Why should you care about the places that finance forgot? There are more reasons than you might think.
As a general rule, nothing good comes from a place falling off the financial map. Most obviously it’s bad for the people who live in that place, who lose access to everything from credit to cash to essential imports. But it’s not good for the rest of the world either.
To take the most brazen example, North Korea’s slippage from the interconnected world order has not worked out well for anyone, and certainly not for global security. Venezuela’s descent hasn’t helped the world either. And we would argue – although others, certainly Donald Trump, would disagree – that scrapping the deal that would have brought Iran back into the fold was a step backwards, economically and geopolitically.
The world is not safer with an isolated Iran, and we are already seeing the consequences of that decision playing out in the Gulf.
Why do countries get forgotten by finance? The answer is often political, as in the three cases mentioned above, but that’s not the whole picture. Arguably a more worrying pattern is convenience: it’s easier for the global financial system to just forget about places where there’s not an obvious source of profitability.
This shouldn’t surprise us in the private sector; indeed, the evidence is there that correspondent banking relationships (CBRs) have been falling away at a rapid pace ever since the global financial crisis.
The IMF studied this in some detail in 2016, with worrying findings. About 55% of banking authorities reported a decline in CBRs, as did 60% of local banks, while 75% of large global banks reported that they had withdrawn from CBRs, led by US and UK institutions.
These declines tended to be tightly concentrated in Africa, Latin America and the Caribbean, and to a lesser extent in Europe and central Asia. Around 67% of respondents in the Caribbean reported correspondent relationships being scrapped in the name of ‘de-risking’.
De-risking, one of those ugly words we also seem to have learned to live with, is an interesting idea in this context, because only one side of the relationship is actually reducing its risk. The other side finds itself worse off, disconnected and isolated.
The IMF says that the withdrawal of CBRs “has reached a critical level in some affected countries, which can have a systemic impact if unaddressed”.
It can disrupt financial services and cross-border flows, including trade finance and remittances, undermining financial stability, inclusion, growth and development goals, the IMF says.
We believe the situation has only got worse in the subsequent three years since the benchmark report.
In some places, it's a lot worse than inconvenience. Euromoney has written extensively about getting finance to refugee camps, some of them the size of cities in their own right.
There, despite such adversity, a ‘can-do’ attitude sometimes shines through. But in places such as Gaza or Somalia, where non-governmental organizations are essential to the economy, they can’t do their work if they can’t get funding in and out. That potentially takes you to poverty and failed states.
Gaza, Palestinian territory
The Pacific island nations are being pushed out of financial inclusion at exactly the same time that climate change is threatening their very existence. Tuvalu and the Marshall Islands have either lost their only international CBRs or are facing the threat of their loss, as the partners on the developed world side worry about the costs of complying with regulation.
The Marshall Islands has one domestic bank and it can’t issue credit cards and doesn’t have ATMs; its only international banking relationship was with First Hawaiian, a unit of BNP Paribas, which announced in 2018 it was closing down all business relationships with the country.
Pacific states like these rely enormously on remittances – they account for 27% of Tonga’s GDP, for example, and 21% of Samoa’s. What happens if the diaspora can no longer send money home or if it is no longer affordable to do so?
The IMF wrote in a 2019 report: “A full withdrawal of services would be devastating, curtailing trade and stemming remittance flows that support household income and growth in the Pacific islands.”
Yet one can hardly blame the banks, who are faced with a greater compliance burden than ever before.
If a country has weak standards on money laundering and terror financing, then banks are not going to want to stay
The shareholder model and the cost-benefit analysis of whether or not far-flung relationships benefit those shareholders is obviously part of it, but it’s not just about profits. Prudential requirements are higher, economic and trade sanctions more punitive, anti-money laundering and anti-terror finance requirements more robust and the threat of those deceits more pernicious.
Banks face regulatory scrutiny and reputational considerations. More so now than at any point in recent memory, the first rule of banking seems to be to avoid risk rather than to take it.
Already, banks in remote places are outliers. When you see the ANZ branches in Kiribati or Laos, you wonder what they are doing there, although you’re glad that they are. The Kiribati one, for example, is a lifeline, as well as a meeting point and a symbol that the place isn’t entirely forgotten as it clings on to being habitable.
An ANZ branch in Kiribati
So we have to count on the public sector to keep financial integration alive. But that’s not straightforward either.
There are so many reasons a country can drift to the outer limits of the financial mainstream and eventually depart it completely. To understand this, our correspondents went to countries at the edges of the financial map to see just why a country can struggle to be part of the bigger picture.
There is no one-size-fits-all fix that would mitigate Kosovo’s lack of recognition by half of the world’s countries because Serbia still believes it owns it; or Liberia’s problems with constantly being bracketed with the Ebola virus, despite having been free of the disease for almost four years; or Kurdistan seeking independence from Iraq while simultaneously having to deal with the emergence of the so-called Islamic State on its borders.
It can’t account for the decades-long hangover of a financial scandal in Algeria that banned any formation of a locally owned private bank; or the widespread suspicion in Laos that comes from French occupation and the Vietnam War; or the unique combination of mismanagement and natural disasters that has repeatedly beaten down Haiti.
But there are practical things that can be done. Strengthening and aligning regulatory frameworks is one: the best way to avoid banks leaving a country is to ensure you don’t give them a reason to leave.
If a country has weak standards on money laundering and terror financing, then banks are not going to want to stay. It is possible to strengthen rules and regulations on the ground to keep them engaged. Multilaterals can offer technical assistance on this; it’s one of the main practical steps the IMF and World Bank have taken, for example.
Colombia is an example of a country that has tried this, with some success. The Bahamas amended its anti-money laundering and countering financing of terrorism (AML/CFT) guidelines partly in response to departing correspondent banks.
The Palestine Monetary Authority, which faces more challenges than most, has tried to implement best practice on these frameworks, introducing a new AML/CFT law in December 2015.
Some central banks have tried to set up ad hoc arrangements for specific challenges.
The Reserve Bank of New Zealand is developing remittance accounts for Pacific island countries. The UK set up a pilot scheme called Safer Corridor between it and Somalia to allow remittances to get where they are meant to go – and to help the Somalis build a regulated financial sector in the process. At the time of writing the corridor has never operated – remittance flows persisted without it – but it was an interesting idea.
On the receiving end, central banks can be smart too. The Tonga Development Bank launched a voucher system called ’Ave Pa’anga Pau in February 2017 with help from the IFC. It can only be purchased in New Zealand and only remitted to a bank account in Tonga. New Zealand’s regulators have deemed it suitably AML/CFT compliant and $2 million of transfers took place in the first 14 months of operation.
How about sharing? Correspondent networks covering multiple sovereign states in the Pacific and Caribbean have been mooted.
Regulators in each jurisdiction have to make their peace with the approach of fintechs, which more often than not won’t be domiciled in their country
On the private side, fintechs offer an opportunity. Many business models have been created around reducing remittance costs. This was the reason Ant Financial wanted to buy MoneyGram; it is also the premise of Azimo, TNG, Ripple India and several African fintechs.
There is a great deal of potential here but also some risk. Regulators in each jurisdiction have to make their peace with the approach of fintechs, which more often than not won’t be domiciled in their country.
But fintechs might just be the answer. Their lack of physical infrastructure means their risk-reward calculation is different to that of conventional banks. The only problem is that, so far, fintechs have sought the low-hanging fruit of remittances to high-population places such as India, Bangladesh and the Philippines; they would need to be convinced of the business case of doing the same in, say, the Marshall Islands or Liberia.
Cryptocurrencies, inherently borderless, also present a great opportunity for financial inclusion – but they, too, present a risk, since they’re even more difficult to regulate than fintechs.
Pyongyang, North Korea
North Korea is thought to have hacked about $2 billion of crypto and other assets for its weapons programmes, according to a UN report seen by Reuters in early August. That’s not a great advertisement for cryptocurrencies as an enabler of financial harmony. But then again, crypto only really exists because of flaws and inequities in the existing financial system.
Whether through mainstream banking or newer digital models, those countries that have fallen off the map must be helped back onto it, because not only do people suffer when they are cut off from the mainstream but bad things happen in places you can’t see.