remittances and fi nancial sector development in confl ict...
TRANSCRIPT
26 April/June 2006 Africagrowth Agenda
Remittances and fi nancial sector development in confl ict-affected countries:Samuel Munzele MaimboSenior Financial Sector Specialist
INTRODUCTION
‘Remittances’, ‘fi nancial sector development’ and ‘confl ict-aff ected
countries’ are, individually, complex and challenging issues in de-
velopment studies. Combined, they create formidably dynamic
development complexities that do not easily lend themselves to
easy analytical segmentation and categorizations or standard static
best practice policy recommendations. At best, research can help
us learn from experience, and enable us be better prepared with a
wider range of policy options for us to consider when responding
to the next confl ict. And learn we must, for ‘remittances’, ‘fi nancial
sector development’ and ‘confl ict-aff ected countries’ are currently
at the top of the development agenda in many countries for the
following reasons:
• Remittances: Global remittance fl ows, including those
to confl ict-aff ected countries, are signifi cant and rising.
In 2005, remittance fl ows were estimated at US$167 bil
lion, up from US$160 billion in 2004. Of this amount,
sub-Saharan Africa received US$8.1 billion compared to
Latin America and the Caribbean (US$42.4), South Asia
(US$32), East Asia and the Pacifi c (US$43.1), Middle
East and North Africa (US$21.3) and Europe and Central
Asia (US$19.9) (World Bank, 2005; Maimbo and Ratha,
2005).
• Financial sector development: Empirical research increas
ingly demonstrates the critical role that well-functioning
fi nancial systems can play in private sector development,
accelerating growth and reducing poverty. Th e importance
of making wise fi nancial policy decisions, and of building
capable institutions, infrastructure and the legal and regu
latory frameworks to support the sound functioning of fi
nancial systems that can provide better access to fi nance for
all, without exacerbating the vulnerability of economies,
is a central challenge in the developing countries (World
Bank. 2006b).
• Confl ict-aff ected countries: Lasting peace can only be
achieved when the peace dividend – employment & entre
preneurial profi ts – exceed the benefi ts of confl ict – con
scription income and confl ict commerce. Attaining that div
idend, unfortunately, is challenging as no two confl icts are
alike. Each has unique characteristics that shape the result
ing peace process and the economic reforms associated
with it (World Bank, 2006c).
All three are related in the aftermath of sustained confl ict. Rees-
tablishing fi nancial institutions, systems and services is an essen-
tial part of restoring economic activities, and securing long lasting
peace.
Addressing all three elements is no easy task and requires
concerted eff ort. Financial sector development in confl ict-aff ected
countries is no where near a science. Th e opportunistic nature
with which entrepreneurs invest in essential fi nancial services is a
fascinating art. In recent times, Somalia and Afghanistan typify
the ultimate example of the fi nancial sector’s ability to use the
remittance business as the nucleus of fi nancial sector activities
during the period of confl ict as a life-line to a people affl icted by
sustained confl ict, and as a basis for rebuilding a new fi nancial
system on cessation of active confl ict.
THE CHALLENGE OF PROVIDING FINANCIAL
SERVICES IN CONFLICT-AFFECTED COUN-
TRIES
Providing access to fi nancial services in post-confl ict countries is
constrained by several factors. Th e basic infrastructure for fi nan-
cial services – legal and regulatory framework, monetary policy
framework, banking supervision structure, basic payments system
- is weak or absent. Th e large number of internally dispersed pop-
ulations with little or no documentation, the absence of physical
collateral and land-tenure systems that minimize the value and
use of land as collateral, the poor transport and communications
infrastructure, and past history of state involvement and subsi-
dized lending, leading to low recovery rates, complicate further
the usual problems often found in developing economies even in
the absence of confl ict. Th ese problems tend to be more acute
26 Africagrowth Agenda January - March 2007
Africagrowth Agenda April/June 2006 27
in rural areas where there will be added pressure for government
intervention.
For example, in Afghanistan, at the end of active confl ict in
December 2001, each of the problems listed above was present
(World Bank, 2004): Afghanistan’s 1994 Law on Money and
Banking, which provided the country’s only legal framework for
the fi nancial sector was designed on the now outdated socialist
principle that the purpose of monetary policy is to direct credit,
the legal framework was unsuitable for a market economy. No
functioning monetary policy framework was in place. Confi dence
in the national currency was low, as the Afghani had lost much of
its value during years of high infl ation. Banking supervision in a
modern sense did not exist.
In Somalia, the state of the fi nancial sector in early 2006,
during a period of relative calm, was no less desperate (Maimbo et
al, 2006): All state institutions that provided services and regulat-
ed the economy collapsed, including the Central Bank of Somalia
and the entire banking system. Th e commercial bank liabilities that
had survived the 1989 bankruptcy of the only commercial bank in
the country disappeared. Some semblance of a central banking au-
thority evolved in the North-West region (Somaliland) and in the
North-East region (Puntland) of Somalia. Th e two regional banks
established in both northern regions established several branches
and off ered very limited commercial banking services in deposit
accounts and trade fi nance. However, their primary function re-
mained that of treasurer of their respective regional governments.
In the South/Central region, no banking institutions existed.
In both Afghanistan and Somalia, the state of the fi nancial
sector precluded the entry of the level of private sector invest-
ment that is necessary to alleviate poverty, create economic op-
portunities, generate employment and contribute towards overall
economic growth.
THE OPPORTUNITIES AND THREATS OF RE-
MITTANCES IN CONFLICT-AFFECTED COUN-
TRIES
In the face of many confl ict-aff ected environments in the world
today, understanding the role and impact of remittance systems
during periods of confl ict is of vital importance. Fundamentally,
the story of remittance systems in confl ict environments is about
entrepreneurs formally or informally moving money into or out of
the confl ict-aff ected country between parties that, primarily, are
either – collectively or individually – surviving or exploiting the
confl ict.
• ‘Survivors’ use the remittance system to sustain the liveli
hoods of friends and family members who remain in the
country during the period of confl ict. Th e
remittances from those abroad are used to pay for
education, medical and other social services that a
state in confl ict is unable to provide for its citizens. ‘Survi
vors’ routinely invest in infrastructure - largely housing and
small scale enterprises - to provide an income (often mod
est) to those directly enduring the confl ict.
• ‘Exploiters’ abuse the remittance system to launder the
proceeds of crime or fi nance the confl ict for fi nancial gain.
Th e absence of public legal regulatory institutions makes
confl ict-aff ected countries attractive for laundering the pro
ceeds of confl ict diamonds, opium production, arms smug
gling, and other crimes – the proceeds of which are then
often invested in more stable countries.
Countries in confl ict or emerging from confl ict are often caught
between these two protagonists. On one hand, remittance systems
have sustained the livelihoods of many a people living in the poor-
est countries in the world. On the other hand, remittances service
comes with some risks, and potential for abuse. Th e benefi ts of
the remittance services can be exploited to facilitate the launder-
ing of criminal proceeds. Th e challenge is distinguishing between
the myths and realities of the remittance companies and, in the
long run, rebuilding a sustainable fi nancial sector that provides a
broader range of fi nancial services when peace returns in earnest.
PROMOTING FINANCIAL SECTOR DEVELOP-
MENT
To make the most of remittance systems (formal and informal) as
tools for fi nancial sector development in confl ict-aff ected coun-
tries, policy makers need to make a mental shift from an insti-
tutional view of the fi nancial sector. Instead, they need to focus
on fi nancial products and services instead of the bricks and mor-
tar of institutions. People emerging from confl ict do not want a
‘commercial bank’; they want seed and working capital for their
businesses; they are not looking for a ‘development bank’; they
are looking for long term fi nance for their more ambitious infra-
structure projects. Policy makers therefore need to remember that
a country may not have:
• a credit registry, but it has established social norms and
practices that determine an individual’s fi nancial standing.
In Afghanistan, for example, when a money remittance
company obtained a commercial banking license on June
26, 2004, it was able to grow its lending business faster
than any other bank in the country using its relationship
banking network built over 14 years in the remittance busi
ness.
• an active property registry to facilitate collateral based
January - March 2007 Africagrowth Agenda 27
28 April/June 2006 Africagrowth Agenda
lending; but have non-collateralized lending practices that
have survived the war. In Afghanistan, there is an estab
lished form of credit for opium at the time of planting,
which suggests that there is a chain of credit not just from
farmer to fi rst-level trader but also beyond, including in
ternationally that was not dependent on collateral (Th omp
son, 2006).
• a national payment system, but have a national network
of intermediaries that facilitate the clearance of bills of
exchange. In Somalia, because of security concerns, remit
tance companies have been very resourceful in minimizing
this risk by minimizing the physical transportation of cash
by using cash from local traders who want to be paid in a
major commercial centre or in another country where they
import or buy their stock.
• a legal and prudential framework, but have codes of con
duct enforced by member associations and traditional sys
tems of justice. In the absence of a central government to
regulate the remittance companies, the Somali Financial
Services Association regulates the industry itself through
membership guidelines.
By focusing on what is left after the confl ict, rather than what is
lost, it is then possible to begin to see the full potential of remit-
tance systems as potential partners in the development of fi nancial
systems. Having sustained a rudimentary fi nancial system during
the confl ict, remittance companies can, as suggested by the exam-
ples above, contribute to the reconstruction of the fi nancial sector
which in general will include:
(1) Drafting new or updating the legal framework and re-build-
ing the regulatory enforcement capacity; (2) Re-establishing cor-
porate governance mechanisms in the banking system, and; (3)
Developing creative systems for facilitating access to fi nancial
services in the economy.
However, because no two confl icts are alike, the sequencing
and degree of reforms associated with each reform depends on the
duration of the confl ict, but also – in varying degrees: the state of
the fi nancial sector before the confl ict; the presence of mineral
resources in the confl ict aff ected regions; the role of ethnic diff er-
ences in fueling or sustaining the confl ict, and; the resulting level
of political fragmentation in the post-confl ict state building proc-
ess.
POLICY LESSONS
In addressing these challenges, and pursuing overall fi nancial sec-
tor development objectives in confl ict-aff ected countries, it is es-
sential that policy makers bear in mind the following lessons from
other confl ict-aff ected environments.
• Sustainable fi nancial reforms have a long maturity period.
Enacting legislation, improving governance structures, de
veloping competitive fi nancial practices, building fi nancial
infrastructure, and encouraging international and domestic
confi dence in fi nancial institutions require patience and de
termination – all of which must be properly sequenced.
• Financial reforms are incomplete without well-conceived
measures for introducing and supporting a competitive envi
ronment. Reforms should be designed to have long-term ef
fects, always keeping in mind the ultimate objective of es
tablishing a competitive environment based on principles of
safe and sound banking under stable fi nancial conditions. Fi
nancial sector legislation and regulations (along with appro
priate tax policies and open current and capital accounts)
constitute the basis for a competitive policy.
• Eff orts to recapitalize previously existing and troubled
banks should be pursued only as a last resort (resulting
from the absence of new investment and in the interest of
broad provision of banking services), and within the con
text of a time-bound privatization program. It takes a long
time for private banks to tool up in an environment like Af
ghanistan. However, because the costs of recapitalizing trou
bled state banks are high relative to monetary and fi scal re
turns, any move to rehabilitate any of the existing troubled
banks should be carried out using performance-based con
tracts.
• Financial reforms are not sustainable unless they are com
prehensive and penetrate institutional structures. Strength
ening fi nancial infrastructure requires several developments.
A good starting point is to ensure the central bank’s ability
to supervise banks. Attention must next be given to infra
structure, including the payment and settlement system,
accounting and auditing standards, the framework for se
cured transactions, and institutional capacity to comply
with and enforce prudential norms.
• Reforms will not succeed without development of the sys
tem for payments and settlements. Th e lack of a formally
functioning payments system for international and domes
tic funds transfers has been an important obstacle to the
timely and eff ective delivery of reconstruction assistance in
Afghanistan. It has also impeded support of central author
ity, as the government has had problems paying civil serv
ants. Action to improve the payments system should be ac
celerated.
REFERENCES
Kulaksiz. S., and Purdekova, A., (2006) Somali Remittance Sec-
tor: A Macroeconomic Perspective In Maimbo (ed) Remittances
28 Africagrowth Agenda January - March 2007
Africagrowth Agenda April/June 2006 29
and Economic Development in Somalia: An Overview. Social
Development Paper No. 38/November 2006. Washington D.C:
World Bank
Lindley, A. (2006) Th e Infl uence of Migration, Remittanc-
es and Diaspora Donations on Education in Somali Society. In
Maimbo (ed) Remittances and Economic Development in Soma-
lia: An Overview. Social Development Paper No. 38/November
2006. Washington D.C: World Bank.
Maimbo, S. & Ratha, D. Remittances: An Overview. In
Maimbo, S., and Ratha, D. (eds), Remittances: Development Im-
pact and Future Prospects. Washington D.C: World Bank.
Maimbo, S. (2003) Th e Money Exchange Dealers of Ka-
bul: A study of the Hawala System in Afghanistan. World Bank
Working Paper No. 13
Maimbo, S., Patel, M., Mahler, M., and Siad, H., (2006)
Financial Sector Development in Somalia: Central Banking and
Financial Services in an Uncertain Environment. In Maimbo (ed)
Remittances and Economic Development in Somalia: An Over-
view. Social Development Paper No. 38/November 2006. Wash-
ington D.C: World Bank
Sander, C. and Maimbo, S., (2004) Migrant Remittances
in Africa: Reducing Obstacles to Developmental Contributions.
Small Enterprise Development Journal, March 2004.
Shire, S. (2006) Somali Remittance Companies and their clients.
In Maimbo (ed) Remittances and Economic Development in So-
malia: An Overview. Social Development Paper No. 38/Novem-
ber 2006. Washington D.C: World Bank.
Th ompson, E., (Forthcoming) Th e Nexus of Drug Traffi ck-
ing and Hawala in Afghanistan. IN Doris Buddenberg And Wil-
liam Byrd (Eds) Afghanistan’s Drug Industry Structure, Func-
tioning, Dynamics, And Implications For Counter-Narcotics
Policy. Washington D.C: World Bank.
World Bank. 2004. Th e Financial Sector in Afghanistan:
Managing the Post-Confl ict Reform Process. Washington DC:
Th e World Bank South Asia Finance and Private Sector Unit.
World Bank. 2006a. Global Economic Prospects. Washington
D.C: World Bank.
World Bank. 2006b. Making Finance Work for Africa.
Washington D.C: World Bank Africa Financial Sector Unit.
World Bank. 2006c. Engaging with Fragile States - An IEG
Review of World Bank Support to Low-Income Countries Under
Stress. Washington D.C: World Bank
June - August 2006 Africagrowth Agenda 29