Remittances and Financial Sector Development

1. Remittances and Financial Sector Development

2. Introduction Monetary Policy Supervision Policy Payments system Education Health Infrastructure ‘Survivors’ Conflict affected countries Financial Sector Development Remittances Terrorist financing Conflict crimes Exploiters Money laundering Lessons from Somalia

3. Macroeconomic Overview • Somalia has existed as a “failed state” since the last central government was overthrown in 1991. • Decades of conflict have displaced an estimated 370,000 Somalis and resulted in the exile of one million people. • The incidence of poverty is very high, with 43 percent of the population living below the extreme poverty line of US$1 per day. • Negative growth in late-1980s, and the collapse of the banking system • Loss of public confidence in government and banks • Since 1991, the economy has suffered from droughts and the devastating civil war. • Despite the absence of a state, a thriving private sector emerged in the 1990s. Unlike the 1970s and 1980s, there have been significant private investments in commercial ventures largely funded by the remittances from the Diaspora. • Today, remittances amount to at least US$1 billion per year, accounting for 71.4 percent of GNP.

4. Successes and Failures in a Conflict Economy Supported by Worker Remittances • Somali entrepreneurs have adapted well in a stateless economy. • A post-conflict economy without restrictions helped the private sector and cross-border trade in a profound way. • Somali remittance companies operate in a highly competitive environment. • In all regions, the private sector is providing sometimes better and more efficient services than the state before the war. There are, however, critical gaps in private sector provision of services. • Failure to provide public goods • Despite $1 billion remittance inflows per year, the cost of civil conflict and absence of a state in economic and social development has been extremely high. • Today, 47 percent of the economically active population is unemployed in Somalia.

5. The Remittance Sector: Effects on Poverty and Growth • Remittances have been a significant contributor to household income and investment, with subsequent effects on poverty and inequality. • Especially in times of economic depressions and external shocks, remittances have been extremely important to the Somali economy because they tend to smooth consumption and thus create a “buffer” against shocks. • Most Somali remittances, which range between $50-100 per month, are used for direct consumption by the household. • Remittances constitute nearly 40 percent of the income of urban households. • Spill-over effects • One negative impact is that remittances discourage job-seeking and keep unemployment high. • While remittances play an important role in the Somali economy, they cannot become a source of long-term sustainable growth.

6. History of Financial Sector • Pre-1991 socialist state – several state-owned commercial banks and Central Bank of Somalia • Entire banking system collapsed in 1991 • Some dubious ‘banks’ have come and gone • No commercial banking sector or financial institutions since 1991 • Bank of Somaliland and State Bank of Puntland have evolved as regulatory bodies (central banks) in North-West and North-East regions – also providing limited banking services • Money transfer companies have since emerged as the most prominent players in the financial sector • Two MFIs established in 1998 (through EC funded programme) • Recently, a bank was established in Bossaso, and others likely to open soon

7. CONSUMPTION LOANS LIQUID SAVINGS MONEY TRANSFERS Spectrum of finance – pro poor finance term PENSIONS AND LIFE ASSURANCE - Long INVESTMENT LONG - TERM ASSET FINANCE TERM HEALTH AND GENERAL INSURANCE LOANS AND EQUITY FOR ENTERPRISE term - ort Sh Micro Small Medium Large TRANSACTION SIZE

8. CONSUMPTION LOANS LIQUID SAVINGS MONEY TRANSFERS Financial services – limited in Somalia term PENSIONS AND LIFE ASSURANCE - Long INVESTMENT LONG - TERM ASSET FINANCE TERM HEALTH AND GENERAL INSURANCE LOANS AND EQUITY FOR ENTERPRISE term - ort Sh Micro Small Medium Large TRANSACTION SIZE

9. Formal financial institutions • Public banks – two regional central banks Semi-formal financial institutions • 10 Money transfer operators • 2 NGO MFIs • Financial Service Associations (e.g. Hijra Organisation for Welfare & Development) • Merchants (retailers) Informal financial institutions • Self-help groups (SHGs) • Rotating savings and credit associations (hagbads) • Moneylenders and traders, etc. • Family and friends networks Financial service providers – limited and more informal

10. What then are the key issues? • Huge gap between demand and supply • Active micro and small enterprise sector in Somalia with approximately 60% to 80% of Somalia households deriving part or all of their income from micro and small enterprises • It is estimated that between 400,000 and 600,000 people would like access to financial services • Currently, best guesstimate of supply is less than 10,000 active borrowers and $5m outstanding portfolio • Current markets are substantially incomplete • Lack of institutional diversity and financial service providers • Limited products and not market-responsive • Virtually absent commercial banking sector • Lack of capacity, systems and know-how • Very limited business support services • Low human resource capacity • Geographically limited operations

11. Using remittances to develop the financial sector • Currency Reform • National payment system • Central Banking capacity building • Reviving the banking sector • Credit Registry • Property registry • National payments system • Strengthening the legal and regulatory environment • Providing access to credit for private sector development

12. The only certainty is uncertainty • Do not lay out a detailed plan for realization of your strategic intent. There are too many elements of uncertainty • Define a limited number of challenges each year and take the necessary steps to achieve them • Opportunities arise on a continuous basis, so be prepared to take them, as and when they do

13. THANK YOUSibel KulaksizSamuel Munzele Maimbo conflict-affected Pre-Conflict In-Conflict Post-conflict World Bank