The halukkah provided financial allowance for the support of the inhabitants of Erez Israel from the contributions of their coreligionists in the Diaspora. In a wider sense, halukkah denotes the organized method of this support and the institutions responsible for it, especially after the end of the 18th century. The support given by the Jews of the Diaspora to their brothers in Erez Israel was customary even in ancient times and there are references to it in the periods of the Mishnah and the Talmud. Rabbis left Erez Israel to seek contributions abroad for the support of Torah scholars. During the Middle Ages and especially during the following centuries, this method of support for the inhabitants of Palestine became widespread and encompassed the whole of the Jewish world. The fundamental idea on which the halukkah is based is the conviction that Erez Israel held the central position in the religious and national consciousness of the people, hence the special importance accorded to the population residing there. This population is not to be considered as any other entity of Jews, but rather as the representative of the whole Jewish people, the guardian of all that is sacred in the Holy Land; in this role it merits the support of the whole people. The Jews, in the lands of their dispersion, both communities and individuals, were conscious of their duty toward the yishuv and considered their support of it as an act of identification with it.

Until the end of the first third of the 19th century, there were two principal sections within the Ashkenazi community, the Hasidim and the Perushim. In the late 1830s, the Ashkenazi community began to break up into organizations based on the countries and regions of origin in Europe. One such organization, known as kolel, was characteristic and exclusively confined to the Ashkenazi yishuv in Palestine of the 19th and early 20th centuries. This sub-division into kolelim was due to economic factors, especially the desire of the emigrants of a given country to ensure themselves the incomes from their country of origin. The sub-division into kolelim was almost nonexistent among the Sephardim because they were not dependent on the halukkah to the same extent as the Ashkenazim. However, even among them there were some who considered themselves to be discriminated against. Thus, the Georgians and the North Africans broke away from the general Sephardi community. The breaking-up process began in the 1830s when the immigrants from Germany and Holland formed their own kolel, the kolel Hod (abbreviation for Holland ve-Deutschland). In 1845 the kolel Varsha (Warsaw) was established and consisted of members of Polish origin who were dissatisfied with the leadership of the Perushim and who felt themselves discriminated against.

The halukkah arrangements were different with the Sephardim and the Ashkenazim. With the former halukkah was only distributed to such scholars whose study was their profession, in accordance with the principle that the purpose of halukkah was to support those who studied the Torah. The poor of the community only benefited from the halukkah indirectly. The justification for this system was that the Sephardim were integrated in the country. They could earn their livelihood and were not dependent solely on halukkah. In practice, with the absence of regular support, there were many poor in the community. In addition to the halukkah for individuals, the Sephardi kolel also set aside a part of its income for general community expenditure. The halukkah of the Ashkenazim was divided on the basis of a fixed sum per head. In addition to this, scholars received an additional allocation in accordance with their status. Occasionally, there were supplementary allocations derived from special contributions which the kolel received apart from its regular income. The halukkah allocations differed from kolel to kolel, according to the income and the number of members. Generally, the halukkah allocation was far from sufficient to provide for the requirements of those who received it, and as the possibilities of gaining a livelihood were extremely limited in Jerusalem, most of the halukkah beneficiaries lived in poverty. They and their kolelim were generally in debt. The halukkah was a decisive factor in the existence and the development of the Jewish population in Palestine. Its importance grew during the 19th century, when immigration reached serious proportions. At that time Palestine was economically poor and was ruled by a retarded and corrupt government. Under these circumstances the yishuv could not have existed, much less have grown, had it not been organized within the framework of the kolelim, who provided for their people and gathered money from abroad. (The other non-Muslim communities in Palestine were also supported to a large extent from abroad.) The kolelim, who were responsible for the halukkah distributions, played an important role in the development of urban settlement, especially outside the walls of the Old City in Jerusalem. The Jewish quarters, which were built after 1869 on the initiative of the kolel leaders, were an important factor in the territorial expansion of the Jewish population of Jerusalem. The Jewish population in the other three "holy cities" - Hebron, Safed, and Tiberias - also was essentially reliant on the halukkah.