Hawala in the System of International Settlements: Decentralised Clearing Under Sanctions-Driven Fragmentation

Abstract

The article examines the economic nature of the hawala payment system in the context of sanctions-driven fragmentation of the global cross-border payment infrastructure, increasing transaction costs of international money transfers, and growing interest in alternative mechanisms for international settlements. The study demonstrates that the existing literature predominantly considers hawala as an informal or underground remittance channel, with primary attention devoted to its anti-money laundering and counter-terrorist financing (AML/CFT) risks, while its underlying economic logic remains insufficiently explored. The aim of the study is to provide a theoretical reinterpretation of the hawala system as a decentralised clearing mechanism in which cross-border liquidity transfers are functionally replaced by the recording of mutual obligations, multilateral netting, and alternative settlement arrangements. The methodological framework is based on institutional economics, transaction cost theory, and approaches to modelling financial obligation networks. In addition, the study employs comparative and structural-functional analysis, content analysis of academic literature, and elements of economic and mathematical modelling of clearing networks. The results of the study include the development of a three-level obligation settlement model incorporating bilateral netting of reciprocal payment flows, multilateral network netting, and settlement of net positions through assets and services. Furthermore, the paper proposes a formal representation of hawala as a network of financial obligations based on a net position calculation model, allowing it to be interpreted as a decentralised clearing infrastructure. It is demonstrated that the clearing logic of hawala operates without a centralised settlement institution through the distributed coordination of obligations, thereby significantly reducing the demand for cross-border liquidity. The study concludes that the resilience of the hawala system is determined by lower transaction costs, network-based coordination of obligations, and its high adaptability to institutional constraints. The findings suggest that hawala should be regarded as an alternative international settlement mechanism capable of addressing the challenges posed by sanctions-induced fragmentation of the global payment infrastructure and its ongoing digital transformation.