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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.
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 laborers, 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.
Recognizing 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 organizations. 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.
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
'Hawala': Formal or informal?
Somalis describe the money transfer system used to send money to relatives back home as hawala. Indeed all money transmitters including Moneygram and Western Union are known as hawala, derived from an Arabic word - (hawil) meaning transfer.
However, media and remittance literature generally refer to hawala as an informal, underground and often illegal money transfer system. In some countries, such as India and Pakistan, non-bank money transfer systems, and therefore hawalas, are illegal. Elsewhere, standard systems or hawalas are legal provided they are registered or have licenses. The media often uses the Indian and Pakistani meaning of hawala to describe other transfer systems so it has become a byword for illegal activities: hawalas are sometimes seen, for example, as the primary network used to finance Al-Qaeda. The association for Somali money transfer companies is even considering banning the use of the word hawala and inventing a new Somali word for money transfer.
Somali remitters or hawalas are neither informal nor illegal. In the UK and USA, from where nearly half of Somali remittances originate, Somali remittance companies are formal transmitters, with the necessary registration and licenses, operating legally. A typical Somali remittance company will have a large network of registered agents and branches in some 35 countries all operating under one brand name - no less formal than any of the large international money transfer operators such as Western Union.
Ismail I. Ahmed