By Emma Lochery
In May this year Barclays announced it would no longer supply bank accounts to 250 money service businesses as of July 10th – including four major Somali money transfer businesses. For most other countries that rely on remittances, there are alternatives for sending money, but Somalia is in a difficult position due to the weakness of its banking system, lack of banking regulation, and high level of need. After much protest from Somali diaspora and other civil society groups, the original deadline was extended a couple of times for particular companies, but as of mid-October only one Somali money transfer company had been allowed keep its account open pending the outcome of a court case arguing that Barclay’s decision violated competition law.
Oxford’s Horn of Africa Seminar met on October 15th to discuss the Somali remittance landscape and the challenges ahead.
Amidst the multitude of challenges facing Somalis today, money transfer agencies represent ‘what works’ in the Somali territories. As pointed out by a FSNAU report authored by Laura Hammond earlier this year, they provide an efficient way for an estimated minimum of $1.2 billion to be remitted back to Somalia every year, which is far more than what Somalia receives in international aid (on average just under $850 million for the last five years), foreign direct investment (just over $100 million in 2011), or exports earnings ($516 million in 2010). In the FSNAU study, which covered both rural and urban areas, 40% of all Somalis surveyed said they received remittances from abroad – and in urban areas that number rose to over 50%. Remittances helped meet basic needs; three-quarters of recipients said they used them to buy food and pay for services such as health and education. Three-quarters of recipients also said they shared what they received with others – demonstrating the way remittances help maintain a fragile but crucial social safety net. 93% of all recipients said they used money transfer companies to receive their money.
Money transfer companies in the Somali territories have also begun to offer more complex services, such as deposit accounts, debit cards, and credit to small businesses. They are a principal employer in the formal economy across Somaliland, Puntland, and Somalia. The bigger companies are also crucial players in wider Somali trade networks, facilitating financial transfers to the Gulf and cities in China and other trading hubs. Money transfer companies have helped to hold together economic networks, which are the mainstay of the Somali economy – from livestock to retail trade businesses. Based on informal mechanisms at first, but soon formalizing and adopting new technologies, they proved essential through the oppressive and extractive 1980s, helped families rebuild their lives amidst the wreckage of a state in the 1990s, and enabled people to survive conflicts in Somalia since then. They have been key in allowing Somali trade networks to expand and link into markets in Kenya, South Africa, and further afield. The names of the largest firms are household names – they are highly trusted brands in very insecure places.
However, the very factors behind the companies’ success are also some of the reasons for the current struggle with banks and regulators. To understand why, it is necessary to step back and look at the broader banking sector. Since 9/11 in particular, there has been a huge growth in anti-money laundering regulations. Much of the pressure in the sector today comes from US regulators – and with operations spanning the globe, British banks such as Barclays cannot afford to ignore the changes. Last year in the US, HSBC was fined $1.9 billion by the US government for weak anti-money laundering controls in Mexico, while Standard Chartered was fined more than $300 million for violating US sanctions on Iran, Burma, Libya, and Sudan.
Money transfer businesses then find themselves in a difficult position. While the amount of money transferred as remittances is important to Somalis, for a bank like Barclays it is rather small in terms of their global business, and the small amount of profit is not worth the perceived risk of hosting the companies’ accounts.
While neither of the cases cited above involved transactions to Somalia, Somali money transfer businesses seem riskier to banks for two main reasons. First, they principally serve one country – and the less diverse a money services company’s customer base, the more risky they appear to a bank. So the reason that the major Somali money transfer businesses are so trusted in Somalia – that they are homegrown businesses with strong track records and connections at home and in the diaspora – means banks trust them less. Secondly, Somali money transfer companies generally rely on a third location as a clearinghouse – and these are most often in the Gulf States. Between a sender in London, and a recipient in Mogadishu, a transaction may also flow through Dubai, for instance. Dubai has long been a central economic node in Somali trading networks; Somalis migrated to labour in the Gulf in the 1970s, and in the 1980s, Somali businessmen took advantage of their relatively easy access to profitable and convenient Dubai markets. However the very ease of access and laxity of regulation that makes Dubai and its free zones attractive to Somali businesses makes large, global banks nervous that they might inadvertently end up flouting regulations in the other jurisdictions in which they operate – for very little profit.
To make matters worse, the UK government’s response has been rather slow and uncoordinated. The Economist hit the nail on the head with their article about the recent conference on a ‘new deal’ for Somalia in Brussels – much waffling about aid and not enough about how to fix the remittance question. Soon before the last and largest company was supposed to have its account closed, the government finally announced that over the next year it was planning to create a ‘safe corridor’ for transferring money between the UK and Somalia in partnership with the World Bank. However, it is unclear what will happen in the short-term before the corridor is set up. Questions remain as to if and when either the UK or US government will also create the regulation needed to assuage the banks’ concerns sufficiently. Somali money transfer companies have adapted to regulation before – but it is hard to adapt to regulation yet to be written.
Finally, last week’s speakers emphasized that people will find alternative means of sending money, sending cash in suitcases (risky for everyone involved and not exactly what the regulators want either…) or by using other companies on the market, many of which have a smaller geographical reach in Somalia. One company for instance has their clearinghouse in a more highly regulated location and connects with Somaliland’s mobile money system. Others are ‘small payment institutions’ (rather than authorized payment institutions), limited to remitting no more than 3 million euros a month. The largest company Dahabshiil, meanwhile, has managed to find a bank that will host its corporate client business, but not its small-scale remittance business that is so central to daily life in Somalia.
It thus remains to be seen how people will adjust to the closure of the accounts of the four major remittance firms – and what effects this will have on the overall market for money transfer businesses, some of whom are very powerful players on the Somali economic scene. As the Oxford event ended, we were still waiting to hear the outcome of the court case deciding whether Dahabshiil, the final company due to lose its account, had managed to escape the ‘final final’ deadline one more time.
This post is solely based on the opinion of the author, but we want to thank the seminar speakers who included:
Abdi Abdullahi, Chairman, SOMSA | Industry perspective
Edwina Thompson, Beechwood International | UK policy environment
Farhan Hassan, Somali Heritage Academic Network | Civil society view
Emma Fanning, Oxfam GB | Impacts on NGOs
Laura Hammond, SOAS | Livelihoods impacts
Chair: Anna Lindley, SOAS