The Hawala System and Sharia Banking

How Terror Abuses Financial Institutions


Hawala, حوالة, in Arabic translates as transfer in English and trust in Hindi. The Hawala System is an Informal Value Transfer System (IVTS) which is essentially a system whereby money or value in the form of commodities, is transferred nationally or internationally by an organisation that does not offer financial services as its primary source of income. (Barber, P8) That is to say, a car dealership could be a hawalador, a point of transfer for money where the money is directly, often physically transported to another hawalador in another country or region. The below graphic demonstrates the system simply:


This system operates outside of conventional financial regulations, often has no way of directly tracing transactions with ease and is fundamentally built on the principle of trust between agents in the system. Having said that, the Hawala system runs alongside conventional banks in the Middle East and is generally accepted as a legitimate system, used to financially support relatives abroad and for daily transactions. The fact remains that it is widely open to abuse and operates out with a large degree of financial oversight. The second financial institution subject to the abuse of terror is the Sharia Banking model. A Sharia bank is a bank which claims to act in accordance with Sharia law prescriptions on banking. Two central features to this model are prevalent in most Sharia banks: Zero interest on investments or loans and alms giving. In accordance with Sharia law, each account holder must give 2-2.5% of their net income to charity, this donation is called the zakat. Secondly, instead of offering loans at interest, banks will often temporarily own a company they are investing in (in many cases for mere days) then charge a service fee to the recipient. It works very similarly to an interest based loan but differs slightly, if only technically. Sharia banking has been hailed as ethical banking with a religious focus, which in theory it is, however in practice the zakat is often abused by terror.


The lack of identification or records kept and the speed of the Hawala system make it a system which terrorist organisations can exploit. For example, as Barber (P8) notes “… one of the suicide bombers of the US Embassy in Nairobi, received $1,000 at the Nairobi office of a Hawalador without … any identification…” The system is built on trust and therefore all that is needed is a note of instruction or a code to collect funds. Therefore, money can be sent from Afghanistan to Libya on Tuesday, a courier will physically deliver the money to a Hawalador on Wednesday with a code for receipt and with no paperwork and the transaction cannot be traced. This is especially true for Hawaladors that operate a business with large revenues and can falsify invoices for tax (Barber P10-11). However, this is not to portray the Hawala system as a solely clandestine operation, indeed it is noted that the system is not even the most common form of terrorist financial activity (Bierstecker & Eckert P177) with the system being abused by terrorist operations.


In a similar situation to the Hawala, is the Sharia banking system, which is essentially a bank that claims to act in accordance with Sharia law, as mentioned above. A customer to a Sharia bank is obliged to open a Mudaraba account which takes 2-2.5% of income and gives this money to charity, this money is called the zakat. A customer can open a ‘Free Mudaraba’ or a ‘Restricted Mudaraba’ account whereby the former account holder can choose directly which charity to donate to and the latter’s zakat is decided by the Sharia council that sits on each bank (Barber P5). This is where problems lie for Sharia banks and their account holders. It is not the bank nor the account holder that allocates the zakat but a board of Sharia law ideologues who often use this money to finance terrorism or militant Salafism. For example, the National Commercial Bank of Saudi Arabia (NCB) was the subject of an audit which revealed that over 10 years the ‘bank’s zakat committee had transferred over $74 million to Islamic charities, which then channelled the money to Al-Qaeda’ (Barber P5). Often these ‘charities’ are pure fronts for terrorist funding and only nominally charitable organisations.


An example of how this situation occurs is the positioning of Muslim Brotherhood ideologue Yusuf al-Qaradawi, who sits on the Sharia boards of the two Qatari Sharia banks owned by the ruling families (Alexiev, P11-12). Mr. Qaradawi has in the past claimed on television that Hitler was sent by God to punish Jews and is in favour of many extreme positions such as favouring FMG. Furthermore, he is the chair of a charity umbrella group ‘Union of Good’ which funds groups like HAMAS and is on the US list of Foreign Terrorist Organisations. It is therefore not difficult to see how zakat can fall into the hands of terror organisations.


In summary, the Hawala system and the structure of Sharia banks are little known beyond the Middle East and it would be useful to conduct more research and have more awareness of just who holds positions of power in these institutions. Whilst these institutions are not inherently bad or dangerous institutions, it is nevertheless important to have an awareness of how they can be, and have been, manipulated by clandestine operations and terrorist groups. Indeed, these are but two examples of many methods through which terrorism gains financial support. For example the rise of crypto currencies poses a new threat. Online Crypto-banks like Liberty Reserve have functioned in a remarkably similar fashion to the structure of the Hawala, guaranteeing tacit anonymity and untraceable transactions (Brantly, P2). The future of terrorist financing is unclear.However, what remains certain is that the current Sharia and Hawala systems lead to too many transactions going unchecked, culminating in inevitable and significant use by terrorist organisations.



Islamic Finance or Financing Islamism?, Alex Alexiev, 2007, The Centre for Security Policy Occasional Papers Series, Washington DC

The New Economy of Terror: The Financing of Islamist Terrorism, Steve Barber, 2011, Global Security Studies, Vol. 2, Issue 1 

Countering the Financing of Terrorism, Edited by Thomas J. Biersteker and Sue E. Eckert., 2008, Routledge, New York

Financing Terror Bit by Bit, Aaron Brantly, 2014, CTC Sentinel, Vol. 7 Issue 10

Image: The Banker’s Table, William Harnett, 1877, Public Domain:






2 Comments Add yours

  1. Blair says:

    Great article Luca. Thanks for sharing. For any new form of banking to gain the size and scale that most modern markets boast, there needs to be transparency and respected regulation that protects parties to a transaction as well as the end client(s). Sharia Banking has the potential to be a significant market in size, but the scale of who can operate in markets with greyer areas (as you said with issues like ‘zakat’) likely only appeals to a handful or participants.

    Dodd Frank and MIFID regulation have (at enormous cost to both buy and sell side) made it a legal requirement to increase the transparency and accountability of all market participants. Until Sharia Banking can operate at a similar degree of transparency as other markets I struggle to see how many investors and market participants could be comfortable operating with significant degrees of investment.

    Liked by 1 person

  2. Jerel W Ehlert II says:

    Didn’t the Pilgrims used a similar system through the Roman Catholic Church to avoid carrying money from England/France to Jerusalem during the Crusades?


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