by Mohamed Mukhtar Ibrahim
Wednesday, December 19, 2018
Somalia is among the many African countries who have benefited from remittance from their Diaspora population. The existence of remittances economy in Somalia was boosted by two main factors: the rapid growth of a migrant workforce from the early 1970s and the unrealistic fiscal and monetary policy – especially the maintenance of a totally artificial exchange rate that quickly led to the emergence of vibrant parallel or a black market, often managed by state officials and their associated middlemen. Over a million Somalis now live abroad remit back home an estimated 1.5 billion US dollars annually.
About fourteen Somali companies are offering money transfer services. There are currently new international money transfer companies coming in the Somali money transfer industry. Somali operators rely exclusively on Somali agent and sub-agents they appoint in some 40 countries worldwide. This article examines the status, opportunities and challenges in the Somali remittance industry.
This article drawn from the recently published “Somali Remittance Report: Challenges Faced by Somali Remittance Industry” report whose findings were drawn from interviews conducted to a wide range of stakeholders including remittance operators, researchers, government officials, financial analysts, beneficiaries (locals) and industry experts.
Services Provided by the Somali Remittance Companies
The expanding business environment in Somalia offers a wide range of opportunities to local Somalis, diaspora Somalis and foreign investors. In addition to money transfer, remittance companies offer savings and transactional accounts for business and private clients for safe keeping and savings towards projects and investments. Another important service offered by these companies is the transportation of large amounts of cash from one location to another. The remittance companies have in the recent years also ventured into strategic investment in different industries further expanding their income base through strategic market diversification both locally and regionally.
Despite the limitations in related to institutional incapacities and lack of expertise, these companies provide a wide range of services that make them quasi-banking institutions in Somalia; they are however unable to provide all banking services. Now, they play several important roles by conducting the following operations.
Traditional remittance business through transfer of small amounts of money sent by migrants to their families for upkeep, or for specific events like weddings and funerals, projects and investments either regularly or intermittently.
Savings and Money Transfer Platform through savings and transactional accounts for business and private clients mainly for the purposes of safe-keeping and savings towards current and future projects.
Another important function provided by the Somali remittance companies is to (transport) move cash from one location to another location with very low commissions.
Making investments: Remittance companies have made strategic investments in different industries, most notably, is the telecommunication industry. It is therefore fitting to look at the remittance industry’s transformation and challenges in a wider context.
Challenges in the Remittance Industry
The services provided by remitters are considered to pose a higher Money Laundering/ Terrorism Financing risk than most other sectors and the risk of breaching sanctions law because they operate outside of conventional banking system and involve sending money to places that do not have established, modern banking networks. In effect, banks in the Western source countries have been closing accounts held by remitters. In addition, the informal nature of remittance businesses and their ability to send money to foreign regions and countries with limited or no financial infrastructure, and potentially weak Anti-Money Laundering/Counter-Terrorism Financing controls, makes them vulnerable to misuse by terrorist groups and other criminals. Another serious challenge to the industry touches on the international obligations revolving around identification and regulation further curtailing the growth in the industry through set regulatory provisions and strict measures including the UN Security Council resolutions.
Closer to home, the maintenance of the money transfer process by the Somali Remittance Companies (SRCs) is critical, but not easy. To outsiders it may seem a simple process of transferring value from A to B, and to others it may look like a murky system where money changes hands secretly under the table or in an alleyway, and messages are passed on orally without leaving any trace. In fact, it is a very sophisticated business, which must overcome day-in day-out technical, regulatory, security, cultural, institutional, logistical and managerial challenges, in an environment, which is anything but hospitable.
The management of hundreds of thousands of transactions and the maintenance of advanced software and hardware are challenges which all SRCs must contend with. Like all cash businesses, security is a major concern for the SRCs. It is a challenge they must deal with from the receiving point to the paying point. This is a serious problem particularly in Somalia where government authority is either weak or non-existent in large areas. Access to banking services is essential to the transfer of value. Before 9/11 terror attack, this was not a problem, but since then, it has become the greatest challenge which SRCs face. Exchange rates and foreign currency deals to minimise losses and maximise returns are some of the challenges SRCs face on a daily basis, just like the dealers in money markets in New York. In addition, cases of dishonest agents overseas have been reported in recent times bringing the image of the industry into disrepute thus mistrusts.
Remittance companies are financial institutions, and their development can lead to a broadening and deepening of financial markets; they can also provide much needed competition to commercial banks which often are reluctant to deal with lower income people. With the expanding market resulting from an improved business environment in Somalia, a lot needs to be done in improving the sector including the establishment of a government industry working group for strengthening regulatory oversight of remitters, including a registration/licensing power and penalty regimes.
Other measures including creation of a tiered licensing, technical capacity and competency assessment for all applicants including key personnel in such companies should be streamlined and put into effect. In addition, mandatory Anti-Money Laundering/Terrorist financing awareness sessions should be conducted to provide platforms for policy changes and briefs, emerging local/regional/global market trends and related lessons and information.
Finally, it is important to give the Somalia Financial Reporting Center stronger powers to control the registration/licensing of remitters. Issuance of regulatory rules and compliance requirements must be made mandatory upon registration of businesses to ensure they are operating within stipulated and publicized regulatory frameworks. This will help inform both running and potential businesses and reduce misinformation.
Mohamed Mukhtar Ibrahim