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In hawala, a sender pays a local hawaladar, and a partner hawaladar in another city pays the recipient out of their own funds. No cash or wire crosses the border at the moment of transfer. The imbalance between the two hawaladars is settled later through offsetting flows, trade goods, or occasional cash couriers, so a single transfer is really an entry in a running bilateral account.
Hawaladars extend credit to one another with no contracts or legal enforcement because their standing in dense family, tribal and trading networks is on the line. A single default spreads quickly through these networks and ends the defaulter's ability to do business. Social sanction therefore does the work that courts and collateral do in formal banking, which makes the system fast and cheap.
In post-2001 Afghanistan, humanitarian organizations had almost no functioning banks available, so they paid staff and funded projects in remote provinces through hawaladars. Donor governments were at the same time treating hawala as a terrorist-financing threat. Relief delivery thus depended on the very channel that counter-terrorism policy was trying to shut down.
Post-2001 efforts to shut down or heavily regulate hawala failed because hawala supplied services that formal banks could not supply in Afghanistan: reach, speed, low cost, and trust. Licensing rules and asset freezes did not remove the demand for these services. They pushed transactions further out of view and alienated the operators whose cooperation regulators needed.
Hawaladars often keep detailed ledgers and know their customers personally, sometimes more thoroughly than formal institutions do. Treating 'informal' as a synonym for 'untraceable' leads regulators to misjudge the risk. It also leads them to overlook the option of engaging hawaladars as partners in monitoring money flows.
Aid disbursements, family remittances and commercial trade payments all move through the same hawaladars and net against one another. Trade flows often balance remittance flows in the opposite direction. Because these streams are intertwined, a policy aimed at one of them, such as illicit finance, disrupts the others, including household survival income.