks acquired a total of almost $11 billion dollars from Syrian banks, according to a report from the UN Economic and Social Commission for Western Africa. When the conflict reached Syria, and refugees flowed into Lebanon, they added another billion dollars to Lebanon’s economy through consumer spending. Thus, in the initial stages, the Arab Springs had a generally positive impact on the Lebanese economy.

The large increase of Lebanon’s population has added pressure to their economy. Refugees, realizing that they cannot return to Syria quite yet, are now competing with Lebanese citizens for jobs. Before the refugees tried to enter the work force, Lebanon was already having issues with job creation. The Ministry of Economy in Lebanon explains how “The Lebanese economy already has a problem meeting local demand for jobs. Out of the 25,000 we need to create each year, we are only creating 3,000.” With such a low demand for workers, but an increased amount of available labor, many Lebanese citizens complain about wage cuts. Because of the increased competition for jobs, The World Bank describes how Syrian refugees have offered to work for half the wage that Lebanese citizens traditionally received for unskilled labor, overall dropping wage rates in Lebanon.

There is also competition for public goods and services, with the government taking the brunt of the costs. Because the Syrian refugees haven’t been absorbed into the Lebanese job market, they require government assistance. Unfortunately, with this increase of an unemployed population, the government has to somehow fund services for them with a dwindling budget. The Associated Press cited a World Bank report that estimates for the years 2012-2013, “$1.5 billion in government revenues will be lost while simultaneously, government spending will have to increase by $1.1 billion because of the surge in demand for public services,” which entails a “total negative impact on the Lebanese budget to $2.6 billion.” Because of the increase in demand for these public services, it has caused a decrease in overall accessibility and quality of the services, as the services were not acclimatized to the sudden surge in population or use.

Geographically, Lebanon is largely bordered by Syria on the East, Israel in the south and the Mediterranean Sea for its west. As a result, Lebanon’s gateways to land routes for trade to the Middle East are mainly through Syria and Israel. The Syrian conflict has disrupted these land routes, which has impacted their flow of goods and ability to transport their goods for trade. The Wall Street Journal explains “In the years that followed, Syria remained a main land route for some of Lebanon’s biggest economic drivers– commerce, tourism, and foreign remittances.” The effects on Lebanon’s trade deficit have been large, “according to estimates from data covering 2008 to 2013, Lebanon has a trade deficit of between 30 percent to 40 percent of GDP” (ESCWA). 

Due to this close proximity, the economies of Syria and Lebanon have been intertwined. Before Syria decided to diversify and liberalize their economy, Lebanon was portrayed as “a lung of the Syrian economy” and Syria was a major market for Lebanese products, as described by the Wall Street Journal quoting Abdallah al-Dardari, ESCWA’s chief economist and Syria’s former deputy prime minister for economic affairs. Their GDPs have indicated this relationship, where in the past two years, Syria has lost between 35% and 40% of its GDP in the past two years, while there was a 6% decline in GDP growth in Lebanon over the same period (ESCWA).

Countries can easily prepare for natural disasters or economic impacts from direct involvement from war. It is not as easy, however, to predict the economic impact of war in a neighboring country, especially one, which has both fiscal and social, ties to the affected country. The most that Lebanon can do now is hope for increased international aid in order to support their newly enlarged population. A Reuters article describes how recently, Lebanon was able to sell “$1.1 billion of long-dated bonds [in April].” This demonstrates the investors are still willing to invest in the country and have hope for its economic resurgence. Hopefully, there could still be positive implications of the rise in population. There would be increased demand for goods and services, such as housing or food and an increased workforce to help meet the demands. This could lead to an increase in prices, but the Reuters article quotes Alix-Garcia, “an assistant professor at the University of Wisconsin,” whom “says that could be offset by free food aid supplied to the refugees.” While there are currently short-term economic pressures for Lebanon, for the long run, they have new potentials for the direction of their economy. Most modern day economies are no longer traditionally bound to a specified output or method of production. With these changing circumstances, the largely trade-based Lebanese economy can adapt and use this new producer and consumer force to promote their economy in an area of conflict.



Due to high gas prices, consumers have paid more attention to the price per barrel of crude oil, as well as the Islamic communities that are reaping the benefits. The massive amounts of wealth stemming from the high price of oil have tremendously impacted Islamic communities. Places like Dubai and Abu Dhabi have come to epitomize the explosion of available capital within the Middle East. As Islamic communities begin to use their capital to invest with other non‐Islamic communities, principles of Islamic law come into play and issues become much more complicated.

In 2007, estimations reported that the American Islamic community, the Muslims living in the U.S. who govern their investments according to the laws of the Sharia and the Quran, had over $170 billion in purchasing power. This niche in American society has recently become a major player in the world of banking and finance due to this enormous wealth.

While firms are scrambling to access this largely untapped resource, they must first overcome Islamic laws that restrict the usage of their capital. Islamic banking operates with the same intentions as standard Western banking, except for one caveat: finance must follow
the rules set forth by the Quran. Under the
laws of the Quran, Muslims are prohibited
from collecting any form of interest. The
problem this created for the traditional
banking world has led to the introduction
of Islamic banking techniques into the
Western world. The following is an
examination of three techniques used
today to help avoid the zero‐interest‐payments rules of the Quran.

The first of these techniques is called Mudharabah. This technique utilizes the principle of profit sharing. While the lender does not charge interest, they do share in the profits and successes of the entrepreneur, similar to venture capital. The second technique is called Wadiah. With this technique, Islamic banks utilize depositors’ funds at their own discretion, and will often reward the depositor with gifts of cash payments for allowing the bank to use the funds. These cash gifts are similar to interest payments, but are not always guaranteed and do not have a set rate of payment. Recently, there has been some controversy in the Islamic community over the issuance of these Sharia‐compliant Islamic bonds, as some religious scholars question whether these bonds adhere to the religious laws outlined by the Sharia. Consequently, the issuance of Islamic compliant bonds has plummeted recently, falling to $14 billion this year from up to $50 billion last year. The third technique is called Ijarah. This practice essentially rents an asset that corresponds to the principal and interest that conventional Western financing would use. In other words, Ijarah is a sale‐leaseback, where the seller begins leasing the asset back and makes rental payments that correspond to the Western concepts of interest payments.

Islamic banking is still in its infancy and has yet to be fully refined. The vast amount of available capital throughout the Islamic communities has created a niche in the banking world that will continue. Large banking firms and even countries like Japan, England, and Malaysia, are catering to these communities by pledging Islamic‐ compliant‐banking‐services. Banks will certainly not forego the opportunity to enter into this competitive market, as the wealth held by oil‐rich American Islamic communities is a perfect target for Western banks looking to utilize their available capital. Islamic banking should continue to be a major factor in the world economy in the future.