Banks Eye More Diaspora Cash After Hawalas Closure

Banks are set to reap a sizable chunk of remittance business following Wednesday’s suspension of licences for 13 hawala money transfer firms suspected of having links with Al-Shabaab terror group.

A Somali bank employee serves a customer. The latest suspension of permits of 13 hawala firms is expected to drive most users to banks. PHOTO | FILE

A Somali bank employee serves a customer. The latest suspension of permits of 13 hawala firms is expected to drive most users to banks. PHOTO | FILE

Half of diaspora remittances into Kenya come in through unofficial channels with the hawala system suspected to handle the bulk of this money.

It is now expected that senders will have to revert to conventional means as the government tightens the noose around transfers that are not easily traceable.

Kenya Bankers Association (KBA) chief executive Habil Olaka said the government’s move, which was in conformity to the Anti-Money Laundering Act was long overdue.

“Banks play within the rules and the alternative left (for the senders) is to use the formal channels which is the banks that are well regulated,” he said.

The Treasury estimates that Kenyans in the diaspora sent Sh108 billion ($1.2 billion) through unofficial channels last year equal to the sum sent officially.

Mahmoud Issa who operates a clothing shop in Eastleigh told the Business Daily that he has no option but to revert to either Western Union or Moneygram transfer services.

“I usually receive money from my cousin in Dubai for the business but now we have to use these alternative means until the hawala system comes back,” he said.

The hawala system is preferred for its flexibility, speed and low cost compared to other money transfer services.

Dahabshiil, the most popular of the suspended firms for example charges £6 to send £100 to Kenya (six per cent) with the firm saying that the money is ready for collection within 15 minutes. The availability of multiple firms has seen customers pay even lower rates.
The cost of sending cash into the country through formal means is estimated at 9.2 per cent of the value of the transfer, above the global average of 7.72 per cent.

For those transferring the money, the difference of over three per cent is significant as they look to send the largest amount possible back home.

Mr Olaka said that the banking sector is currently looking at ways of further reducing the amount to entice more members of the diaspora to use the formal means.

“A lot of banks are open to all sorts of innovations to identify sources of this money and see how they can bring down the cost,” he said.

The closure will also affect thousands of Somalis who live in Kenya and send money back to their relatives in Somalia. The money is used to meet basic needs, including food, water, healthcare, and education in the country that faces multiple crisis including violence and drought.

Kenya hosts a sizable number of Somali refugees, some of whom have managed to set up small businesses.

Wehliye Jimale, an Eastleigh resident said there are many Somalis, both from Somalia and Kenya who rely on the remittances from relatives abroad to pay school fees, pay rent, run their businesses and buy food.

“Closing of hawalas is not a solution in itself; it’s a knee-jerk reaction. They should be allowed to operate, but under closer scrutiny,” he said.

In a hawala transaction the sender of the money gives the cash to the remitting agent who notifies a corresponding counterpart in the country or location of the recipient, giving them instructions to release an equivalent sum of money to the intended recipient.

The transaction cannot be traced back as hawala operators barely keep records and can be used by workers in foreign countries keen to avoid a paper trail.

This loose system has made hawala susceptible to terrorists’ manipulation with Al-Shabaab said to be using it to fund attacks like that at Garissa University that left 148 people dead.

– Business Daily