Monday, October 04, 2010

Banking on Somalia: Why Remittance Companies Are Crucial to Rebuilding The Shattered Economy

Somalia’s crippled financial system faces severe challenges even as the country struggles to emerge from two decades of conflict.

Peacebuilding and reconstruction work will cost billions of dollars. The question of how this is paid for is crucial. Though Somalia potentially has sufficient natural resources, these are yet to be developed and the current level of funding for the Transitional Federal Government does not inspire confidence that the international community is keen to foot the bill.

Further, the country has been suspended from accessing global financial markets, and cannot expect to borrow to finance the cost. Further, rampant borrowing by Somalia's former military regime has left a pending debt crisis and the country has not taken advantage of the many opportunities for debt relief that have presented themselves over the past 20 years. As of 2007, the national debt stood at US$ 3.3 billion, 81 per cent of which is arrears.

Though the private sector is growing the country lacks a strong banking sector able to mobilize domestic savings for investment, providing the fuel for economic growth and the resources for reconstruction. In January 1991, all state institutions that provided services and regulated the economy collapsed, including the Central Bank of Somalia and the entire banking system.

According to a 2004 report by KPMG, the banking sector currently comprises a virtually-non-existent formal sector and an active informal sector. The former includes central banks in Mogadishu, and in the self-governing regions of Puntland and Somaliland. The country has no commercial banks though the central banks in Bosasso and Hargeisa offer limited commercial banking services, creating an undesirable conflict of interest with their role as treasurer of their respective regional governments.

Though the Central Bank of Somalia reopened its offices in Mogadishu and Baidoa in December 2006, it continues to have limited functionality. Despite a draft Central Bank Bill and Banking Bill having been developed, these are yet to become law and the bank operates under Decree Law No 6 of 18 October 1968.

The informal sector, which is dominated by privately-owned remittance companies, offers more promise. What started as a way for Somalis fleeing poverty, repression and, more recently, anarchy, to send cash back to their extended families in Somalia has in many cases blossomed into full-blown financial operations. By 2004, the remittances had reached $1 billion and to date remain Somalia’s largest source of foreign exchange. Though a tiny proportion of the global remittance industry, which is estimated at between $100 and $300 billion, these transfers account for up to 40 percent of the income of urban households in Somalia. A survey conducted by UNDP estimated that more than a quarter of families in Somalia receive remittances from abroad.

Remittance companies, being the sole international financial institutions operating in Somalia, are a lifeline for many Somali families both in Somalia and in the Horn of Africa. They provide a conduit for hard currency entering and leaving the country, as well as an instrument for trade and commerce in Somalia and abroad.

According to Mohamed Abshir Waldo, founder and director of the Sandi Consulting Group, a political, business and strategic consulting group whose primary focus is the revival and reconstruction of the Somali nation, the system of sending remittances in the first half of the 1990s was highly informal and personalized. It typically relied on trust relations with a known broker based in Nairobi or elsewhere who would insure that funds were delivered (either by carriers who flew to cities with cash on daily khat flights or via local high frequency radio operators) to family members inside Somalia or in refugee camps in the Horn of Africa.

HF radio was at the time the only means of communication available inside Somalia at that time and local private operators thus handled most remittances. They founded the first, small-scale remittance sector and a lack of capital prevented them from expanding the service beyond very modest levels. However, revolutionary advances in the telecommunications sector in the 90s made remittance transfers from great distances much easier. The rise of the remittance companies specializing in global money transfers into and out of Somalia followed the introduction of the first private satellite phone companies in 1994-95. Most of HF radio operators have been absorbed into these larger remittance companies as local agents, giving the companies the ability to reach virtually every community in the country, though some independent operators in small towns and villages continue to play a minor role in remitting money.

It is a misnomer to call these Somali remittance companies. Whilst the owners and origins of these companies are ethnic Somalis, most of them have operations in the Gulf, United States, Europe and East Africa and almost all are, in fact, owned and managed by citizens of these countries. According to Waldo, Somali nationals own less 15 hawalas while the overseas-owned remittance companies could be in the hundreds. It is the close partnership and networking between the overseas hawalas and the local Somali hawalas that gives the impression that they are one and the same. Typically, the international operators create regional clearing centres or headquarters in key locations worldwide, and decentralize most of the operations at country level through ‘agents’ – either as branches owned by the company or agencies franchised to independent agents.

Major operators include Sahaan, Amal Express, Global, Al-Mustaqbal, Towfiq and Barwaqo Financial Services, all of which are based in Dubai. Others are Cidgal in Djibouti, Kaah Express and Dalsan Nairobi and Salama Money Express operates out of London. The largest is Dahabshiil which is based in Hargeisa, the capital of the autonomous region of Somaliland. According to a report published in The EastAfrican, industry experts estimate it handles up to two-thirds of remittances to Somalia and is fast emerging as the largest money transfer company on the continent.

Growing out of a small store in the tiny town of Burau, Dahabshiil, which also deals in telecommunications, is today a multi-million dollar empire, with bases in over 40 countries including Australia, the United Arab Emirates and Britain. The company maintains offices in the Democratic Republic of Congo, Uganda, Rwanda, Sudan and Ethiopia.

While the remittance companies rely mainly on the business of migrant money transfers from western economies for family maintenance and investment in Somalia, individuals and businesses within the country use them as crude savings banks, depositing funds for short periods. According to the KWPC report, this quasi-banking role continues to generate the most interest amongst major remittance companies. In fact, Dahabshiil is currently constructing a bank in downtown Hargeisa.

However, most other remittance companies face major constraints in converting themselves into banks, not the least of which is the lack of a centralized government and financial regulatory authority. The lack know-your-customer regulation coupled with the relative simplicity of hawallas creates the possibility of hiding the origin and destination of funds or breaking the audit trail. That has led to unfounded suspicions that these firms were being used by terrorists to transfer funds for terror plots and as a conduit for money laundering. Such accusations can have devastating effects.

In 2001, following the 9/11 attacks, the US government shut down the overseas money remittance channel of the then largest Somali remittance company, al-Barakat, labeling the company "the quartermasters of terror." This was despite numerous investigations turning up nothing linking al-Barakaat to terrorist activities as outlined by the 9/11 Commission, and the fact that the terrorists involved in the attacks received the majority of their funds through the conventional financial system.

Nonetheless, the closure of Al-Barakat significantly dented the confidence of the Somali business community in the remittance companies as a result of losing their deposits. And though other companies were quick to step into the void, the humanitarian impact of money frozen in transit was considerable because Al-Barakat handled half of all remittances to Somalia and was the country's largest private employer.

As Somalia strives to rebuild its shattered economy, a viable commercial banking sector will be indispensable. As noted in a UNDP report prepared by Dr. Abdusalam Omer, “commercial banks provide services that are not currently provided by the remittance companies such as retail banking, corporate banking, and loans for commercial and social development.”

In creating such a sector, the country would do well to take advantage of the remittance companies, most of whom are legally registered or in the process of legalizing their status and pay taxes in every country in which they operate. As the KPMG report says, there is no reason why the existing Somali remittance companies cannot expand to provide commercial banking services in Somalia, or anywhere else. Despite the lack of formal regulatory mechanisms in Somalia, all these companies exercise self-regulation of some kind and at a conference held in Dubai in June 2003, they committed themselves to move towards licensing and to formalize their operations preparing the ground for the expansion of financial services.

Dahabshiil, for example, embarked on a campaign to apply for and register its operations with concerned authorities in all countries where this is required, hired money laundering reporting officers and trained staff on rules and procedures. It incorporated appropriate checks in its IT software allowing for the reporting of suspicious activity and on transactions that exceed a certain amount by agents and published guidelines for its agents on how to detect suspicious transactions and report them.

Still, Somalia does not have much of the legal framework, technical expertise, security, or strong central bank needed to regulate the establishment of any commercial banks. This will only come with the establishment of the state and its institutions. This is what the TFG and the international community must strive to do with utmost haste.

As Dr Afyare Abdi Elmi, professor of international politics at Qatar University and author of the book, Understanding the Conflagration of Somalia: Identity, Islam and Peacebuilding, wrote in an article published by Al Jazeera earlier this year, “economic development is key to a sustainable peace in Somalia…. The time has now come for the international community to stop bypassing or ignoring the already weak Somali government institutions. Reinstituting a legitimate and functioning central authority should be the priority of all interested stakeholders.”


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