The High Price of Losing Remittances
By Amanda Roth
Every year, hundreds of thousands of Somali immigrants walk into small money transfer organizations in more than 150 countries around the world in order to send money to relatives in their homeland. Their funds prop up local and regional economies, keep families fed, and help preserve stability around the country. But this soon may change. As international banks shut down money transfer organizations to curb the funding of terrorist groups, many Somali workers worry their families will no longer have an income.
In Somalia, (where there hasn’t been a central government since the collapse of the Somali state in 1991), remittances are the single largest source of revenue. Although difficult to measure, remittance flows are thought to total $1.2 billion a year, surpassing foreign direct investment, livestock trade (Somalia’s largest commercial sector), and international aid.
Yet funding from the Somali diaspora is teetering on a precarious precipice. In September 2013, British banking giant Barclays sent notices to 250 money transfer companies from a variety of countries, notifying them that Barclays would be closing their accounts due to fears of money laundering and terrorist financing. Dahabshiil, Somalia’s largest remittance organization, won a temporary injunction against the bank in November, delaying the closure until a full trial can be held.
Barclays is one of many banks that have made the decision to close the accounts of money transfer organizations over the past fifteen years. Faced with ever-greater regulatory scrutiny since September 11, the inherently anonymous nature of money transfers represents a significant risk for large international financial institutions. Most recently, Minnesota-based Sunrise Bank cancelled its money transfer accounts after two Somali women were convicted of sending money to the Al Shabab terrorist organization.
Somalis around the world are holding their breath as they wait for the outcome of the Barclays case. Dahabshiil is not the only company threatened by the case’s outcomes, nor is Somalia the only country at risk. But the situation is particularly ominous there, where money transfer organizations are the only means of transmitting money to many parts of the country, especially in rural areas. Approximately 60 percent of the remittances sent by Somalis in the diaspora are routed through Dahabshiil. For thousands of families across the country, funds from abroad are the only source of income. Without them, millions of individuals would be without a roof over their heads or food on their tables.
As more banks close their doors in the face of international pressure, an underreported risk rises. Beyond devastating the lives of individual Somalis, eliminating the transfer of remittances could decimate one of the most promising building blocks for sustainable, national peace.
While every effort should be made to regulate against potential terrorist financing, cutting off this crucial lifeline will likely do more harm than good. Instead of taking rash action to prevent alleged money laundering, the international community should be looking to Somalia’s hawala system to understand the vital role remittances play in creating stability.
Hawala organizations collect funds from Somalis living abroad and contract with agents on the ground in the country, who use mobile phones and email to transmit the money to the recipients. These trades often occur in less than 24 hours. Later, the organization reconciles the funds transfers through a larger host institution, such as Barclays. The hawala system is widely used throughout Africa and the Middle East.
Somalia does not have a formal financial system. International aid organizations cannot operate freely in much of the country due to violence, and although the United States recognized the transitional government last year, there is still little infrastructure and few employment opportunities. The severe famine that occurred from 2010 to 2012 further exacerbated existing poverty and insecurity. The hawala system means that funds can be sent nearly anywhere at anytime, whether financial infrastructure is present or not.
“Somalia has not been functioning for over 23 years, and all those sectors and all those institutions have been completely destroyed,” notes Jamal Gelle, a Somali immigrant living in Minneapolis, Minnesota.
Despite working full time and attending school to become a certified public accountant, Gelle sends several hundred dollars to his mother and siblings in Somalia every month. “They mainly use it to eat, for food,” he says. “My brother also has kids and some of the money pays for schooling, because schooling is not free, and for the books and uniforms that they need.”
By keeping families and individuals from extreme poverty, remittances may actually limit the appeal of terrorist groups such as Al Shabab, who often recruit young, unemployed, and desperate men as members. In addition, in some parts of the country – especially the more peaceful, semi-autonomous regions of Somaliland and Puntland – diaspora members are increasingly sending money not just to support their families, but to contribute to community development and peace building projects in their hometowns.
The role of remittances in peace building is receiving increasing attention among academics and practitioners. Funding sent by the diaspora fills crucial gaps in recovery, reaching individuals and communities that aid often doesn’t, and provides an insurance mechanism to subsidize unemployment during the crucial post-conflict period when there are not enough sources of income to provide for the population.
“There’s a tendency to focus on piracy and terrorism, but not to focus on the role of state building and community” when the international community speaks about Somali remittances, notes Dr. Keren Weitzberg, a postdoctoral fellow at the University of Pennsylvania who has done extensive work on the Kenya-Somalia border.
Abdi, a Somali living in Colorado who works with the refugee community there, agrees. Many citizens living abroad view remittances as both a familial and social obligation.
“I actually haven’t met anyone who doesn’t send money home,” she notes. The money is “not just to feed our families, it’s also to rebuild. Although we can’t be there, we have a responsibility to send money that can help rebuild the country.”
Somaliland, for example, which receives little targeted international aid due to its disputed independence status, has relied heavily on its diaspora to begin the process of reconstructing as conflict has tapered off. Remittances provide small capital contributions for families to begin small businesses in the region, such as food and clothing trade, or taxi and bus companies. The funds have also been used to finance community projects, build schools, and pay salaries of critical workers such as police officers, teachers, judges, and clerics.
The temporary injunction against Barclays will keep the account open for a few more months, but the larger issue still remains. Dahabshiil, and many other money transfer organizations, have voluntarily complied with all existing regulations. If Somalia’s hawala system continues to be indiscriminately targeted as part of ongoing counterterrorism efforts, any advancement toward stability and peace will likely be reversed.
“What I suspect would happen is that not only would people suffer,” says Weitzberg, “but these money transfer systems would just continue and become much more informal and less transparent. I just see it as a tool, and removing the tool is just going to do more harm than good.”
As long as Somalia remains without any formal banking system, the remittance system will be difficult to monitor. Yet the international community must also realize that as long as the country’s ineffective government remains unable to provide for its citizens, the money sent by the diaspora is crucial for the wellbeing of its citizens and its overall stability. Cutting this critical lifeline will threaten the already fragile economy and bring further hardship to millions of Somali citizens.