Remittances have been the main source of foreign exchange supporting Somalia during the conflict for the last twenty years. A recent IMF fact-finding mission  to Somalia found that about $2 billion in remittances are handled by money transfer companies. These companies are located throughout the country and they are providing shadow banking services since there are no licensed commercial banks. Somalis called this system “xawilaad ” which is the Somali rendering of the Arabic word “hawala”.
Since the events of September 11, 2001, many countries have adopted stringent Anti-Money Laundering and Combatting the Financing of Terror (AML-CFT) regulations for funds transfers. Several banks in the US (Wells Fargo, US Bank, the TCF bank, and Sunrise Community Bank) and in the UK closed the accounts of money services business to avoid incurring in penalties for not complying with the new regulations. (Note: HSBC was fined $1.9 billion for not complying with money laundering controls in 2012.)
The UK Serious Organized Crime Agency has also issued new regulations for money service business including providers of pre-paid cards, remittances, online payment services and e-wallet services. Due to these new requirements, Barclays announced a deadline of July 10, 2013 for suspending and closing the accounts of the all Somali money transfer companies. Barclays was the last institution in the UK that allowed Somali remittance firms to have bank accounts. In November 2013, an injunction blocked Barclays from closing its business with Dahabshiil, the largest money transfer operator. But that injunction expires in October 2014.
In early January 2014, DFID announced the creation of the Action Group on Remittances and its Working Group on Safer Corridors that are responsible for implementing, within 12 months, a reliable and secure remittances channel to the Somali regions. However, there is concern that they will not find a timely solution given the lack of a banking system in Somalia.
About 800,000 Somalis live abroad (out of a total population of 9 million). According to a recent survey , on average, Somali migrants send $2,040 annually. The average amount send by the Somalia diaspora is larger than the average annual remittance sent by an African migrant which is $1,263.  This corroborates World Bank findings that African migrants from poorer African countries are more likely to remit more than those from richer African countries. Data from the survey also reveal that a large portion of remittances are spent on food, education and health.
Since the UK and the US are the two top destinations countries outside Africa, if this income source is interrupted it can have a large impact on the country just at the moment when the international community is recognizing the new Federal Government of Somalia (FGS). Both urban and rural areas will be severely impacted affecting the progress reached in terms of stability. The resurgence of the private sector in the services industry in the communications, construction, and money transfer sectors can also be derailed.
- These regulations will be counter-productive since they will encourage the use of informal channels.
- It is also eliminating competition since only larger remittance service providers (e.g., Western Union) can afford the cost of compliance). However, these institutions do not have the same coverage of agents in all the areas in the country thus less people will be able to receive remittances.
- The cost of sending remittances might increase since the cost of compliance will be passed to the customers and there will be less competition.
- The closing of the accounts of the remittance service providers to Somalia will interrupt not only the transfer of remittances but also the transfers of aid send by NGOs and the development agencies.
- Perhaps one immediate measure to be undertaken by the FGS will be to license and supervise commercial banks and the money transfer companies. It will be also important to establish domestic and international payment systems.