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Sunday, October 3, 2010

Business in Somalia: Why 'hawala' firms are crucial to rebuilding the economy


Somalia’s crippled financial system faces severe challenges even as the country struggles to emerge from two decades of conflict.

Peace-building and reconstruction work will cost billions of dollars. The question of how this is to be paid for is crucial.
Though Somalia potentially has sufficient natural resources, these are yet to be developed and the current level of funding for the Transitional Federal Government does not inspire confidence that the international community is keen to foot the bill.
Further, the country has been suspended from accessing global financial markets, and cannot expect to borrow to finance the cost.
On top of all that, rampant borrowing by Somalia’s former military regime has left a pending debt crisis, especially since the country has not taken advantage of the many opportunities for debt relief that have presented themselves over the past 20 years.
As of 2007, the national debt stood at $3.3 billion, 81 per cent of which is in arrears.
Though the private sector is growing, the country lacks a strong banking sector able to mobilise domestic savings for the investment that would provide the fuel for economic growth and the resources for reconstruction.
According to a 2004 report by KPMG, the banking sector currently consists of a virtually nonexistent formal sector and an active informal sector.
The former includes central banks in Mogadishu and in the self-governing regions of Puntland and Somaliland.
The country has no commercial banks, though the central banks in Bosasso and Hargeisa offer limited commercial banking services, creating an undesirable conflict of interest with their role as treasurers of their respective regional governments.
Though the Central Bank of Somalia reopened its offices in Mogadishu and Baidoa in December 2006, it continues to have limited functionality.
Despite a draft Central Bank Bill and Banking Bill having been developed, these are yet to become law and the bank operates under Decree Law No 6 of October 18, 1968.
The informal sector, which is dominated by privately owned remittance companies, offers more promise.
What started as a way for Somalis fleeing poverty, repression and, more recently, anarchy to send cash back to their extended families in Somalia has in many cases blossomed into full-blown financial operations.
By 2004, the remittances had reached $1 billion and to date remain Somalia’s largest source of foreign exchange.
Though a tiny fraction of the global remittance industry, which is estimated at between $100 billion and $300 billion, these transfers account for up to 40 per cent of the income of urban households in Somalia.
A survey conducted by UNDP estimated that more than a quarter of families in Somalia receive remittances from abroad.
Remittance companies, being the sole international financial institutions operating in Somalia, are a lifeline for many Somali families both in Somalia and in the Horn of Africa.
They provide a conduit for hard currency entering and leaving the country, as well as an instrument for trade and commerce in Somalia and abroad.
According to Mohamed Abshir Waldo, founder and director of the Sandi Consulting Group, a political, business and strategic consulting group whose primary focus is the revival and reconstruction of the Somali nation, the system of sending remittances in the first half of the 1990s was highly informal and personalised.
It typically relied on trust relations with a known broker based in Nairobi or elsewhere who would ensure that funds were delivered to family members inside Somalia or in refugee camps in the Horn of Africa.
HF radio was at the time the only means of communication available inside Somalia and local private operators thus handled most remittances.
However, revolutionary advances in the telecommunications sector in the 1990s made remittance transfers from great distances much easier.
The rise of the remittance companies specialising in global money transfers into and out of Somalia followed the introduction of the first private satellite phone companies in 1994-95.
Most of the HF radio operators have been absorbed into these larger remittance companies as local agents, giving the companies the ability to reach virtually every community in the country, though some independent operators in small towns and villages continue to play a minor role in remitting money.
It is a misnomer to call these Somali remittance companies. While the owners and origins of these companies are Somali, most of them have operations in the Gulf, United States, Europe and East Africa and almost all are, in fact, owned and managed by citizens of these countries.
According to Waldo, Somali nationals own less than 15 hawalas while the overseas-owned remittance companies could number in the hundreds.
It is the close partnership and networking between the overseas hawalas and the local Somali hawalas that gives the impression that they are one and the same.
While the remittance companies rely mainly on the business of migrant money transfers from Western economies for family maintenance and investment in Somalia, individuals and businesses within the country use them as crude savings banks, depositing funds for short periods.
According to the KPMG report, this quasi-banking role continues to generate the most interest amongst major remittance companies. In fact, Dahabshiil is currently constructing a bank in downtown Hargeisa.
However, most other remittance companies face major constraints in converting themselves into banks, not the least of which is the lack of a centralised government and financial regulatory authority.
The lack of know-your-customer regulation coupled with the relative simplicity of hawalas creates the possibility of hiding the origin and destination of funds or breaking the audit trail.
That has in the past led to unfounded suspicions that these firms were being used by terrorists to transfer funds for terror plots and as a conduit for money laundering. Such accusations can have devastating effects.
In 2001, following the 9/11 attacks, the US government shut down the overseas money remittance channel of the then largest Somali remittance company, al-Barakat, labelling the company “the quartermasters of terror.”
This was despite numerous investigations turning up nothing linking al-Barakat to terrorist activities as outlined by the 9/11 Commission, and the fact that the terrorists involved in the attacks received the majority of their funds through the conventional financial system.
Nonetheless, the closure of Al-Barakat significantly dented the confidence of the Somali business community in the remittance companies as a result of losing their deposits.
And though other companies were quick to step into the void, the humanitarian impact of money frozen in transit was considerable because Al-Barakat handled half of all remittances to Somalia and was the country’s largest private employer.
As Somalia strives to rebuild its shattered economy, a viable commercial banking sector will be indispensable.
As noted in a UNDP report prepared by Dr Abdusalam Omer, “Commercial banks provide services that are not currently provided by the remittance companies such as retail banking, corporate banking, and loans for commercial and social development.”
In creating such a sector, the country would do well to take advantage of the remittance companies, most of whom are legally registered or in the process of legalising their status, and who pay taxes in every country in which they operate.
As the KPMG report says, there is no reason why the existing Somali remittance companies cannot expand to provide commercial banking services in Somalia, or anywhere else.
Despite the lack of formal regulatory mechanisms in Somalia, all these companies exercise self-regulation of some kind.
At a conference held in Dubai in June 2003, the remittance companies committed themselves to move towards licensing and to formalise their operations, preparing the ground for the expansion of financial services.
Dahabshiil, for example, embarked on a campaign to apply for and register its operations with concerned authorities in all countries where this is required, hired money laundering reporting officers and trained staff in rules and procedures.
It incorporated appropriate checks in its IT software allowing for the reporting of suspicious activity and on transactions that exceed a certain amount by agents and published guidelines for its agents on how to detect suspicious transactions and report them.
Source: The EastAfrica

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