Trust in Transition: Afghanistan’s Hawala System in Crisis and Recovery

Executive Summary

Afghanistan's hawala system is a key part of the country’s financial ecosystem. Since August 2021 and amid the ensuing political and economic crisis, these money transfer networks have become even more important. Based on field research conducted in late 2023, this Working Paper provides development funders, humanitarian organizations, and other stakeholders with insights into the evolving role of Afghanistan’s hawala system.

Hawaladars have emerged as the primary type of financial services provider (FSP) for many Afghans, filling the gaps left in the country’s struggling banking sector. Hawaladars offer a range of services, including domestic and international money transfers, foreign exchange, savings, and a form of informal lending. The surge in demand for their services since 2021 has been driven by economic crisis, migration, and a sustained lack of trust in local banks.

Trust is the cornerstone of the hawala system as it extends from customers to hawaladars, between hawaladars and their counterparties, and to regulators. The hawala business is built on personal relationships, community ties, and a long history of inexpensive, efficient, and reliable service to the most rural areas. Many Afghans view hawaladars as an integral part of their community. Yet globally, the international community continues to view hawala with skepticism due to its often limited transparency, potential for misuse, and money laundering/financing of terrorism (ML/FT) risk. 

Afghanistan’s hawala sector also faces local challenges. Increased competition among hawaladars since 2021 has led to pressure on profits despite higher transaction volumes. New regulations aimed at formalizing the sector have introduced higher financial and operational requirements, which some smaller operators struggle to meet. Despite these challenges, hawaladars are generally open to further formalization. Many express interest in training on compliance activities and regulations that better reflect the reality of their business.

This paper concludes that hawala networks should not merely be viewed as a stopgap measure in Afghanistan’s current financial crisis but as a fundamental and enduring part of the country’s financial sector. The paper recommends that development funders, humanitarian organizations, and other stakeholders take steps to:

1. Deepen engagement with hawala networks, recognizing their role in Afghanistan’s financial ecosystem.
2. Encourage regulation and supervision that balances formalization goals with operational realities.
3. Support capacity building to help hawaladars improve compliance, recordkeeping, and risk management.
4. Explore innovative partnerships, leveraging hawala networks to support financial inclusion initiatives.

Working constructively with hawaladars can help build a more inclusive and resilient financial system for all Afghans. The challenge lies in finding the right balance between preserving the financial inclusion benefits of hawala’s informal, trust-based nature and simplicity while introducing the necessary formalization and modernizations to ensure sustainability and reduce risk. Failure to do so will risk perpetuating a dual reality that has dominated many of the past decades, where development plans ignore what is already working locally in favor of external models. As one hawaladar stated, “The future is known. Hawala is here for centuries, and it will continue . . .”