Impact of Remittance on the Dev of War-torn Nations – A Study With Reference to Somalia

by hanad | Monday, May 8, 2017 | 2877 views

Remittances play a crucial role in many countries’ economies, sometimes making up a very significant portion of the gross domestic product.

How the inflow of remittances is used and whether their effects are strong enough to create significant impact on microeconomic and macroeconomic levels has been debated. While some authors argue that remittance inflow provides positive effects on a country’s economy through growth and productivity, others state that the effects are minimal and even detrimental in some cases.

In light of the many conflict-affected environments in the world today, understanding the role and impact of remittance systems during periods of conflict is of vital importance. Fundamentally, the story of remittance systems in conflict environments is about entrepreneurs formally or informally moving money into or out of the conflict, affected country between parties that primarily are either collectively or individually, surviving or exploiting the conflict.

Until Somalia is able to achieve some measure of political stability, its citizens will continue to depend on the resilience of the remittance system to sustain lives and commerce. Unfortunately, operating a remittance company in Somalia is not an easy proposition. However, the benefits of the remittance sector need to be complemented by broader financial sector reforms.

Like other financial intermediaries, remittance companies are constrained by the absence of a sound legal and regulatory framework, strong property rights culture, enforceable collateral contracts, accessible credit information systems and related financial infrastructure. Remittances have strong positive impacts on the current account balance of Somalia but could also have less desirable outcomes such as the Dutch disease effect.

Although remittances as foreign savings allow Somalia, a country without access to international capital markets, to consume outside its production frontier, these inflows might also draw resources from tradable to non-tradable sector, worsening the welfare of families that do not benefit from remittances.

Key Words: Remittance Sector, Financial Sector, Intermediaries, Growth and Productivity

The international remittance markets have grown dramatically in many parts of the world for the past two decades or so. Yet their critical roles in the economic development of least developed countries are not widely known and acknowledged in the field of economics, finance and related academic studies.

The importance of remittance for the people of Somalia since the collapse of the Somali state in 1991, engendering the breakdown of all institutions including national and international payment systems (banking), cannot be denied. Remittance services have provided lifeline for the majority of poor households as they mitigate vulnerability and sustain livelihoods among the population, through timely cash payments.

Impact of Remittance on the Development of War-torn Nations - A Study With Reference to Somalia.

Impact of Remittance on the Development of War-torn Nations – A Study With Reference to Somalia.

In other words both needy families and individuals in urban and rural localities in Somalia receive vital small amounts of money sent by their migrant or refugee relatives from the Diaspora, particularly, from Europe, North America and the Middle East with the aim of supporting their family members back home, where most seem to endure abject poverty and low income aggravated by lack of economic and employment opportunities.

In the meantime it is important to note here that remittance money tends to have significant impact on the socio-economic situation of the population particularly by empowering marginalized women as they represent the majority of recipients for most of the small amounts remitted for livelihood security.


Remittances to Somalia are at risk of being caught in the backwash of a global tendency towards tighter regulation of financial flows. This new tightening aims to prevent money laundering and to block flows to groups involved in terrorist activities.

Remittances enable Somali families to mitigate poverty, and, in many cases, remittances help them fulfill their immediate needs for food, shelter, clothing, and other basic necessities. Although remittances evidently improve the lives of Somali women and their families, it is important not to overstate this impact.

As is the case in many other countries, Somali women receive slightly less (5 per cent) than men in annual receipts. Also, they depend more on remittances than men: remittances account for 64 per cent of their income, compared with 59 per cent for men. International migrant remittances are perhaps the largest source of external finance in developing countries.

Remittances were certainly larger if flows through informal unrecorded channels are also included. Remittances also appear to be the least controversial aspect of the overheated debate on international migration. Both remitting and recipient countries are considering the long-term economic implications of these transfers.

The World Bank, the International Monetary Fund, and the United Nations have formed an interagency, intergovernmental technical group to improve remittance statistics. The Bank for International Settlements and the World Bank have formed a special task force on international retail payment systems, to improve transparency in remittance transactions. Remittances are expected to show a steady increase well into the foreseeable future, as more people migrate in response to globalization and as income levels grow in labor-receiving countries.

Impacts of Remittances
At a Micro Level

Evidence from around the globe suggests that recipient households generally have higher levels of consumer spending and lower incidences of extreme poverty than their counterparts who do not receive remittances. Ratha (2013) argues that remittances could play a key role as a ‘powerful anti- poverty force’ because they tend to increase the incomes of households in the developing world.

Analyzing 71 developing countries, Adams and Page (2005) found a relationship between remittances and poverty reduction, statistically demonstrating that a 10 per cent increase in international remittances from each remitter will lead to a decrease of 3.5 per cent in the share of people under poverty.

Most critically, migration and remittances are not accessible to all needy populations. Not all poor or vulnerable households have the initial capital needed to migrate. Often selective and expensive, international migration is generally associated with flows of migrants to developed countries where immigration regimes tend to be more restrictive (de Haas, 2007).

As generally observed, the economic behaviour of recipient households usually tends to increase the prices of goods and services in the local domestic market, potentially affecting the entire community, including non-recipient households.

Remittances are believed to further allow migrants’ households to build their assets, both liquid (cash) and fixed (property), enhancing access to financial services and investment opportunities (Orozco et al., 2005; IMF, 2005).

In the Philippines and Mexico, for example, research suggests that remittance inflows are associated with a greater accumulation of assets in farm equipment, higher levels of self-employment and increased small-business investments in migrant-sending areas. Similarly, Rapoport and Docquier (2005) suggest that remittances can promote access to self- employment and increase the likelihood of recipients investing in small business, contributing in turn to the development of financial systems in the country of origin.

Policies tend to focus mostly on monetary aspects, although the non-pecuniary effects of remittances and migration are equally important. Focusing on social remittances, Levitt’s study (1998) shows how migration drives forms of cultural diffusion and social change. She describes social remittances as being ‘the ideas, behaviours, identities, and social capital that flow from receiving-to-sending-country communities’.

At a Macro Level

Some empirical studies (Solimano, 2003; World Bank, 2006) suggest that remittances may have the potential to positively affect a country’s economic growth.

A group of studies (Aggarwal et al., 2006; Giuliano and Ruiz-Arranz, 2005) also confirm the significant positive impact of remittances on both bank deposits and bank credit to the private sector. They argue that remittances act as substitutes to other financial means such as credit and insurance, which do not necessarily exist in developing countries.

Stimulating consumption and investment, remittances may have the potential to reduce the size of a recession in certain countries and to boost the local economy. Outside of the normal day- to-day consumption, remittances could possibly allow households to engage in more profitable economic and high-risk activities. Recently, Ratha (2013) reports that remittances raise domestic savings and improve financial intermediation, which could in turn improve the growth prospects of the origin countries.

The International Monetary Fund (IMF) and the World Bank (2009) recognise the benefits of remittances as a stable and countercyclical source of external financing when assessing how much debt low-income countries could safely handle. Being able to borrow more when receiving a high amount of remittances, States could use the extra borrowing power to fund investments, which may promote national economic growth.

In fact, the World Bank–IMF Debt Sustainability Framework launched in 2009 is allowing recipient countries to carry higher levels of debt when the ratio of remittances is higher than 10 per cent of their domestic income and 20 per cent of exported goods and services.

Maintaining substantive relationships to their countries of origin, migrants and Diasporas are becoming more involved in socioeconomic and/or political activities in their home countries. To engage the diversified resources (monetary and in-kind) of migrants and Diasporas, innovative mechanisms that are able to foster growth in developing countries are also in demand.

History of Remittance in Somalia

Remitting some of their earnings back to their families has always been part of the Somalia migrants who worked abroad. However, in the old days migrants from Somalia used to remit money to their relatives either via international bank transfers or via couriers from other migrants, usually, from the same clan or locality.

The former method was expensive and took longer but safer, while the latter was free of charge and quicker but riskier. A third method known as “Hawala” which involved remitting cash was started during the oil boom of the 1970s and 1980s when large number of Somalia migrant workers in Saudi Arabia and the Gulf. These countries needed to send remittance to their families back home.

The traders and their agents would collect money from those migrants/workers to deliver to their families. This process equally involved in long delays and was not a risk free at all, however it was this method which was later improved.

The scope of remittance in Somalia, was transformed after the break-out of civil conflict in Somalia which resulted in more than quarter of a million Somalians fleeing their homes to seek refugee status in Western Europe, North America and other parts of the world and further half a million became either internally displaced or refugees in neighboring countries (most in Kenya).

Those refugees and immigrants from Somalia wanted to help relatives they left behind by way of financial assistance (cash). Some of those traders who were involved in the remittance businesslike Dahabshiil, who was already engaged in the money transfer business, albeit in a small scale, realized the urgent need for an organized corporate structure to provide prompt remittance to the people of Somalia.


Remittance money constitutes an important sector of the Somalia economy, but there is little accurate information about the actual volume of the cash flow passing through money transfer companies.

Today there are about 15 companies in the industry including the international giant Western Union, who has just opened its first branch in Somalia. The main advantage of the money transfer operations is that it is simple, convenient, basic, cheap and reliable.

These financial service providers are keen in developing their businesses not only as remittances but also as local banks in the future (commercial banks), and may including offering loans to small businesses.

However, the possibility of financial intermediation from these remittance companies is hindered by lack of legal and regulatory framework as there is no Banking Law in Somalia yet, something that is continuing to have a big “opportunity cost” for the country’s economic development.

In other words some money transfer companies now offer a wider range of “Bank-like” services such as savings and deposits (non-interest bearing deposits) and they may also provide consumer lending in the form of small loans. However, this may require some sort of a “guarantor”, which could be based either on kinship and clan affiliation or through social capital and trust.

In most cases the source of financial assistance in the form of small credit is obtained from relatives and friends, who lend cash to those who want to set up businesses, in return for future goodwill. Business lending by remittance companies seems unviable even with collateral, both for religious reasons, and due to business preferences for direct involvement of an investor/lender in the operations they are financing.

Limited short-term trade credit (against security such as fixed assets) is sometimes available from main remittance companies. But even in those circumstances there are some risks involved in lending, due to lack of legal obligations and regulatory framework from the part of the government, which makes the need to re-establish conventional banks imperative.

Aside from the vital small amounts of money sent by relatives from the Diaspora, particularly in Europe and North America, to support their dependents back home, most of whom have been enduring harsh poverty aggravated by civil conflict, the remittance services provided by money transfer companies contribute to investments, commerce and reconstruction projects in the region.

In the absence of internationally recognized bank in Somalia, these remittance companies are considered as reliable and trustworthy “local Banks”. They provide some of the facilities offered by conventional Banks, such as saving and current accounts to individuals, private companies and international organizations, thus facilitating international payments for imports.

In addition to the key roles that remittance companies play in the economic development of the country in terms of trade, investment and livelihood security they are also considered as one of the biggest private sector employers in Somalia, employing around 4,000 people directly.

However, the closest estimate of remittance that flows into the country could be in the region of US$780 Million annually. About 30% of this (US$234 Million) comes in as capital and/or financial investments and the remaining 70% (US$546 Million) comes in as small money between US$100 and US$500, received as household maintenance for families and individuals.

Given this fact it would be true to argue that today in Somalia remittance is by far the biggest contributor to the economy. The successful growth of remittance companies in Somalia is almost completely dependent on social capital; namely the cohesiveness and trust within communities.

Remittances to Somalia

The World Bank and the Federal Government of Somalia are working together to help support the flow of remittances to Somalia, to ensure they continue to reach people who depend upon them as a critical source of income.

Remittances in 2015 were estimated to reach a total of US$1.4 billion in Somalia and support 23% of the GDP. The World Bank’s work in Somalia is being generously supported by the donors to the Somalia Multi Partner Fund (MPF).

In total, donors have committed US$185 million to the MPF. Donors contributing to the MPF include the European Union, the Royal Norwegian Embassy, the Swedish International Development Cooperation Agency, the Swiss Agency for Development Co-operation, the UK Department for International Development, Italian Ministry of Foreign Affairs and International Cooperation, Denmark Ministry of Foreign Affairs , Finnish Ministry of Foreign Affairs, and the World Bank’s State and Peace-building Fund.

The World Bank has been working alongside the Central Bank of Somalia (CBS) to implement a number of activities aimed at tackling key deficiencies in the Somali financial sector affecting remittance flows to the country.

In this context, the World Bank has selected and appointed “Abyrint AS” to act as the “Trusted Agent” to the CBS and assist the authorities in comprehensively regulating and supervising money transfer businesses. Abyrint has been selected through a publicly advertised and competitive process, in line with World Bank procedures, and has already commenced activities on the ground in Mogadishu.

The “Trusted Agent”, in collaboration with the CBS, will conduct joint on-site and off-site supervision with CBS staff on registered and licensed money transfer businesses as well as work to build capacity within the CBS’s Licensing and Supervision Department.

“The deployment of the Trusted Agent is a critical step toward improving supervision and formalizing the money transfer business sector in Somalia,” said Bella Bird, World Bank Country Director for Somalia, Tanzania, Burundi and Malawi. “Money transfer companies have provided a lifeline for millions of Somalis through years of exclusion from the formal financial sector, and will continue to play an important role in the longer term.”

In addition to the contracting of the “Trusted Agent”, the World Bank has been assisting the CBS in drafting and implementing new regulations and guidelines for the money transfer business sector within the new regulatory regime established under the AML/CTF Bill, passed in April 2016.

The World Bank began working with the UK last year to develop mechanisms, in case of severe disruption of remittance flows between the UK and Somalia. This work has since evolved to address fundamental issues affecting remittance flows to the country. The current activities are focused on improving the formalization, transparency, and compliance of the money transfer business sector in Somalia.

Global Context

Somalia is not the only country with vigorous remittance flows. There are international recommendations regarding the regulation of financial institutions, including specific recommendations regarding specialized remittance intermediaries. These require the implementation of national registration or licensing systems for remittance intermediaries and observation of specific business practices.

Expected to have reached $ 414 billion in 2013, recorded remittances to developing countries are nearly triple the level of official development assistance and more than half the size of foreign direct investment flows, according to the World Bank. Relaying these funds is a multi-billion dollar business, with services offered by a range of regulated and informal intermediaries, including banks, specialized MTOs, post offices, couriers, traders, bus and taxi drivers, micro-finance institutions, pre-paid card companies and mobile phone networks. Policy-makers regulate financial Systems to prevent them being used for criminal or terrorist purposes, as well as to ensure financial stability.

These efforts were intensified after 9/11, with the US seeking to extend the ‘war on terror’ to the financial sector. These international recommendations have considerable bite, given the possibility of sanctions on non-cooperative countries, including loss of access to the US-dollar financial market.

Recognizing the economic importance of remittances in many poorer countries, development policy-makers have embarked on a range of initiatives in the area of remittance management, focusing on improving data, curbing costs and encouraging transfers through formal institutions. Broader initiatives attempt to shape the impact of remittance flows and Diaspora investment by channeling them towards developmental activities.


The international remittance markets have grown dramatically in many parts of the world for the past two decades or so. Yet their critical roles in the economic development of least developed countries are not widely known and acknowledged in the field of economics, finance and related academic studies.

Remittance services have provided lifeline for the majority of poor households as they mitigate vulnerability and sustain livelihoods among the population, through timely cash payments. In other words both needy families and individuals in urban and rural localities in the meantime it is important to note here that remittance money tends to have significant impact on the socio-economic situation of the population particularly by empowering marginalized women as they represent the majority of recipients for most of the small amounts remitted for livelihood security.

The remittance industry can no longer be left in the fringes of financial sectors or the periphery of microeconomic level and its informal economic dynamics. In this regard it is hoped that Somali-owned remittance companies will rise up to these challenges and put their houses in order, in terms of adopting robust and rigorous anti-money laundering policies and procedures to alley the sort of fears raised by foreign banks like Sunrise Community Banks in Minnesota who announced last week that they will stop processing remittances to Somalia on the one hand, as that will unchain the country’s financial services for the benefit of everyone in the country and contribute towards more economic recovery and growth through international investment and trade resulting better future for the citizens of the country and further assist the government to strengthen its institutions.

Mohamed Adan Abdilatif “Master Degree in Finance, Department of Commerce, Annamalai University”

Rais Ahmed Khan “Senior Research Scholar, Department of Commerce, Annamalai University”


Somalia Press Reports
Somalia Leading News Papers
Government Published Reports
2015 Article IV Consultation—Press Release; Staff Report; And Statement By The Executive Directors For Somalia
A Press Release summarizing the views of the Executive Board as expressed during its July 27, 2015 consideration of the staff report that concluded the Article IV consultation with Somalia.
An Informational Annex prepared by the IMF staff.
Mohamed Adan Abdilatif

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