Bank’s move could strangle Somalia’s economy, force ‘hawala’ underground

In Summary

• Last month, a group of researchers and aid workers sent a letter to Mark Simmonds, the UK’s Parliamentary Under-Secretary of State for Africa, urging him to persuade Barclays not to withdraw its services to the money transfer companies

• Shutting down money transfer services in the UK will, in effect, strangle a significant player in Somalia’s economy

• As the UK-based Somali Money Services Association pointed out, the decision by Barclays could have the unintended consequence of pushing the money transfer service underground into the hands of unlicensed, unregulated and illegal providers, thereby exacerbating money laundering and other vices, the very vices that led to the Barclays directive in the first place.

By RASNA WARAH

The announcement by Barclays Bank Plc of the UK that it will from this week withdraw banking services from some 250 money transfer companies has caused panic among Somalis in the diaspora who use these companies to send money to family members back home.

Explaining the move, Barclays stated: “It is recognised that some money service businesses don’t have the proper checks in place to spot criminal activity and could, therefore, unwittingly be facilitating money laundering and terrorist financing.”

Critics of the decision say that remittances are a “lifeline” for the millions of Somalis who are not served by formal banking institutions and that thousands will not be able to pay for food, education and medical expenses. Some researchers have suggested that Somalis operate and even thrive in a largely unregulated and informal economy because of remittances.

Last month, a group of researchers and aid workers sent a letter to Mark Simmonds, the UK’s Parliamentary Under-Secretary of State for Africa, urging him to persuade Barclays not to withdraw its services to the money transfer companies (also known as hawala), adding that these companies not only provide essential services to the global Somali community, they also make it possible for aid agencies, such as UNDP and Oxfam, to pay their staff and procure services in Somalia.

It seems remittances have proved to be a much more effective coping mechanism than aid in Somalia.

It is estimated that hawalas remit between $1 to $3 billion to Somalia every year – more than the total amount of international aid the country receives.

The hawala system is the backbone of the Somali economy, and has played a critical role in ensuring that the war-ravaged country’s unbanked population gains access to funds.

These remittances not only allow families to survive, they are also used to conduct business. Shutting down money transfer services in the UK will, in effect, strangle a significant player in Somalia’s economy. Forcing money transfer companies to shut down is the equivalent of closing down M-Pesa in Kenya, which transacted a staggering Sh129 billion last year.

Dahabshiil, the largest and most successful of these money transfer companies, has more than 300 branches across the length and breadth of Somalia and has agents in over 150 countries.

More than a quarter of Dahabshiil and other money transfer companies’ business comes from their customer base in the UK. Money transfer companies based in the country adhere to regulations set by the UK’s banking sector.

The decision by Barclays could be a strategy by Britain to force Somalia to adopt a more regulated banking system that adheres to international standards, and which can serve the aid agencies that will soon set up base in Mogadishu.

Nations eager to exploit Somalia’s untapped natural resources, such as oil, will also need banking services in Somalia that they can rely on. That is perhaps why the European Union is holding talks with the Somali Government on introducing “a new financial architecture based on mutual accountability and partnership”.

There is clearly an urgent need for a regulated banking sector and sound monetary policies in Somalia. Without them, the government cannot conduct its operations efficiently. The government still uses cash to pay salaries, a practice that is subject to abuse.

A Reuters report last week stated that Somalia’s Central Bank is being used as a “slush fund” by politicians and that cash withdrawals amounting to millions of dollars are largely unaccounted for.

However, replacing hawala with a regulated banking system is not feasible at the moment, as there is no regulatory framework guiding the banking sector. Slowing down money transfer services, which have proved to be more reliable and efficient than banks, could lead to the proliferation of unregulated banks in Somalia and harm the economy.

As the UK-based Somali Money Services Association pointed out, the decision by Barclays could have the unintended consequence of pushing the money transfer service underground into the hands of unlicensed, unregulated and illegal providers, thereby exacerbating money laundering and other vices, the very vices that led to the Barclays directive in the first place.

rasna.warah@gmail.com

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