Rift Valley Institute Briefing Paper March 2014 POLICY AND PRACTICE Challenges for the Somali money transfer sector By Anna Lindley and Jason Mosley Somali American protests withdrawal of bank facilities from MTOs Introduction Key points Remittances to Somalia are at risk of being caught • Money Transfer Operators (MTOs) have in the backwash of a global tendency towards played a vital role in the Somali economy tighter regulation of financial flows. This new for many years, functioning effectively tightening aims to prevent money laundering and despite chronic conflict and absence of to block flows to groups involved in terrorist government. activities. One recent consequence of this tendency has been that the banking sector—in the • With the global tendency towards tighter UK, the US and other jurisdictions—has become regulation of financial flows, intended to more circumspect about providing accounts to counter crime and terrorism, Somali money service businesses, such as money transfer MTOs are finding it increasing difficult to operators (MTOs), cheque cashers and bureaux de retain direct access to banking services. change. Smaller MTOs serving particular ethnic or national niches are finding it particularly difficult to • While legal remittance flows persist, retain direct access to banking services. Most thanks largely to private sector recently, Barclays Bank withdrew from offering adaptation and initiative, the situation bank accounts to many UK-based MTOs. remains precarious. There is an urgent There is particular concern about the impact on need for governments and the private Somali money transfer sector. There are limited sector to find a workable way forward. alternatives for channeling funds to Somalia, in the absence of an established banking system and Rift Valley Institute | Nairobi Forum | Briefing Paper | Challenges for the Somali Money Transfer Sector| March 2014 | Page 2 of 8 there is concern about the possible impact on money to the bank account of the national livelihoods of any major disruptions to remittance MTO office.4 As there are no correspondent mechanisms. Somalis express outrage that a banks in Somalia, the national MTO office system that functions effectively in a state where instructs its bank to transfer tranches to a there is so much else that is amiss should be central clearing house. This is generally located undermined—even as the governments of in the United Arab Emirates, a major business Western countries provide financial support to hub for Somalis.5 Somalia’s Federal Government. There are fears • The clearing house pays out money to Somali that remittances may be pushed into less traders to purchase imports. The traders regulated, or underground, channels, and that a replenish the funds of the local agent in sense of exclusion among Somalis abroad will be Somalia. Settlement may also occur through exacerbated. These fears have been strongly retention by local agents of outbound voiced in advocacy and media coverage.1 As yet, no transfers. Only rarely will a company move systematic evaluation has been carried out of the money physically to settle a debt with an impact of recent changes. agent. Due mainly to private sector adaptations and The system relies on a high level of trust. This initiatives, legal remittance flows to Somalia from allows remittances to be paid out speedily, usually major diaspora countries continue. But the in a matter of hours, with the debt still pending. situation is precarious and there is an urgent need Somali MTOs initially relied on clan-based loyalty for governments and the private sector to find a to establish a functioning network of agents, but workable way forward. larger MTOs have established networks that cut across clan divisions, allowing them to expand How the system works their customer base and their profits.6 The largest and longest-established Somali MTO, Dahabshiil, Remittances play a major role in Somalia. Before which is estimated to have 40-60% of the market, the collapse of the state in 1991, the Somali has a single proprietor.7 Other Somali MTOs have territories developed a far-flung diaspora, through multiple shareholders. Agents usually operate as labour, student and business migration, as well as franchisees, sometimes for multiple MTOs. refugee movements. With the collapse of the state and banking sector in the early 1990s, the demand for alternative financial mechanisms grew.2 By Transaction costs 2012, remittances amounted to a minimum of $1.2 Somali MTOs have thousands of agents, spread billion per year, compared with typical levels of across Somalia and key diaspora and trade international aid of around $800 million per year, locations around the world.8 In Somalia, 64% of exports of $500 million, and foreign direct remittance collection points are located outside investment of $100 million.3 urban areas.9 The cost of sending a sum of £120 Specialized MTOs have emerged to convey these from the UK to Somalia was 5.65% of the funds. The companies work by balancing out the remittance in the third quarter of 2013. This needs of the diaspora and traders to move money: compares to Nigeria at 7.36%, Ethiopia at 8.29%, and Kenya at 9.77%.10 Fees for transfers to • Senders living abroad give money and Somalia are very consistent across companies.11 information about the intended recipient to an Rates are often reduced for large amounts, for agent. The sending agent communicates the regular customers relaying high volumes, and details, via a central information hub, to a during Ramadan. receiving agent located close to the recipient in Somalia. The debt between agents is settled at Although Dahabshiil retains a large share of the a later point. Somali market, the overall situation in terms of cost and quality of service to the customer is • Agents abroad aggregate deposits until they considerably better than in Africa in general. In reach an agreed level; they then transfer Rift Valley Institute | Nairobi Forum | Briefing Paper | Challenges for the Somali Money Transfer Sector| March 2014 | Page 3 of 8 most other African countries the formal money The global context transfer market is highly monopolistic, dominated by Western Union and MoneyGram. These Somalia is not the only country with vigorous companies have national pay-out networks that remittance flows. Expected to have reached $414 are locked into exclusive partnerships. In these billion in 2013, recorded remittances to developing countries, consequently, there is a high level of countries are nearly triple the level of official informal movement of money in order to development assistance, and more than half the circumvent high fees and service inadequacies.12 size of foreign direct investment flows, according 18 to the World Bank. Relaying these funds is a multi-billion dollar business, with services offered Other financial services by a range of regulated and informal Money transfer companies have been among intermediaries, including banks, specialized MTOs, Somalia’s few success stories in the past two post offices, couriers, traders, bus and taxi drivers, decades. There are no functioning state or micro-finance institutions, pre-paid card commercial banks registered in the Somali companies and mobile phone networks. 13 territories. The Central Banks of Somalia and Policy-makers regulate financial systems to 14 Somaliland operate at a very basic level, and prevent them being used for criminal or terrorist recent scrutiny of the Central Bank of Somalia purposes, as well as to ensure financial stability. suggests that there are major problems with These efforts were intensified after 9/11, with the 15 corruption there. Traditional financial US seeking to extend the ‘war on terror’ to the institutions exist, notably the rotating savings financial sector. There are international system known as hagbaad, but these tend to be recommendations regarding the regulation of local and not formalized on the scale of the MTOs. financial institutions, including specific Somali MTOs thus occupy a unique position as the recommendations regarding specialized 19 primary providers of financial services. Many remittance intermediaries. These require the companies act as deposit-taking institutions in the implementation of national registration or Somali territories, holding funds for a range of licensing systems for remittance intermediaries customers from individuals to large organizations, and observation of specific business practices. The including international agencies. They have played latter include due diligence (verifying the identity an essential role in the delivery of cash for of customers and confirming that they do not humanitarian relief, for instance during the famine appear on various watch lists), keeping clear of 2011.16 The larger companies are household records of transactions, and reporting suspicious names and significant employers and investors in transactions. These international Somalia. recommendations have considerable bite, given the possibility of sanctions on non-cooperative Recently money transfer via mobile phone has countries, including loss of access to the US-dollar taken off within the Somali territories, allowing financial market. payment for a range of goods and services, but this has yet to connect with the international Recognizing the economic importance of remittance system on any scale. Telecoms remittances in many poorer countries, companies in southern Somalia have reportedly development policy-makers have embarked on a been discouraged by