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The African bank crisis and remittances

I’m on holiday in Africa to get
away from it all, but just to show that banking is a global business, there’s an
ongoing banking crisis relating to Africa.

I’ve been tracking the issue –
that Barclays  is in the process of closing the accounts of
a number of Authorised Payments Institutions, in the light of recently
tightened policies around AML and KYC – for a while, and indeed wrote about remittances
very recently.

So it was no great surprise to hear on the BBC Today programme that one
diasporate, the Somalis, is particularly badly hit.

Unfortunately, following on
the heels of HSBC  closing down
the accounts of the APIs which provide money transfer services a few months back,
no other UK bank seems willing to take on these firms, many of which have
relatively modest aggregate transaction values in banking terms.

The
commentators thought that the problem was partly down to a broken banking
system in Somalia, which isn’t entirely true. As we’ve frequently commented in
this blog, innovators in countries which lack a strong banking system
frequently turn to mobile as an alternative, and in so doing, leapfrog
developed economies. Somaliland, a region in northwestern Somalia that
has broken away and declared independence from Mogadishu, has one of the
world’s highest rates of digital transactions.  According
to the Canadian Globe and Mail
, the Coca-Cola branch in Somaliland is the
only cashless Coca-Cola company in Africa.

But local payments schemes are
only any good if someone puts money into them, and for Somalia, remittances are
a substantial proportion of GDP. According to Channel
4 News
, British-Somalis send up to £100m every year
and for their relatives back home, it makes up 60 per cent of their annual
income. Until August that is, which is when Barclays will cease to
provide accounts to the regulated, authorised payments institutions which
provide the service.

UKMTA, the trade association
representing money transmitters in the UK, says Barclays’ decision may affect
70% of UK money-transfer firms. The Government estimates that money transfers
from the UK were worth £5.74 billion in 2011, and World Bank data suggests a
substantially higher figure. UKMTA members account for approximately 40% of
this market and are all Authorised Payment Institutions, regulated by the
Financial Conduct Authority and registered with HMRC under the Money Laundering
Regulations. Around 250 firms could be forced to close next month, resulting in
around 3,500 job losses.

Money will no doubt continue to
flow somehow. UKMTA estimates that, on
some corridors, as much as 50% of existing cash-transfer business could be
driven towards unregulated ‘Hawala-style’ money-transfer providers. This would
make it easier for funds to flow illegally. The Serious Organised Crime Agency
has endorsed this analysis, arguing that because the majority of APIs are
“compliant with good AML policies and procedures … the MSB sector should be
banked”. HMRC have also expressed support for keeping the APIs banked.

Barclays are concerned that "some money service businesses don't
have the proper checks in place to spot criminal activity and could therefore
unwittingly be facilitating money-laundering and terrorist financing,"
according to the BBC. UKMTA assert that their members do, and have
established a Code of Conduct which may help to bridge the gap.

It’s unfair to pick on Barclays; all the banks, and especially those with
US operations, are paying close attention to KYC and AML. But there’s precious
little evidence that the APIs contribute to the risk; most of the banks’
transgressions have been self-inflicted.

Remittances may be a challenge for banks but they are even
more so for politicians and policy makers. 28 countries lose more than 0.5% of
GDP to the fees their diasporates pay to send money home, according to
research from Earthport. That’s an amazing sum, and is of huge importance to
those countries. On 17
July, MPs debated the provision of money-transfer accounts services by banks to
ethnic minority communities. The discussion was well-informed and wide ranging,
touching on broader issues including ‘the need for the Government to engage in
urgent discussions with the United States, where a lot of the regulatory
pressures are coming from’.

Though there were no firm conclusions, Sajid Javid, the Economic
Secretary to the Treasury – after explaining that his unbanked gran in Pakistan
is a long standing recipient of remittances – said he had asked the BBA to
organise an urgent roundtable which the Government would attend.

This looks like it’s got a way to run.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Chris, I am actively involved in this matter at both IAMTN and DMA. The issue is clearly quite complex but I agree, a working group of banks, RSPs and the government is required in order to try and reach a workable long-term solution.
    Initially the government has commissioned a ‘rapid response’ report on the UK market and the current situation. This is necessary because, as your comment implies, there is not enough data to have a sensible discussion.
    Ultimately though this is a global problem that needs to be addressed with the US as a key component to that. We’ll keep you posted.