Politics of Poverty

Finally, A State Department Grant Offers Good News for Somali-Americans, But Will it Help?

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Remittances to Somalia amount to approximately $1.3 billion a year, 16 percent of which comes from the United States. Photo: http://bit.ly/1skat6C

After months of inaction, the State Department has made the first public commitment to shore up Somalia’s financial system.

Scott Paul is a senior humanitarian policy advisor at Oxfam America. 

“I really hope Somalia can have its own bank someday,” said Sahra Farah of the Seattle metro area. Like Ms. Farah, many Somalis and Somali-Americans have great hope for the future of Somalia’s financial system even as they’re fearful for their present ability to send money to their loved ones.  In Ms. Farah’s case, her siblings in Somalia are panicked because they depend on money from their family in America to survive. After months of inaction following the bank account closures that have disrupted remittances to Somalia, the State Department this week made the US government’s first public commitment to shore up Somalia’s financial system. The $3 million grant is well-designed to help realize Somalis’ hopes for the future of their financial system, and, if implemented thoughtfully, could also help allay some of their fears about the sustainability of the current remittance system.

The grant is actually comprised of three sub-grants:

  • one to analyze the capacity of the Somali Central Bank’s supervision department;
  • a second to develop infrastructure to help financial institutions like money transfer operators (MTOs) meet international standards and communicate with the Central Bank; and
  • a third to work with the government and Somali financial institutions to develop a reliable and interoperable national ID system.

Taken together, these three relatively low-budget projects could go a long way towards building a sound financial system in Somalia in the long-term. But will it also help maintain the flow of remittances?

Two Key Issues:

First, will the project strengthen banks’ confidence that the MTOs know their customers? Banks are reluctant to open accounts for Somali MTOs partly because those companies have no way of identifying the recipient of the money in a way that is internationally accepted. When making payments in Somalia, MTOs request identification documents, but these documents are neither fully reliable nor widely available in Somalia, and there is no uniform system for tracking them. MTO agents who have a personal and professional stake in making sure outlaws don’t benefit are actually excellent bulwarks against financial crime, even if they can’t get good documents. But banks and their regulators like tools that they recognize and can verify, and a credible national ID system may put them more at ease.

Second, Even if banks are satisfied on that front, they still may not be interested in banking Somali MTOs. With their ever-decreasing appetites for risk, banks may decide that even knowing their customers does not make Somali MTOs account-worthy. In countries that are perceived as “high-risk,” even well-known humanitarian organizations and foreign embassies have experienced difficulties accessing financial services. Strengthened financial governance may help bring down banks’ risk ratings for Somalia – but then again, with the presence of designated terrorist organizations and other renowned criminal networks, it may not.


The new biometric ID system must be closely linked with the United Kingdom’s Safer Corridor Pilot, which will appoint a trusted third party in Somalia to verify money is indeed getting to the right people. If these systems are well-connected and have the seals of approval of the US and UK government, banks may be more confident that MTOs and other financial institutions in Somalia really know their customers.

Unfortunately, the project’s benefit to the remittance system is pure speculation, and depends entirely on the perspective of banks. To figure out what exactly is going to move the needle for banks considering accounts for Somali MTOs, the US government must do something it has thus far failed to do, at least in a systemic way: it must ask the banks directly. Banks alone know what kind of ID system will boost their confidence, what kind of governance will influence their risk ratings, and what kind of third-party verification will make them feel safe. If the State Department doesn’t consult banks on this project it may miss out on a great opportunity to reverse the tide of bank account closures that MTOs have suffered in recent years.

Lastly, it is important to point out that even the most optimistic outcomes of the State Department project will take at least a year, and probably a few years, to come to pass: the project itself has a timeframe of 12-36 months, and it will take additional time for banks’ attitudes to change as a result. Sahra Farah and her siblings cannot sleep easy yet, and the government’s failure to acknowledge any immediate consequences of the disruption to remittance flows is continually astounding. But with the State Department’s recent announcement, Somali-Americans can at least have faith that the US government’s promises to help are not empty.

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