WHY KENYAN BANKS ARE WORRIED ABOUT HAWALA SYSTEM

Kenyan banks and financial regulators have raised concerns over the growing use of Hawala, an informal money transfer system that operates outside the traditional banking framework. Authorities fear the system could be exploited for money laundering, terrorism financing, and evasion of financial regulations.
Hawala, which is popular in parts of the Middle East, North Africa, and the Horn of Africa, works on a trust-based network of brokers known as hawaladars. It allows people to send money across borders without physical cash movement or digital tracking, making it difficult to regulate.
“In a typical Hawala transaction, no money crosses borders officially. Instead, two agents in different countries settle debts informally at a later stage,” a senior financial analyst explained.
In Kenya, the system is widely used by individuals sending money to countries like Somalia and Ethiopia, especially in regions where formal banking is limited or inaccessible. However, its growing popularity has alarmed local banks and government agencies.
The Central Bank of Kenya (CBK) and anti-terrorism units have flagged Hawala for its potential use in funding extremist groups, particularly Al-Shabaab. Because the system lacks paper trails and bypasses Know Your Customer (KYC) requirements, it becomes a convenient route for illicit financial flows.
“We are not opposed to informal systems entirely, but there must be accountability. Unregulated money movement threatens national and regional financial stability,” said an official from Kenya’s Financial Reporting Centre.
Kenyan banks are also concerned that Hawala undermines formal banking, reduces remittance revenue, and exposes the country to international sanctions if such unmonitored funds are linked to crime or terrorism.
In recent years, the government has ramped up its efforts to monitor and regulate informal money transfer systems, but enforcement remains a challenge due to the discreet and trust-driven nature of Hawala.
As the debate continues, authorities are urging users of informal channels to switch to registered financial service providers to ensure transparency and security.