Kenyans living and working abroad increasingly avoided banks when wiring cash home in favour of less costly traditional money transfer methods such as “hawala” amid money laundering threats.
The World Bank says the cash transfer fees in the banking sector and the lower exchange rate is encouraging the use of traditional money transfer by Kenyans abroad.
The global lender says it costs an average of Sh1,549 ($11.14) to wire Sh27,806 from the US to Kenya through banks.
It further adds that the spread – the difference between the prices a dealer buys and sells a currency — has seen banks pay less per dollar compared to traditional money transfers and forex bureaus.
The World Bank does not list the traditional methods, but the Central Bank of Kenya says the informal channels include sending money through friends and relatives, and personally carrying cash and hawala while acknowledging that banks remain dominant on remittance transfers.
“A perceived forex shortage may also partly explain weaker recorded remittances, which were increasingly channelled outside the formal banking sector as the spread between the official and market exchange rates widened,” said the World Bank in its Kenyan Economic Update report published on Wednesday without giving figures.
The biting dollar shortage eased following the revival of the interbank currency market on orders from the State House.
Bulk buyers of dollars have witnessed increased availability of the greenback in recent weeks, a marked departure from market conditions that saw banks run out of the US currency on some days as others imposed a daily cap on dollar purchases of as little as $5,000.
The changes followed a directive from President William Ruto on March 22 for the revival of the interbank foreign exchange market in an effort to remove distortions in the market that had exacerbated the shortage of foreign exchange. An earlier the Central Bank of Kenya (CBK) survey said the average cost of sending funds was in the range of four to five percent of the amount being remitted while using mobile money operators, money transfer companies and banks.
The survey established that informal remittance channels were comparatively cheaper, a driver for traditional money transfer operations.
“The use of courier companies was established to be the most expensive channel of sending money in 2019, costing 29.2 percent of the value remitted. Moreover, some informal channels provide cheaper options for remitting cash compared to formal channels,” said the CBK in the survey.
This comes at a time customs officials have intercepted individuals both Kenyans and foreigners, with huge sums of unexplained cash that the government fears are illicit. The law requires cash of $10,000 (Sh1.26 million) and above to be declared in what is aimed at fighting money laundering.
Kenya is now seeking to have sniffer dogs at border points and airports trained to detect currency in its latest fight against tax evasion and money laundering. The US and other Western nations have expressed discomfort with the global use of Hawala, especially in countries like Pakistan where the trust-based money transfer system has long been the banking system of choice for many people.
Hawala money transfer businesses work under a system that allows customers to rapidly move large sums across borders outside the scrutiny of regulators. Cash sent home by Kenyans living and working abroad in the three months to March fell for the first time since 2010 as inflation hit multi-decade highs in many countries, squeezing household budgets.
Kenyans abroad typically send money to help their families and to invest in projects like real estate, with flow from the US accounting for about 60 percent of the total remittances. The rising cost of living in countries like the US and in Europe on the back of costly energy, food and rent has been squeezing households and putting pressure on policymakers to bring the issue under control.
Lower-income minorities, including a significant share of Kenyans working in the US, have been hit particularly hard as a larger portion of their income goes to essentials such as food, transportation and housing. The CBK data shows the remittances dropped 3.1 percent to Sh185.74 billion ($1.336 billion) in April compared to the same month a year earlier.