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Executive summary

Somalia’s financial sector is not a centralised system with clear checks and balances. Instead, it operates through various formal, less formal and informal actors, including three central banks (in Somaliland, Somalia and Puntland), money transfer operators (known locally as hawala) with international bank accounts, mobile money operators tied to the private sector and informal money transfer businesses operating locally. The financial sector faces both internal and external challenges, all of which have important implications for local 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.

For local humanitarian organisations, these de-risking measures make it difficult to receive transactions through the formal banking system in a timely manner. They also block money transfer operators as a viable channel for financial access and the transfer of remittances from the Somali diaspora. For the local humanitarian sector 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. Interviews with bankers, humanitarian actors and academics for this study point to the following:

• 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 organisations have stopped using money transfer operators in order to support more financial/aid transparency, but this means that many local humanitarian organisations are not able to use these funds because they do not have access to bank accounts.

The study calls for more long-term support from international humanitarian actors as well as financial regulators in the US and Europe for Somalia’s financial and humanitarian sectors. It 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. The study’s overarching recommendation is the urgent need to support Somalia’s financial sector to facilitate muchneeded humanitarian assistance and remittances, while also reducing financing for violent extremism. This will require investing in the country’s financial infrastructure, as well as rethinking the utility of the counter-terrorism regime.

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