KEN MENKHAUS

Remittance companies and money transfers in Somalia

October 2001

This briefing paper is intended to inform policy discussions on the Somali remittance,
or hawilaad, companies. It addresses:

the scale and significance of remittances in the Somali economy today;

the workings of the remittance system;
the likely impact of restrictions on remittances on Somali households and
commerce
other policy issues related to remittance companies

The rise of a remittance economy

The system of remittances, or wealth transfers from abroad, is a well-established
practice in Somalia. Remittances are intimately linked to Somalias role since the 1970s
as a labor reserve for Gulf states and (since the mid-1980s) as a diaspora community in
the West. In the 1970s and 1980s, the most common means of remitting wealth was
called the franco valuta system. Somali migrant laborers flocking to high-paying jobs in
the Gulf either purchased high-value consumer goods and shipped them back to family
members, or transferred their salaries via Somali traders, who then paid their relatives in
Somali shillings and used the hard currency to purchase imports. Though this system of
remittances was relatively crude, it quickly grew into an important pillar of the Somali
economy, so much so that one Boston University study in 1983 suggested that far from
being a brain drain Somalias export of its own labor was probably the best use of that
workforce, earning higher value abroad than at home.1 Indeed, Somalias primary export
since the 1980s has been the labor of its own people.
In the 1970s and 1980s, the opportunity to work as a migrant laborer in the Gulf
was considered a privilege available only to middle or upper income Somali households,
even though the work in the Gulf was often menial labor. The cost of international air
travel and obtaining of travel documents made the trip inaccessible to poorer households.
Those households able to send a young man (or less frequently a young woman) to work
in the Gulf enjoyed economic benefits that set them further apart from poorer
households.
1

Boston University, African Studies Center, The Somali Social and Institutional Profile: An Executive
Summary (Boston: Boston University, 1983), African Studies Center Working Paper No. 79. See also
Norman Miller, The Other Somalia: Illicit Trade and the Hidden Economy. Horn of Africa 5, 3 (1982), 319.

The scale and significance of remittances today

Since the collapse of the Somali state and economy in the 1990s, Somalia has
become even more dependent on remittances from family members working abroad.
Today, remittances are by far the largest single source of hard currency entering the
country, and are vital to the countrys limited ability to feed and sustain itself. One study
estimates that remittances to Somaliland alone (which is home to about 1/5 of the total
population in Somalia, which is estimated at about seven million people) reach as much
as US$500 million per year four times the value of livestock exports in a normal year.2
Another study calculates that remittances constitute nearly 40% of the income of urban
households in the northern towns of Hargeisa, Burao, and Bosasso.3 Remittances to
southern Somalia are less well-documented. Mogadishu is unquestionably the largest
recipient of remittances; it probably accrues a similar level of remittances as does
Somaliland. In the town of Beled Weyn, with a population of about 50,000, an estimated
US$200,000 per month is received in remittances, for a monthly average of US$4 per
towndweller.4 Our best estimates are that remittances nationally probably total
somewhere between 500 million to one billion US dollars per year. Even the low end of
this estimate dwarfs the amount of money the country earns in livestock exports or
receives in foreign aid.
When one considers that most of the Somali population is living off of less than
one dollar per day, that the injection of hard currency from abroad is essential in
enabling Somalia (which has a chronic balance of trade deficit and a local currency of
little value) to purchase staple food imports like rice, sugar, and flour, and that the
remittances tend to have a multiplier effect in local communities, indirectly benefiting
households which do not receive remittances themselves, the importance of remittances
to Somali food security is hard to overestimate. Without access to remittances, Somalia
which already faces very severe economic duress and a worsening food crisis would
slip into famine and malnutrition levels akin to what we witnessed there in 1991-92. The
remittances very much constitute a life support system for a comatose economy.
These studies also point to a number of other important facts about remittances.
First, remittances tend to be enjoyed mainly by more urban households with welleducated members. The rural poor and the internally displaced rarely access remittances.5
Remittances are thus critical sources of funds for larger cities and towns. Second, most
remittances fall in the range of $50-400 per month, and service an extended household.
Third, the flow of remittances has generally remained quite regular; the flow of money
from the diaspora does, however, tend to increase in times of economic stress (such as the
2

Ismail I. Ahmed, Remittances and Their Economic Impact in Post-War Somaliland, Disasters 24, 4
(2000). Some observers suspect this figure is high.
3
Khalid Medani, Report on Migration and Remittance Inflows: Northwest and Northeast Somalia.
Nairobi: UNCU and FSAU, 2000.
4
Ken Menkhaus, Hiran Region, UNDOS Studies on Governance, (2000).
5
Medani documents much lower access to remittances among returnees and IDPs in Somaliland, on
average only 2-5% of household income in most urban locations. See Medani, Remittances, p. 5. Only a
dozen or so households in the heavily rural district of Saakow (Middle Jubba region) enjoy access to
remittances. See Menkhaus, Middle Jubba Region, UNDOS Studies in Governance (1999).

current livestock export ban by the Gulf states) or in response to inter-clan warfare.
Fourth, Somalis in the diaspora are under considerable pressure from collectors from
their own clan to support their lineage in times of war; those contributions go to militias,
not households.6 Fifth, due to historical circumstances, some clans have a much higher
proportion of members in the diaspora than others, so that some clans benefit more than
others from remittances. Sixth, while remittances were throughout most of the 1990s
used to finance purchases of basic consumer goods, in recent years local observers have
noted a trend toward use of remittance money by more middle class families for
investment purposes mainly in real estate, but also in small businesses.7 Finally, the
extensive flow of remittances, often representing a significant financial sacrifice on the
part of the diaspora, reflects a profound sense of obligation to kin which is part and parcel
of Somali clannism.
Sources of remittances have significantly expanded due to the dramatic explosion
of the number of Somalis in the diaspora as refugees in the late 1980s and early 1990s.
Remittances today are as likely to be sent from North America, Europe, or Australia as
they are from the Gulf states. As the population of Somalis in the diaspora changes and
as the flows of new Somalis into the diaspora dwindles due to more restrictive asylum
and immigration policies in much of the world -- we may begin to see shifts in
remittance flows. One important question is whether second generation Somalis abroad
will continue to commit themselves to sending remittances to relatives they do not know
in a country they may never have visited.
The hawilaad companies
In the first half of the 1990s, the system of sending remittances was highly
informal and personalized. It typically relied on trust relations with a known broker based
in Nairobi or elsewhere who would insure that funds were delivered (either by carriers,
who flew in to cities with cash on daily qaat flights, or via local HF radio operators) to
family members inside Somalia or in refugee camps. Poor communications inside
Somalia hindered the delivery capacity of this form of remittances. Most remittances
locally were handled by individuals operating private HF radio communication services,
the only type of communication available at that time. HF radio operators tended to deal
with small sums of money; they would be promised reimbursement plus commission by a
broker in Nairobi for providing (typically) $50 or $100 to a local family. Receipt of funds
was confirmed by the recipient family, on the HF radio. In this way, local HF radio
operators became the first, small-scale hawilaad sector. But their lack of capital
prevented them from expanding the service beyond very modest levels. Though some (in
small towns and villages) continue to play a role in remitting money, most HF radio
operators have since 1995 been absorbed into larger hawilaad companies as local agents,
operating on commission. This gives the companies the ability to reach virtually every
community in the country. The hawilaad companies even went so far as to provide
discounted distribution of HF radios (sold on credit) to operators in remote villages who
in turn agreed to work exclusively for them as agents.
6

This was the subject of an in-depth report by the Minneapolis Star newspaper earlier this year, and has
apparently been the subject of FBI monitoring.
7
See Ahmed, Remittances.

By chance, Somalias collapse into a failed economy and heavy dependence on its
diaspora for economic survival in the 1990s coincided with revolutionary advances in the
telecommunications sector. This made remittance transfers from great distances much
easier. The rise of the hawilaad companies specializing in global money transfer in and
out of Somalia coincided with and could not have occurred without the introduction of
the first private satellite phone companies in 1994-95. These two industries financial
services and telecommunications have been among the most innovative and dynamic
sectors of the post-intervention Somali economy. The satellite phone systems were
initially confined to the main cities of Mogadishu and Hargeisa, but today have expanded
to most mid-size towns, in Somalia, and occasionally are present even in small
settlements. They provide reliable phone contact worldwide at some of the lowest rates
in Africa currently at about one dollar per minute for calls to the US.
A number of companies compete in the remittance business today, but three
companies now dominate the hawilaad sector al-Barakat, al-Amal, and Dahabsheil.
The three share a number of similarities. All are Somali-owned but headquartered abroad
(in Dubai or Nairobi); all involve global networks of bank accounts and agents working
on commission in over forty countries (though some are stronger in one region of the
world than others); and all have local offices or agents throughout most of Somalia. All
are anchored in the business triad that now defines the Somali business world Dubai,
Nairobi, and inside Somalia (Mogadishu or Hargeisa). Each tends to specialize in
different parts of the world and different regions of Somalia. Importantly, each of the
three remittance companies is owned by members of different Somali clans, and thus
tends to be somewhat associated with that clan. Restrictions imposed on only one
remittance company would likely be perceived in Somali eyes as an action taken against
an entire clan.
The system by which remittances are sent back to Somalia via the hawilaad
companies is relatively straightforward. A Somali in Toronto who sends $100 per month
to his family in Mogadishu will contact the local Toronto agent of the company he opts to
work through. He usually contacts his family by phone in advance to alert them that the
funds are coming. He provides cash to the local agent, who deposits it in a Toronto bank
account owned by the hawilaad company, calls or faxes the local branch of that hawilaad
company in the neighborhood of Mogadishu where the recipient family lives, and
instructs the local branch to transfer $100 to the recipient family. That family is
contacted, comes to the hawilaad office and usually confirms over the phone receipt of
the money. Families receiving remittances in more remote areas where no phone services
is available communicate via an awkward but effective combination of phone and HF
radio. In recent times, email has also become a means of communicating such transfers,
reducing still further the transaction costs involved.
The sender in Toronto pays a commission, which varies according to the amount
of money transferred (larger transfers get percentage discounts) and according to the level
of competition occurring at that time between rival hawilaad companies (they have
alternated between fierce price wars and collusion in recent years). Typically the

commission for small transfers falls between 3-7%. Local agents get a portion of that
commission; the rest constitutes revenue for the company. The entire transaction is
usually conducted with US dollars, which are much preferred by recipients since dollars
are easier to conceal (the Somali shilling has devalued so greatly that one needs a large
plastic bag to carry the equivalent of $US100 of shillings) and because the dollar is
immune to hyperinflation. Indeed, because the Somali economy has de facto become
dollarized over the course of the 1990s, most large transactions are now conducted in
dollars, not in shillings, which have been relegated to a role of petty transactions. This
means that local branches of hawilaad companies must replenish the supply of dollars in
their local offices, by couriers in cars of planes.
Interestingly, despite the high value of currency hawilaad offices hold, and
despite the general absence of law and order in Somalia, hawilaad companies have not
been the targets of armed robberies. The companies keep armed guards on the payroll,
and appear to possess a deterrence capacity that is understood by all concerned. Because
so many households and businesses rely on hawilaad, the companies appear to be able to
count on the entire community to protect them from theft.
When possible, Somalis will sometimes send money to relatives via human
carriers themselves, or a trusted friend or clansman in order to avoid payment of the
commission. The magnitude of such private transfers is impossible to estimate, but is a
very common practice wherever security permits. In Beled Weyn in 1998, which was
relatively secure at the time, hawilaad companies estimated that they handled about twothirds of the total remittances into the area; hand-carried cash and small remittance
exchanges via HF radio operators constituted the rest.
The hawilaad companies rely mainly on the business of remittances. But in
recent years, the hawilaad companies have expanded their services. Businesspeople
routinely use hawilaad companies to transfer funds to purchase imports from Dubai,
Kenya, or elsewhere, so that hawilaad companies have become central to the countrys
important transit trade and import-export activities. Hawilaad companies also routinely
handle money for international aid agencies, which are disinclined to risk carrying large
sums of money directly into Somalia to meet payrolls and contract payments. 8 Domestic
business transactions also rely on hawilaad traders from smaller towns will travel to
Mogadishu to purchase cloth and pay for orders through the remittance companies, rather
than risk carrying money on dangerous roads. Hawilaad companies are even issuing the
equivalent of travelers cheques for this purpose, and using scanned photos of regular
customers on computers to verify the correct recipient of transferred funds. Finally, some
businesspeople are actually holding funds in the hawilaad companys account for short
periods, using the companies as a crude bank. It is this trend, toward a quasi-banking
role, that generates special interest in the remittance companies. Whether the hawilaad
companies remain primarily money transfer businesses or evolve into banks is uncertain.
Their development over the past five years has, however, been essential for the expansion
of commerce which Somalia has enjoyed.
8

UN agencies have for years been instructed by the UN Security office not to carry money into the country,
as it only attracts security problems.

Hawilaad companies and al-Ittihad

In addition to the legitimate and essential financial transaction services that
hawilaad companies serve in remittances and commercial exchanges, rumors have long
circulated that some of the companies have also been linked in some way to al-Ittihad.
These can be broken down into several distinct concerns:
1) Use of hawilaad services by external Islamist groups such as al-Queda to move
money undetected around the world.
Because the hawilaad companies keep very limited records of transactions and do
not involve personal accounts, the money they move is essentially unmonitored and
untraceable, and hence of obvious attraction to any number of illicit transnational
movements. In this scenario, the Somali hawilaad companies would not necessarily be
aware that their money transfer services were being misused by criminals or terrorists.
We know that the Somali companies are used by non-Somalis; Eritrean, Sudanese,
Kenyan, and other Horn of Africa diaspora members sometimes rely on Somali
hawilaad as the most effective way to transfer funds. That criminal and terrorist
elements make use of the Somali hawilaad sector is a given. The question that is far
more difficult to answer is the extent and significance of such illicit activity. The only
way to begin to get answers to that question is to require the hawilaad companies to
adhere to some standard of transparency, record-keeping, and external monitoring which
they may or may not be willing or able to comply with. Even with very effective
monitoring of hawilaad transactions, it should be stressed that there are many other
ways to move money around in Somalia, independent HF radio operators and couriers
still account for a significant amount of money transfers.
2) Direct affiliation of some hawilaad companies with al-Ittihad.
Al-Barakat has in particular been the subject of rumors that it has direct links with
al-Ittihad, but it is by no means alone. This is part of a more general rumor that some of
Somalias top business elite men who have made their fortunes in the new, post-state
environment of the 1990s are close to al-Ittihad. If direct evidence of such links exist,
it would be in the realm of classified documents and intercepts of communications,
information which is not available to academic analysts.
But presuming that the rumors are at least partially true, crucial distinctions needs to
be drawn here over the types of affiliations Somali businessmen may have with radical
Islamist groups. Some businessmen have chosen to embrace closer links with al-Ittihad
for tactical reasons, as a way to gain greater access to profitable networks, information,
and security, but are not ideologically committed to the cause. Given the very pragmatic
nature of Somali businessmen, this scenario makes the most sense intuitively, but will
only be proven or disproven over time particularly if they sense that the costs of
affiliation with al-Ittihad outweigh the benefits. Another possibility is that some
hawilaad companies consist of Somali partnerships with (silent) non-Somali Islamic
radicals, who provide the funds to start the business. This partnership scenario is
compelling in that it would help explain how the hawilaad companies acquired the large
sums of money to start up their global businesses. A third scenario is that some

hawilaad businessmen are indeed closely affiliated with al-Ittihad, but do not embrace
al-Qaeda and other transnational Islamic agendas. There is no easy way to measure this,
but it is plausible that some if not most Somalis who embrace al-Ittihad are focused on a
domestic, not global, agenda, hoping to transform lawless Somalia into an Islamic state
but uninterested in waging war against the West.
Meanwhile, the exact nature and extent of hawilaad links to al-Ittihad is not known
in the public domain. Because many rumors especially ones which can damage a
rivals reputation turn out to be false in Somalia, most observers have to date
suspended judgement on this question until more persuasive evidence is available.
Impact of restrictions on hawilaad companies
If Somali hawilaad companies do appear to be serving as conduits of radical
Islamic funds, one option which may be considered is the restricting or closure of their
operations. Closure of their operations in Western countries, Dubai, and Kenya would
effective shut them down globally. This option, however, involves a number of potential
problems and unintended consequences which need to be considered carefully.
1. Policies aimed against hawilaad companies which disrupt or prevent the flow of
remittances would have a devastating impact on Somali food security, which is
already precarious. It would be portrayed by many as American genocide against
innocent Somalis, would be held responsible for rapidly worsening malnutrition and
starvation, and would almost certainly provoke rage and rioting inside Somalia (and
perhaps beyond) on a scale which we have not seen before. Too many families rely on
remittances for their survival; they would view the blocking of remittances as an act
of war. Whatever policies are developed regarding hawilaad companies must not
restrict or prevent remittances, or the policy will create many more problems than it
solves.
2. Policies aimed against hawilaad companies which restrict the ability of businessmen
to purchase food and other consumer goods in Dubai will also do serious damage to
Somalias fragile economy and create animosity with the business community, which
is currently the most powerful social group in Somalia. Our policies should be
designed to cultivate and deepen relations with the business elite in Somalia, not to
alienate them.
3. Policies which target a single hawilaad company rather than all of them must take
care not to allow that action to be viewed as a hostile act against the clan with which
that company is identified. As we learned in the fight against General Aideed in 1993,
Western notions of individual culpability collide with the powerful Somali principle
of collective responsibility.
4. Provided the companies in question are not irrevocably linked to al-Ittihad, a
constructive engagement approach to the hawilaad companies may yield better
results. These are businessmen who have made their fortune navigating the difficult
and dangerous shoals of state collapse and civil war. They understand fully how to
manage and adapt to changes in the political environment. If met with privately, they
may be very willing to revise their way of doing business in order to meet the needs

of the outside world for accountability, transparency, and monitoring of their

transactions. The threat of restrictions on their activities can and should loom quietly
in the background as a way of encouraging their full cooperation, but need not be
made explicit. Should cooperation not be forthcoming, restrictions should be applied
in a ratchet-wrench approach, as a series of gradual penalties and pressures which
enable us to turn on the heat gradually rather than simply shutting them down. One
obvious and painful policy would be use of existing tax laws. Investigation of the
Somali agents working for the companies abroad, would probaly reveal that they are
working off commissions which they arent reporting as taxable income. Conversely,
if the companies do appear ready to assist, there should be some set of rewards or
benefits in place. As businessmen, they presumably will be closely attuned to a costbenefit analysis in their recalculation of their relations with the West and Islamic
radicalism. We can help shape that cost-benefit analysis in ways that work for us.