Indeed, many Orientalists such as Louis Massignor and Joseph Schacht believe that the modern legal commercial system was derived from these early Islamic mercantile practices.  In recent times, the Hawala has developed into a complex financial transfer system that many recent immigrants in the West use to transfer money to their relatives back home.  In India, for example, the Hawala system has become part of an underground money transfer system that evades government regulation.  In war torn Somalia, however, the Hawala emerged as the sole functioning financial system as the civil war destroyed what little banking system existed in the country.  As nations of the world develop ways to combat international terrorism, they should first recognize the different ways in which the financial systems have evolved in various societies.  By so doing, the international community can develop ways to integrate the Hawala system into the international financial system, working to build on its strengths while eliminating the inherent illegalities of the system.

“Hawala” comes from the Arabic word “to transfer.”  The term was mentioned in the sayings of prophet Muhammad (PBUH) as far back as the sixth century and was later developed by Islamic jurists into a paper credit system that Muslim, Christian and Jewish traders used to transfer debts and credits across trading routes in Africa and Asia.   In Somalia, the Hawala system began to evolve and grow to meet the needs of Somalis trying to eke out a living in an increasingly global environment.  Noteworthy here is the Somali government’s failure to develop a modern banking system and integrate it into the local Somali economy.  I

n the 1970s the new Socialist system in Somalia enacted strong exchange control laws that disrupted the existing free exchange market mechanisms in the country.  During this period, Somalis used the Hawala system to circumvent government restrictions.  Somali merchants collected money from Somali expatriates in the Gulf.  They then used this money to buy goods from the Gulf. Once these goods were imported into Somalia and sold, the merchants used their profits to pay back their debtors in the Gulf.  It is here that the transfer component of Hawala came into use.  The merchants simply paid the debts they owed to the relatives or beneficiaries designated by their sponsors in the Gulf.   In this way, Somali expatriates were able to send money back to their relatives in Somalia.  Indeed, the severe drought of 1974 forced many Somali nomads to abandon their livestock and seek help and shelter from their relatives in the cities.  This change increased the use of the Hawala system, as Somalis in the Gulf sent urgently needed financial help to their relatives in Somalia. 

When the Somali civil war ravaged the country in the 1990s, it seemed that all the modern institutions that had emerged in the country in the last 30 years simply vanished.  The political repressions of the government and the brutality of the civil war also forced many Somalis to flee the country.  Many fled to refugee camps in neighboring Kenya and Ethiopia while others sought refugee and political asylum in North America, Europe and Australia.

Hawaalad Office in Hargeisa

It was during this period of severe dislocation that the Hawala system began to grow and evolve in Somalia and among the far-flung Somali Diaspora.  Banks and other modern institutions were destroyed during the civil war, the Hawala businesses began to emerge as a new global financial service that linked Somalis living abroad with their relatives at home.  Unfettered by government regulations and helped immensely by emerging information technology, Somali businessmen began to establish a fairly reliable and efficient financial system.  In the 1970s, Somalis in the Gulf relied on a Hawala system that took over a month and reached only Somalis living in the cities to transfer funds to their relatives and loved ones.  

By the late 1990s, the Hawala system was expanded into a financial system that enabled Somalis from across Europe, North America, Asia and Australia to transfer funds to their relatives affected by the civil strife in remote areas in Somalia and adjoining refugee camps within twenty-four hours.  Not only was the system helpful in keeping Somalia from falling back into another devastating famine, but it also afforded a cheaper and sometimes even quicker alternative to banks and money transfer firms like Western Union.  The Hawala system thus became a crucial venue for transferring funds to Somalia and neighboring countries like Ethiopia, Sudan and within the Somali Diaspora.

As the campaign against terrorism and its financial support network intensifies, attention should be paid to the particular evolutionary paths that the Hawala system has experienced in the different countries.  In this way, the South Asian form of Hawala is very different from the version that developed in Somalia.  The Hawala system in India, for example, works as a shadowy underground money transfer system that the Indian government is trying to ban.  In Somalia, however, it has emerged as the sole financial link to the world economy.  Abolishing that system would be devastating to the country.  

The international community should, instead, work on ways to further develop the Hawala system to meet international rules and regulations that safeguard against abuse.  The Hawala system may actually be used as a tool for economic development that gives people what they desperately need for a better future.