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Ibrahim Farah
operates a money transfer business in Nashville used by many Somalis to send money to their families in Somalia and in international refugee camps.  Listen to additional content from our interview and learn more about the informal money transfer network known to many Somalis as Hawala.

Icon Listen to the money transfer interview (mp3) (2.2 MB)

What is Hawala?[ top of page ]
In Arabic, the word hawala means “trust,” or “transfer” depending on who you talk to.  Essentially,  the  hawala network is an informal financing system that allows participants to transfer money both cheaply and efficiently.    The system is a convenient way for individuals to transfer cash both locally and overseas, to people who may not have access to a bank, usually those who live in rural areas, or who live in war-torn or unstable areas.  The informal transfer system is most commonly used by members of immigrant communities in Europe, the Persian Gulf region, and North America to send money to family members in East Asia, Africa, and Eastern Europe.

Here in Nashville, Somalis refer to this system as hawala only informally.  The businesses that provide this service to their community prefer to separate themselves from the term hawala because it has been linked to controversial uses in some instances, particularly in India.  

What is the history of hawala? [ top of page ]
The hawala system has been around for centuries and developed as a way to transfer money before there were banks, and wire transfers.  The exact origins of hawala in the Middle East are not well documented and there are discrepancies as to how exactly the system came about.  There are two accepted origins of the system:  The first is that hawala developed as a means for communities in Southeast Asia and immigrant South Asian communities in Africa to settle accounts with each other.  The second is that hawala arose out of the need for Arabic traders to protect themselves against highway robbery.  In either case, hawala was built on trust and early Islamic commercial practices.    The term, hawala, was developed by Islamic jurists into a paper credit system that Muslim, Christian and Jewish traders could use to transfer debts and credits.  Due to the large distances and time periods between transactions, trust was a major factor. 

How does it work?[ top of page ]
The modern informal transfer system allows customers to deposit cash in one country and expect a sum of similar value to reach a specified destination within 48 hours, usually 24, no matter how remote the location.  In some cases a transfer can occur in as little as fifteen minutes.

A transaction fee, traditionally 3-5% (though this varies) of the amount to be transferred, is charged for the service.  To transfer money, the agent of one transfer business contacts, either by phone or e-mail, an agent in the other location.  The first agent confirms that money has been received for transfer, the second confirms that is has enough cash on hand to complete the transfer.  If this is the case, a password is shared among the originator, the recipient and the two agents.  The originator passes the password along to the recipient who then provides the second agent with the password to receive the money.  The cash debt is settled later between the two money transfer agents, usually by using traditional banks to transfer funds to a central bank account, in a third country in the case of Somalia.

How is Hawala or the informal transfer system used today?[ top of page ]
Informal money transfer continues to be popular in the modern world due to three factors: speed, cost, and convenience.  The typical transfer takes less than 48 hours to complete, a significantly shorter time period than most wire transfers.  For major cities, the transfer can be made in less than a day, though time zones and more remote areas require more time.  A traditional bank or transfer agency could take a month to provide the same service. 

In addition to taking less time, the cost of an informal transfer is also less than a wire or bank transfer.  While a formal money transfer (like Western Union) or bank might charge 12% or money for transfer services, informal business traditionally charge 3-5%.  For Somalia, the informal network is the only method of money transfer possible, because no formal banking system has existed since the civil war began and the government collapsed in 1991.

The third reason that hawala’s continue to flourish in the modern world is cultural convenience.  These informal banking systems are able to thrive in areas where trust among community members and group solidarity builds a trust that leads to the development of these networks.  Language and educational barriers that immigrants face in new countries may make someone uncomfortable with process to open an account, or to send money, through the bank.

The informal transfer system is extremely adaptable and able to send transactions despite civil wars, economic crisis, conflict, and blockades.  In many war-torn countries, the informal network remains the only reliable means to transfer money.

The Somali informal transfer system.[ top of page ]
The Somali money transfer system, called the “Somali Remittance Organization” by World Bank, evolved to meet the needs of a country whose government and federal banking system collapsed due to civil war.   As the Somali civil war wrecked havoc across the country in the 1990s, the informal transfer network enabled refugees to send money back to their relatives still living in Somalia.  In Somalia, it is the sole financial link between a war torn country and the world economy.  The informal transfer is also used internally for international businesses and even by many of the non-governmental agencies (NGOs) as a means to pay employees working in Somalia, and refugee camps.   

Why has the U.S. government been concerned about informal money transfer businesses?
How has this impacted money transfer to Somalia?[ top of page ]

After 9/11, the U.S. Government was concerned an unregulated Hawala network could be used by terrorists.  A primary target was the Al-Barakaat network, the principal means through which Somali residents in the United States sent money to their relatives back home.  Despite evidence that the cash remitted by the Al-Barakaat network had kept the Somali economy afloat for the past decade, the network was shut down.   This resulted in the bankruptcy of thousands of Somalis and severely damaged the reputation of the Somali remittance system with banks and governments.

Since 9/11 the informal transfer system in the US and Canada has been updated to meet federal, state and local banking regulations.  Primarily these regulations focus on record keeping of transactions and identifying those who use the system.

In 2005 The World Bank and United Nations held a conference to rebuild support for maintaining a regulated informal money transfer network in Somalia.  The World Bank and UN stated that in the case of Somalia many concerns about the illicit nature of informal transfer were unfounded.  They also were concerned that without the informal transfer network, Somalia would dissolve into even more chaos, resulting in loss of life for those in Somalia and increased instability in the region.  

Today, informal money transfer businesses in Nashville and elsewhere are still concerned banks will refuse to provide overseas transfer services, which are crucial to maintaining the transfer system.  Informal money transfer networks still rely on traditional banks to move funds overseas, once a transaction has occurred.   

For a more in depth look at the hawala system. [ top of page ]

Informal Funds Transfer Systems: An Analysis of the Informal Hawala System.
 Prepared by Mohammed El Qorchi and John F. Wilson of the International Monetary Fund, and Samuel Munzele Maimbo of the International Bank for Reconstruction and Development.
[more info - pdf ]