For the local humanitarian sector in Somalia to survive, systemic and structural shifts need to be put in place to ensure transparency within the financial system, and open up channels for financial access for local humanitarian actors, according to a new report from the Overseas Development Institute, The Challenge of Informality: Counter-terrorism, Bank De-risking and Financial Access for Humanitarian Organisations in Somalia. Read more
The country's challenges in its financial system have important implications for humanitarian actors. Internally, the financial sector is stuck between dominant private money transfer companies and a small and relatively weak formal banking sector. External challenges stem largely from the enforcement of counter-terrorism measures and banking regulations, which has seen transactions delayed or frozen and bank accounts closed.
Through interviews with bankers, humanitarian organizations and academics, the report's author found that:
- Money transfer companies, mobile money and other means of financial transactions outside the formal banking system are essential to the humanitarian response in Somalia.
- The popularity of money transfer operators may have contributed to the weakening of the Central Bank of Somalia, which has had no oversight over money transfer businesses.
- Some local money transfer businesses have questionable transparency measures and have contributed to aid diversion, but the majority of local and international operators have rigorous Know Your Customer (KYC) measures in place.
- Some international organizations have stopped using money transfer operators in order to support more financial/aid transparency, but this means that many local humanitarian organizations are not able to use these funds because they do not have access to bank accounts.
The report's author urges the various actors involved to manage risk, rather than trying to avoid it, working with formal, less formal and informal financial actors in Somalia to ensure financial access for humanitarian actors, and to create incentives for informal financial actors to submit to more regulation and join the formal financial sector.