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11. Somalia: The Experience of Hawala Receiving Countries

International Monetary Fund
Published Date:
March 2005
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Mohamed Djirdeh Houssein

On behalf of the Somali people, I would like to take this occasion to thank H.H. Sheikh Zayed bin Sultan Al Nahyan, the President of the United Arab Emirates (U.A.E.); Their Highnesses, the members of the Supreme Council; and the government and the people of the U.A.E. for their generous hospitality in accommodating such a big community of Somalis who live and work in their country. The U.A.E. has been our second home for a long time and especially during the past 14 years since the state of Somalia collapsed.

I want to thank the Governor of the Central Bank of the U.A.E., H.E. Sultan bin Nasser Al Suwaidi, and the central bank for holding the Second International Conference on Hawala—as well as for holding the First International Conference on Hawala on May 15–16, 2002—and for inviting me to participate in this conference.

History of Somalia

In 1960, two colonies, British Somaliland and Italian Somaliland, received their independence and united to form the Somali Republic. During 1960–69, a democratic parliamentary system existed. Then a military coup took power in 1969. After decades of civil war, the government was toppled on the night of January 26, 1991. Since then, no one has ruled Somalia. It disintegrated into several parts. Some set up viable stable administrations like Somaliland and Puntland, while others were characterized by total anarchy. Meanwhile, a creeping civil war continues.

Somalia is unique; it is not a failed state, although there are many. Somalia is simply a state that ceased to exist. There is no central government; none of the organs of government exist, such as police or military forces, central or commercial banks, hospital or schools, or any other public entity, physical or otherwise. The Mogadishu International Airport and the Port of Mogadishu state facilities are not functioning, while a few kilometers from each there are dirt-runway airports and open-ocean ports that are functioning and are run by militias.

That is dangerous, because what happened in Somalia could happen to other states, and the vision of life without a government might become logical or acceptable. There is a German saying: “No one should feel comfortable with a fire engulfing his neighbor’s house.” It is essential to appreciate this reality and to understand the Somali context as we envisage various policies and regulatory arrangements. It will not be possible to make separate regulations for Somalia only, but at the same time, it will be difficult to apply the normal international regulations to a state that does not exist in a normal sense.

Somalis are nomadic, and though the Somali language has a rich literature, it was an oral language until 1973, when it was written in the Latin alphabet. As such, personal identification and documentation were never widely used except in the capital, Mogadishu.

Hawala System in Somalia

Hawala is an efficient, practical, and cost-effective system of transferring funds from one country or area to another. It has been used for millennia. Unfortunately, these days, the name hawala conjures images of dark forces and underground activities. We had major problems using the name when we were forming the Somali Financial Services Association late last year.

Hawala serves more than half of the world, far more than conventional banking, and serves it well. We should not overregulate the hawala business. If we do so, we might make it an underground business. In the case of Somalia after 1991, when the civil war reached the capital, Mogadishu, and the government collapsed, more than 25 percent of the urban population migrated to Gulf Cooperation Council countries, East and South Africa, Australia, Canada, Europe, and the United States. It is estimated that about half a million Somalis live in the Gulf Cooperation Council countries. They all transfer funds to Somalia as family support, as investment, and for business transactions. Since there are no banks, there is no other financial transfer system except the hawala system. United Nations Development Programme (UNDP) studies have shown that 26 percent of the total population of Somalia depend totally on transfers, and up to 66 percent depend on it for 50 percent of their basic needs.1 This system serves an important humanitarian need. Hawala is the only mechanism businesses have for transferring funds out of Somalia to purchase imports. Within Somali territories, because of the insecurity caused by the civil strife and the physical bulkiness of local currencies, all fund transfers are by the hawala service. Hawala repatriates all the export earnings back to Somalia. In a country where unemployment is about 80 percent, the hawala industry is a major employer. As there are no banks, many of the hawala companies serve as deposit takers for their customers.

Where hawala services are provided, there are other beneficial aspects. Communication links are set up with satellite connections and with telephone and Internet service or high-frequency radio services. Electric supplies are also set up. These can then be offered commercially to the surrounding communities. Thus, there are communication links with all major and minor towns of Somalia.

The process of hawala funds transfer is simple and straightforward. A person in Columbus, Ohio, who wants to transfer US$100 to a relative in Merca, Somalia, will contact an agent in Columbus. Either the funds will be paid in cash or credited to the agent’s account. Once this is confirmed, the agent will send the instruction to either the company’s regional office in the United States or the company’s headquarters. Within the same working day, the main office will instruct either their regional office in Somalia or their paying agent directly. Charges are 5 percent, which are split between the collecting agent or branch (30 percent), the main company (50 percent), and the paying agent or branch (20 percent). Literally every town is served. No banking service in Somalia in the past has ever achieved this scale of funds transfer and covered such a wide area. In fact, some companies offer payments within two hours. One company has set up a server-based, live-data system whereby all agents and company offices are connected to the live transaction. On this, all regulatory requirements are built in; the system will process neither illegal transactions nor those that have further formalities to be taken care of. It will send copies of transactions automatically to government authorities when mandated. It is also linked to the blocked persons list of the U.S. Treasury and cross-checks names.

The following is an example of one transfer using hawala that took place on March 29, 2004. A customer transferred US$1,000 from Hargeisa, Somalia, to a Somali businessman in Guangzhou, China. The hawala company in Hargeisa could only transfer to Dubai. They charged a transfer fee of US$10 and used an exchange rate of AED 3.67 to the U.S. dollar. From Dubai, one of the big exchange houses was used, with a rate of AED 3.676 to the U.S. dollar, and a transfer fee of US$52 was paid. The total amount paid for fees was US$64 ($52 plus $10 transfer fees and AED 6, which is the difference between the exchange rates used by the hawala company and the exchange house). If the hawala company had an agent in Guangzhou, I don’t think more than a total of US$30, i.e., 3 percent, would have been charged.

The total funds transferred by Somalis are estimated at around US$1 billion per year.2 Somalis are not necessarily known as good savers, but the reality of a huge migration in such a short period and the serious unemployment and famine at home make everyone wish to assist, even if the saving is from the welfare assistance of the refugees.

Settlement in hard currency is also very attractive. The hawala companies pay either local currency or hard currency, especially in U.S. dollars, the main international currency that is used. This serves as a hedge against inflation and is also an element of security. As the Somali shilling devalued, the physical handling and safekeeping of cash, especially in the civil war atmosphere, became a serious problem (see Table 11.1). As such, U.S. dollars are more conveniently handled and securely stored.

Table 11.1.Devaluation of the Somali Shilling to the U.S. Dollar, 1982 to 2003


No governmental regulations control financial transactions within Somali territories. In Somaliland, the Bank of Somaliland registers hawala companies. The bank issues a Certificate of Authorized Exchange Dealer for a fee and a deposit of US$3,000. With this, the municipality issues a license to operate. Beyond that, no other regulation exists.

The UNDP Somalia and EU Somalia organized a workshop in Dubai in July 2003 and a conference in London in December 2003. As a result, the Somali hawala companies have set up the Somali Financial Services Association (SFSA). We are in the process of building up the organization. The SFSA is the first attempt at self-regulation and needs to be professionally managed. The UNDP Somalia and EU Somalia offices are assisting. The SFSA also needs training and capacity building.

Challenges of the Somali Hawala Business

Somalia is a country that has to function without a central government, and the challenge is how to deal with that and how to address the following issues.

  • Regulation within Somalia should not be expected until a recognized government is formed.
  • Regulation of the hawala system at the source of the transfer should be developed.
  • Disruption of this humanitarian service that provides a livelihood to many should be avoided.
  • Overregulation, which could drive this needed service underground, should also be avoided.
  • Concerns as to how to nurture, guide, regulate, and integrate the hawala into the mainstream industry should be addressed.
  • Appreciation should be encouraged for a service that is efficient, is cost-effective, and serves rural areas.
  • Hawaladars need technical assistance to understand complicated and diverse regulations. In the United States many of the 50 states have their own regulations.
  • Collaboration between the formal financial institutions and hawala should be developed.
  • Discussion should be had as to ways to apply the know-your-customer requirement in Somalia.
  • Accommodation should be considered for small businesses that do not need much capital or training but operate in niche markets that depend on other traditional methods.

Special Challenges of the Central Bank of the U.A.E.

The Central Bank of the U.A.E. can play a pivotal role in implementing the achievements and agreements of this conference in Somalia. It can play a bridging role between the hawala sending and receiving countries, especially Somalia. This is easier, given that the U.A.E. is the second home to Somali businesses, and that there are cultural similarities between Somalia and the U.A.E. Most of the exports and imports come through the U.A.E. All the financial transactions are done through the U.A.E. Moreover, the sea and air transport to and from Somalia are with the U.A.E. Somalis consider the U.A.E. the financial capital of Somalia.


The First International Conference on Hawala opened the discussion and formally addressed the hawala issue. For the first time it was shown that the hawala money transfer system is a genuine, working, efficient, cost-effective system that is here to stay. The conference, in reality, has brought the hawala industry in out of the cold. The Central Bank of the U.A.E., under the leadership of its Governor, H.E. Sultan bin Nasser Al Suwaidi, has taken a drastic, novel, and courageous stand to acknowledge the existence of the hawala money transfer system and has supported the need for its existence. The Abu Dhabi Declaration on Hawala has accommodated this significant international financial service and has also encouraged the international financial industry to do so and live with it. The Abu Dhabi Declaration set guidelines and the first mechanism to integrate the hawala system into the mainstream financial system. The declaration was groundbreaking.


The Somali hawala companies feel they are misunderstood. They do not want to be prosecuted for adopting an old, traditional mechanism and for having developed it into an efficient funds transfer system. The need to offer efficient, cost-effective, and instant service is making financial services use the latest communications technologies, which creates an atmosphere for more transparency and accountability. This is where the hawala companies and the public authorities can converge, and both could do their job well. The need for modern, online services has advantages for both the companies and the regulators.

As we are today participating in the Second International Conference on Hawala, we should not only build on the first conference’s achievements and guidelines but also try to set solid and fundamental procedures to legalize, regulate, integrate, and develop the hawala money transfer industry, keeping in mind all the above needs and challenges.

More studies are needed, and more discussions between the main participant groups at the conference that will help us reach a consensus that will cater to all our basic needs. We should expect more scrutiny by all authorities concerned about abuses and hawala’s potential to facilitate crime. The need for more transparency by hawaladars is also clear. At the same time, the activity of hawaladars must be clearly distinguished from normal banking services, which include taking deposits, issuing checks, or making loans. The process by which hawala funds are transmitted and hawala’s interface with banking channels are still not well or widely known.

We feel that Somalis have been singled out too unevenly for control since 9/11, and public authorities should be more aware of the collateral damage this continues to inflict. We should also work toward setting affordable, transparent, and reasonable regulations of Somali and other hawala networks. Continuous outreach and active dialogue are essential.

Mohamed Djirdeh Houssein has been Chairman of the Somali Financial Services Association since August 2004.
1Report on Supporting Systems and Procedures for the Effective Regulation and Monitoring of Somali Remittance Companies (Hawala), prepared for UNDP Somalia by Abdusalam Omer, 2002.

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