By Rohit Sudarshan
The future of traditional foreign assistance is in a precarious situation. Over the past five years, Organization for Economic Co-operation and Development (OECD) countries that contribute the largest share of international aid—namely Australia, France, and the U.S.—have seen a downward trend in official development assistance (ODA) as a percentage of gross national income (GNI). Additionally, the United Kingdom’s development agency, DFID, is currently handling a surge of fraud investigations regarding their foreign aid. Countries that are global leaders must promote other financial means for international development. Few options are as important and efficient as remittances.
Remittances are payments made by immigrants to families and friends in their country of origin and represent an effective method for those in developing countries to continue to improve their standard of living. While ODA requires the coordination of government agencies as well as policymakers from many countries, remittances do not face that same constraint. The difficulty in ensuring accountability has meant that governments have misused and absorbed aid money. For these reasons, remittances can be an appealing alternative; they can move expediently and directly to a recipient that needs it.
By Catarina Santos
Roughly 38 percent of the two billion people in the world’s lowest economic percentile do not have bank accounts and therefore lack access to the global financial market. Hawala, or “transfer” in Arabic, is a remittance system that runs parallel to formal financial system transactions. Although it is often associated with financing terrorist activities, narcotics trafficking and tax evasion, and is therefore illegal in most countries, hawala can be an important tool to facilitate the sending of remittances. This is especially the case for poorer populations in developing countries and for transactions by undocumented people. In fact, remittances received through hawala account for a third of Somalia’s gross domestic product (GDP).
Despite its ubiquity in many parts of the world, hawala remains under the radar. This article provides a background on how hawala functions, discusses why it can be an attractive alternative remittance system, and considers whether hawala should be regulated as a security threat or promoted as a development tool.
Background on hawala and how it works
Hawala started in South Asia around the 18th century, before Western banking practices reached the region. It evolved over the years and today is used mostly by migrant workers overseas for financial transactions domestically and internationally. This system distinguishes itself from the traditional remittance systems because it is largely based on trust and uses family connections and affiliations within communities to circulate money between “hawaladars,” or hawala dealers.
Why would migrants prefer to use this system over an official banking system? The main reasons are cost effectiveness, efficiency, reliability, lack of bureaucracy, and tax evasion. This system does not require identification documents or formal bank accounts, and does not leave a paper trail. Users of this method are therefore often associated with undocumented people and people committing illegal activities.
By Waka Itagaki
Development Impact Bonds (DIBs) are a results-based financing mechanism that leverages private capital for international development. Since the first DIBs were created in 2014, one of the mechanism’s key challenges has been high transaction costs: Each DIB project is unique, and this customization increases legal fees and requires financial intermediary and technical services. This article highlights two ways to reduce these costs: sharing data and knowledge about DIBs among stakeholders, and limiting the focus of DIBs. The reduction of transaction costs will promote greater use of DIBs for international development.
Introduction and Background
DIBs catalyze private investment that generates social impact as well as financial return, so called “impact investment,” by engaging private investors, service providers, host-country governments, donors, and intermediaries. Once all stakeholders agree on a common goal and an evaluation method, private investors provide upfront funding for a development project and work with service providers. If and only if the pre-agreed development outcomes are achieved, host-country governments or donors repay the investors. An intermediary organization coordinates among the stakeholders and contributes to the creation of a deal that meets all stakeholders’ interests.
In July 2015, heads of state, finance ministers, foreign ministers, and ministers for development cooperation will gather in Addis Ababa, Ethiopia for the third United Nations International Conference on Financing for Development. The Addis Conference seeks to identify funds to support the post-2015 Sustainable Development Goals (SDGs). This conference will be fundamentally different from earlier FfD conferences held in Monterrey in 2002 and Doha in 2008. In 1980 low and middle income countries received $32 billion of ODA and $7.6 billion of FDI, but by 2013 those countries received $133 billion of ODA and $735 billion of FDI. As global incomes rise, emerging donors have taken on a much greater role in development. Developing countries’ themselves have gained a greater ability to finance their own development as private sector economic activity in the developing world continues to grow. Below we have outlined some of the ways development finance has changed to respond to a new set of challenges and development realities.
The UN will host the third Financing for Development Conference this July in Addis Ababa, Ethiopia.
A New Role for Traditional Donors
While ODA and traditional development financing remain important catalysts for development, donors that were once the main sources of financing for developing countries increasingly find themselves playing a complementary rather than unilateral role. Private financial flows have increased rapidly and ODA and public funding for donor organizations have increased at a more limited rate. As a result, traditional donors are finding new ways to leverage their funds to create maximum impact, often through encouraging private sector growth. Continue reading