KSA عربي
KSA عربي
Global عربي
There are various methods for paying for a purchased commodity. The simplest is direct cash payment.
However, payment may also be made through Hawalah, in which the buyer, instead of paying the seller directly, refers the seller to another party from whom the payment will be received.
Prominent classical scholars did not classify Hawala under the categories of sale, because the concept of transfer is not exclusive to sales—it applies to any form of debt. Therefore, they discussed its terms and conditions in a separate chapter entitled “Hawala.”
In earlier times, payment through Hawalah was not as common as it is today. In modern commerce, it has become widespread, especially in the form of bank cards, cheques, and other types of bank transfers.
This growing prevalence makes it necessary to clearly explain its terminological status and to identify its various manifestations within financial institutions.
Read more about: Procrastinating Debtor in Islamic Finance
The term Hawalah is derived from Arabic and is defined in Islamic jurisprudence as:
"نقل الدين من ذمة إلى ذمة أخرى" — the transfer of debt from one person’s liability to another’s.
According to AAOIFI Shariah Standard, the Hawalah is defined as; “Hawalah of debt is the transfer of debt from the transferor (Muheel) to the payer (Muhal Alaihi).
The transfer of right, on the other hand, is a replacement of a creditor with another creditor. The transfer of debt differ from transfer of right in that in transfer of debt a debtor is replaced by another debtor, whereas in a transfer of right a creditor is replaced by another creditor.”
Its permissibility is established by the hadith of Abū Hurayrah (may Allah be pleased with him), who narrated that the Prophet (peace and blessings be upon him) said:
عَنْ أَبِي هُرَيْرَةَ رَضِيَ اللَّهُ عَنْهُ، أَنَّ رَسُولَ اللَّهِ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ قَالَ:
«مَطْلُ الغَنِيِّ ظُلْمٌ، فَإِذَا أُتْبِعَ أَحَدُكُمْ عَلَى مَلِيءٍ فَلْيَتْبَعْ».
Translation: Narrated Abū Hurayrah (may Allah be pleased with him):
“The delay in payment by a wealthy person is an injustice. So if one of you is referred to a solvent person, let him accept the referral. So, if one of you is referred to a solvent person, let him accept the referral.”
So, Hawala is a legitimate and permissible Shariah contract made for the courtesy.
The Muḥīl is the principal party in a Hawalah transaction. He transfers his creditor to a third party for the collection of a debt. In certain forms of Hawala, the Muḥīl himself may also be a creditor.
Muhal lahu or the transferee is the party who accept the offer of the transferor Muhil to collect his debt from the transferor debtor. He is also known as Muhtal lahu.
Muhal Aliah is also known as Muhtal Aliah is the person who accept the debt liability which will be collected from him by the transferee.
The practical mechanism of Hawala involves three parties: the transferor (Muḥīl), the transferee (Muḥāl Lahu), and the person upon whom the debt is transferred (Muḥāl ʿAlayh). In this arrangement, the debtor (Muḥīl) transfers his debt— with the consent of the Muḥāl Lahu—to the Muḥāl ʿAlayh.
In practice, this means that if someone owes a debt, instead of repaying it directly, he refers his creditor to a third party (Muḥāl ʿAlayh), from whom the creditor (Muḥāl Lahu) will collect the payment.
According to the AAOIFI Shariah standard related to the Hawalah, the Hawalah contract is “The acceptance of Hawalah is recommended for the transferee if the potential payer is known to be solvent and a person who honours payments.
This is because Hawalah benefits the creditor and gives relief to the debtor. If the financial status and creditworthiness of the potential payer are unknown, then Hawalah becomes Mubah (permissible).”
If a person holds a current account in a bank and is indebted to a third party, and he issues a cheque in the name of that third party to collect the debt amount from the bank, this transaction will be regarded as Hawala.
In this case, the account holder is the Muḥīl, the bank is the Muḥāl ʿAlayh, and the third-party beneficiary is the Muḥāl Lahu.
According to the AAOIFI statement related to the permissibility of the Hawala is:
“The contract of Hawalah derives its permissibility from the Qur`an, the Sunnah, Ijma’ (consensus of Fuqaha) and reasoning.
Abu Hurayrah (may Allah be pleased with him) narrated that the Prophet (peace be upon him) said: “Default on payment by a solvent debtor is unjust, and if anyone of you is transferred to a solvent person, he must accept the transfer.”(2) In another text of the Hadith, related by Ahmad and Al-Bayhaqi,
the Prophet (peace be upon him) said: “If one is referred to a solvent person for the recovery of his right, such a person must accept the transfer”.
The Prophet’s order that the creditor must accept the transfer means transfer of debt is legal, otherwise he would not give that order. The permissibility of Hawalah has enjoyed unanimity in Muslim societies and communities from time immemorial and there is no report that anyone has disapproved of it.”
From this statement it is proven that Hawala is permissible and halal from a Shariah perspective.
Read more about: Islamic view of debt, lending and borrowing.
- Hawala: is an informal money transfer system based on the trust between the parties usually without involvement of the bank.
- Hawalah: is an Islamic contract where the debt is transferred from one party to another.
Frequently Asked Questions
1- Hawala Vs Western Union / SWIFT / Fintech Apps
Hawala works through informal network and trust between the agents in which little or no documents are needed.
In contrast the Western Union/ SWIFT/ Fintech Apps works through licenced money transfer system with full record and legal oversight. In short all are the money transfer tool but their way of working is different.
2- Difference Between Hawala and Conventional Wire Transfer
The difference between Hawala and a conventional wire transfer is that in Hawala, the amount is usually transferred through informal channels without legal documentation or regulatory oversight.
In contrast, a conventional wire transfer moves the amount directly between bank accounts via the formal banking system, with complete documentation and legal supervision.
3- Hawala in International Law and Compliance
Hawala is an informal method of transferring money that typically operates without the involvement of banks. It relies heavily on trust between brokers and involves minimal documentation.
While hawala can be used for legitimate purposes such as personal remittances, it is a concern in international law and compliance because it can also facilitate money laundering and the financing of terrorism.
4- FATF (Financial Action Task Force) classification
The Financial Action Task Force (FATF) classifies hawala as an Informal Value Transfer System (IVTS). In 2013, the FATF introduced the term Hawala and Other Similar Service Providers (HOSSPs).
HOSSPs are a subset of informal value transfer systems and include mechanisms such as Chinese underground banking, hundi, and the black market peso exchange. These systems are characterized by the movement of value without the physical or electronic transfer of money. For more detail please refer to: https://www.eumonitor.eu/9353000/1/j9vvik7m1c3gyxp/vl0k6sk63kuv
5- How countries regulate or ban Hawala?
Establish a joint money laundering task force to strengthen cooperation between financial institutions and government agencies.
Monitor money remitters to ensure they can detect hawaladars operating through registered agents as a cover for hawala services.
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
