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Hawalah-based financing

Propindo Islamic Cooperative

One notable example of Hawalah-based financing can be found in Propindo Islamic Cooperative, Indonesia. It can be utilised in the trading sector involving Islamic Financial Institutions (IFI), especially Islamic microfinance institution. Hawalah-based financing has been introduced by Cooperative, an independent Islamic cooperative pioneered by a group of small traders in Jakarta Indonesia (Dewi and Kasri, 2011). In relation to that the Cooperative aim to provide additional working capital for their Small Medium Enterprise (SMEs) members because the SMEs usually receive payment within 1-3 months for the goods’ supplied. At the same time, the SME requires sufficient working capital in order to continue productions while waiting for the payment from the partner. This situation creates additional burden for SME in maintaining their business sustainability. Therefore, Hawalah-based financing is provided by the Cooperative to counter the problem.


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Basically this mechanism involve three parties: the partner is principal debtor, the Cooperative is the transferee, and SME is the creditor. The scene starts when debt created between the partner (principal debtor) and SME (creditor). Hawalah take place when SME transfer their debt to the cooperative. The cooperative then provides cash, based on the SME receivables values, and later collect the receivables from the partners (SME trading partner). Thus, the cooperative acts as a third party that takes over the SME’s receivables and provides ‘quick cash’ for working capital for the SME. In return, cooperative receives hawalah fee from the SME. A clear illustration of the transaction can be seen in the diagram below.  

The transaction flow of Hawalah-based financing  

Hawalah-based financing

The above figure shows transaction flow of Hawalah-based financing works between the three parties involved and the explanation is as follow:  

1) SME supply particular goods to the partner.

2) After checking quality and quantity of the ordered goods, the partner issues term payment cheque that can be cashed within a particular period.

3) The SME pass the current account to the Cooperative.

4) SME will then check the originality and validity of the financial instrument issued.

5) The Cooperative issues cheque that can be disbursed and used by the SME as working capital. In return, it receives fee (ujrah) from the service provided based on agreements with the SME.

Shariah issues in Hawalah-based financing  

The Shariah issue that can be identified is that the risk of non-compliance arises as there is lack of clarity in defining and setting percentage of fee proposed in the transaction. While it is allowed to take some fee, strict Shariah position requires this fee to be justified with the real costs to deliver the service. It is possible that clients may take advantage of this condition and delaying payments to the banks.

Source: Service Based Contract Used in Islamic Finance: A Comparison of Hawalah, Wakalah, and Kafalah, Maryam Sofia Mohd Suhaimi