Hawalah

Hawalah (also written hawala or hiwalah) is the classical Islamic contract by which a debt is transferred from one debtor to another. Once the transfer is valid, the original debtor is released and the creditor must collect from the new party. The term comes from an Arabic root meaning to transfer or change, and the same word gave its name to the informal money transfer system known as hawala.

Hawalah is one of the nominate contracts of fiqh al-mu'amalat, the Islamic law of commercial dealings, and remains part of the legal toolkit used by Islamic banks for payments and settlements.

A hawalah involves three parties and one debt:

• the muhil, the original debtor who transfers the debt;
• the muhal, the creditor to whom the debt is owed;
• the muhal 'alayh, the new party who takes on the obligation to pay;
• the muhal bih, the debt itself.

In the typical case, A owes B, and C owes A. A directs B to collect from C. If the transfer is accepted, B's claim against A ends and B's claim is now against C, while A's claim against C is extinguished to the same extent. Three debts are settled with a single payment from C to B.

Jurists base the contract on a hadith recorded in the collections of al-Bukhari and Muslim, which states that delay in payment by a wealthy person is injustice and that a creditor referred to a wealthy person should accept the referral. The schools of law agree on the contract's validity but differ on details. The main conditions discussed include:

• the consent of the transferring debtor and, according to most schools, of the creditor; the Hanafi school also requires the consent of the new payer;
• the debt must be established and known in amount;
• where the new payer already owes the original debtor, the two debts should be of the same kind and amount, so that the transfer does not become a disguised exchange producing riba.

The schools also differ on whether the creditor may return to the original debtor if the new payer turns out to be insolvent. The Hanafi school allows recourse in certain cases, while other schools generally treat the release as final unless the creditor was deceived. Hanafi jurists further distinguish a restricted hawalah (muqayyadah), tied to a debt the payer owes the transferor, from an unrestricted one (mutlaqah).

A retailer owes a wholesaler 50,000 dirhams. A customer owes the retailer 50,000 dirhams for goods already delivered. The retailer instructs the wholesaler to collect directly from the customer, and the wholesaler and customer agree. When the customer pays the wholesaler, all three obligations are discharged. The wholesaler cannot sell its claim to a fourth party at a discount, because selling a cash debt for less cash is treated as riba; that is the main limit hawalah places on factoring-style arrangements.

Islamic banks and standard-setters treat hawalah as the legal basis of several everyday banking functions, including fund transfers, cheque and bill settlement, and some card and remittance arrangements. AAOIFI has issued a Sharia standard on hawalah. In practice it is often combined with wakalah (agency), under which the bank acts as the customer's agent to pay or collect, and with a fee for the service that is permissible as payment for work rather than for the time value of money. Related concepts include qard, the interest-free loan, and ibra', the release of a debt.

The informal value transfer system of the same name works on a similar principle: a hawaladar in one country pays a recipient on the instruction of a counterpart in another, and the two brokers settle their positions later through trade, cash or bills of exchange. The contract of hawalah describes the legal transfer of a debt; the network is a commercial business that uses that idea for remittances. Regulators distinguish licensed operators from unregistered and criminal ones, often described as white hawala and black hawala.