De-risking Somalia is a false economy - TheBanker.com

Somalia's financial sector faces a paradox that Western regulators seem determined to ignore. While international banks justify mass de-risking as prudent anti-money laundering (AML) compliance, the policy is achieving the opposite: pushing Somalia's $20 billion economy into informal channels where transparency vanishes entirely.

De-risking—where international banks withdraw correspondent banking relationships and close accounts en masse—has become the default response to perceived money-laundering risks in fragile and conflict-affected states. For Somalia, this approach is economically devastating and counterproductive to the stated goal of combating financial crime.

### Why De-risking Somalia Makes No Economic Sense

The mechanics are straightforward: Somali remittance operators, small businesses, and even government agencies lose access to the formal financial system. Without bank accounts, they cannot process international transfers, access credit, or build financial histories. The result is a thriving informal economy—precisely the environment where illicit flows flourish and regulators lose visibility entirely.

Consider the scale: Somalia receives approximately $7 billion annually in diaspora remittances, representing over 30% of GDP. These transfers fund healthcare, education, and entrepreneurship across the country. Yet de-risking has made moving this money legally more difficult than ever. Money transfer operators (MTOs) that once operated transparently now face account closures and correspondent banking rejection, forcing them to operate at the margins of the formal system or shut down entirely.

### The Regulatory Failure Behind De-risking

The fundamental flaw in de-risking policy is confusing correlation with causation. Somalia has genuine governance challenges—weak institutions, ongoing conflict, and limited regulatory capacity. But the solution is *strengthened* engagement with Somali authorities and the financial sector, not blanket exclusion.

De-risking also ignores progress. Somalia's Central Bank has implemented new AML frameworks, improved reporting mechanisms, and begun training regulatory staff. The Financial Action Task Force (FATF) has acknowledged these efforts. Yet Western banks treat Somalia as immovable—a jurisdiction to abandon rather than assist in building capacity.

### Market Implications for Investors

For foreign investors and diaspora entrepreneurs, the consequences are immediate. Cross-border transactions that should take days now require weeks or workarounds. Trade financing becomes impossible. Small and medium enterprises cannot access the working capital necessary to scale operations.

This creates a vicious cycle: without formal finance, Somali businesses remain small, informal, and undermonitored. Investment capital flows elsewhere. The economy stagnates.

### A Better Path Forward

The evidence from Rwanda, Uganda, and Kenya demonstrates that engagement works. As these countries improved compliance infrastructure and institutional capacity, de-risking pressure eased and financial inclusion deepened. Somalia requires the same prescription: technical assistance, graduated re-engagement, and recognition that financial inclusion and AML compliance are complementary, not contradictory.

De-risking Somalia is not prudent risk management—it is economic self-sabotage masquerading as compliance. For serious investors, the message is clear: Somalia's informal finance sector is growing precisely because the formal one has been abandoned. The opportunity lies in advocating for policy change that brings finance back into the light.

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