New regulations restrict Somali remittances

Approximately one million Somalis send US$1 billion back home every year, a crucial source of income for most of the Somali population. New regulations, however, as part of the 'war on terror', are restricting the flow of remittances into the country.

Billboard advertising an international money transfer company. Most people in Somalia depend on remittances sent to them by family members living abroad.
Photo by: Sven Torfinn/Panos Pictures

In 2004, remittances were about 67 percent of Gross Domestic Product and more than ten times the value of exports. The Somali economy is now more dependent on remittances than any other in the world.

Migrants normally come from wealthier families who can afford to send someone abroad. But because of a strong tradition of sharing wealth they support their immediate families as well as extended family and distant relatives.

Remittances have succeeded in:

• creating employment opportunities and reducing poverty: the booming construction sector employs thousands of poor male labourers, while families receiving remittances employ similar numbers of female domestic workers from rural areas
• boosting the rapid growth of the private sector
• softening the predicted economic disaster following the livestock export ban imposed by Saudi Arabia since 1998.

Somali companies engaged in money transfers have developed extensive, efficient and low-priced transfer networks throughout north-east Africa. Almost every Somali district now has a remittance company branch that serves as a bank facilitating local and international trade and telecommunication links with migrants.

Recognising the reach of these networks, international agencies have now set up partnerships with the remittance companies for humanitarian purposes.

Remittances boost trade and savings

As the main source of foreign currency earnings, remittances finance the import of goods and services. Funds deposited by importers with agents in East Africa are paid in Dubai at no cost. Money transmitters and their agents can manage their cash flows without having to physically bring cash into the country, unless trading is disrupted by conflict.

Small-scale savings are also increasing as more migrants open savings accounts with remittance companies in their hometowns thinking that their funds are safer back home than in European or US bank accounts. Others prefer to keep their capital closer to home to invest in property, other assets or further migration. Some remittance companies are now exploring microfinance and other investment services and products.

Regulations curb remittance flows

Remittance companies, however, have fallen victim to government anti-terror measures worldwide. In November 2001, the largest Somali money transfer company, Al-Barakaat, was shut down and its assets frozen by the US Treasury Department because of alleged links with terrorist organisations. Strict laws against money laundering and financing terrorism have led to greater scrutiny of remittance companies by regulators, banks and law enforcement agencies in Europe and North America. Companies complying with the new regulations are struggling as US banks have closed the bank accounts of all international money transmitters (including most Somali companies) perceived as high risk.

To comply with the new regulations, transfer companies have to obtain expensive licenses, bonds, and minimum capital as well as invest in technology to ensure compliance with anti-money laundering regulations. Transfer costs have thus increased significantly: transmitter licenses in 5 of the 35 sending countries require a total investment of at least US$5 million dollars; a typical transfer of US$50 from the Netherlands now costs US$10 - four times what it used to cost.

Identifying clients

Moreover, the traditional client identification systems that worked so well in the past are no longer accepted. Transmitters now have to obtain formal identification forms and proof of receipt from recipients. This is further complicated by the expanding list of common Arabic or Muslim names on US, United Nations, European Union and other sanction lists. Up to 40 percent of common Muslim names are now blocked by standard screening software.

Remittances clearly provide a lifeline to poor families. As more countries impose complex and sometimes conflicting regulations, a better understanding of their potentially negative effects on remittance flows is crucial.

The United Nations Development Programme is supporting Somali remittance companies to set up self-regulation systems and adopt money transfer technology that is compliant with new regulations to maintain and strengthen this financial lifeline and reduce increasing transfer costs n

Ismail I. Ahmed
Governance and Financial Services Programme, United Nations Development Programme (Somalia), Springette, Spring Valley, Lower Kabete Road, P O Box 28832, 00200, Nairobi, Kenya
T +254 20 4183640/2/3/4
F +254 20 4183641
Ismail.ahmed@undp.org

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