Remittances and Financial Sector Development

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Remittances and Financial Sector Development
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Introduction
Monetary Policy Supervision Policy Payments system
Education Health Infrastructure
Survivors
Conflict affected countries
Financial Sector Development
Remittances
Exploiters
Money laundering
Terrorist financing Conflict crimes
Lessons from Somalia
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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 US1 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 US1
  billion per year, accounting for 71.4 percent of
  GNP.

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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.

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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.

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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

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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
Large
Medium




TRANSACTION
SIZE


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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
Large
Medium




TRANSACTION
SIZE


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Financial service providers limited and more
informal
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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

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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

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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

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