The World Bank recently completed two surveys that confirm that large global banks are restricting or terminating relationships with other financial institutions and that banking services for money-transfer operators have become increasingly limited.
The risk is that a decline in correspondent banking services can lead to financial exclusion, particularly for remittance providers – poor people working in richer countries who send money home to their families in poorer countries. To a large extent, these restrictions have come about because of worries about money laundering or financing for terrorism and less appetite for risk.
However, there are alternatives. Mobile money is a fast-growing alternative to traditional banks. CBS’s Lesley Stahl recently reported on how MPesa has transformed financial inclusion in Kenya, where people- many of them poor- do most of their financial transactions via cellphone and outside of traditional banking systems. She also pointed out that tech giants like Google, Facebook, PayPal and Apple are all exploring this new consumer market, where sending money can be as simple as sending a text message. Also, according to the Financial Times, mobile money is making serious inroads in Latin America, where 37 mobile money services are now operational across 19 countries. Unlike the experience of Africa, Latin Americans are using mobile money to support urban middle-class lifestyles.
The informal money transfer networks themselves are also transforming. The Economist explained last month how Dahabshiil, the largest international money transfer firm in Africa, moved from hawala to a more formal system, to respond in large part to the demands of Western regulators. It now logs all transactions, and the identities of senders and recipients are recorded and checked against blacklists. It also does background checks to prove identities and records biometric data for future checks. What’s more, some Western money-transfer companies are learning from the hawala system and imitating this business model to cut costs in money transfers.
It looks like people are finding ways to create new pathways to financial inclusion.
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Photograph of Rafu, a chief, on his mobile phone by Arne Hoel / World Bank
Photograph of Wakala providing M Pesa service by Development Planning Unit University College London