Having cash, accessing a loan or picking up remittance money from a distant relative are financial transactions most people in stable countries probably take for granted.
A functioning payment system allows money to circulate easily within an economy, or between economies. But in fragile and conflict-affected countries, this system often breaks down. Without a functioning payment system, people and businesses can’t gain access to money to buy and sell goods or services. That kind of activity is fundamental to jumpstarting growth, restoring stability and helping an unstable country start to rebuild.
At the World Bank Group forum on fragility, conflict and violence this year, experts discussed how the international community could better address the kinds of issues that fragile countries face. While developing a functioning payment system in fragile situations is complicated, it’s also critical: with around 1.5 billion people living in fragile and countries affected by conflict, making progress is vital to reducing poverty and strengthening shared prosperity.
The difficulty in setting up these systems often stems from the lack of a centralized payment infrastructure or a strong central bank, as well as a weak overall capacity of the financial sector. In countries that largely operate as cash economies and where people aren’t accustomed to using financial services, staging interventions to deliver money to people in need can be particularly challenging.
A weak financial infrastructure also affects remittances that flow between countries, which often provide a large and stable source of external finance to fragile states. In 2013, international remittance to fragile countries was estimated at more than $16bn.
Underdeveloped financial and payment infrastructure, coupled with overall instability, make sending and receiving remittances in fragile countries more expensive, with money transfer operators imposing higher fees to process such transactions. For example, the global average cost of sending $200 internationally is 7.99%, but remitting that amount of money to a fragile country costs 9.24%. The money that could otherwise be injected into the economy is instead being used to pay for the transmission of cash.
Fragility also makes it difficult for unstable countries to comply with the international FATF guidelines, which seek to combat illicit transactions, such as money laundering and terrorist financing. Concerns about illicit financial flows further impede the smooth flow of remittances.
Having a functioning payments system isn’t just critical in post-conflict situations, it’s also crucial in helping economies and people recover in the aftermath of a natural disaster. When a situation like this wipes out a country’s infrastructure and brings the economy to a halt, we must be able to quickly establish a payment system to facilitate relief efforts and allow for cash transfers to help displaced people get back on their feet.
Private sector investments, international payment card networks and other stakeholders also have an important role to play in the development of the financial infrastructure in countries, in particular those in fragile and conflict-affected states. The World Bank Group now has payment-systems engagements in more than 60% of the world’s fragile and conflict-affected countries. Examples of this include strengthening the financial sector and market infrastructure in Kosovo; providing post-disaster partial credit guarantees in Haiti; increasing access to finance in Afghanistan; and providing technical assistance to help develop payment systems in Somalia.
But the group’s work goes beyond payment systems. We provide a broad range of analytical and advisory services, including supporting capacity-building in accountability; designing and implementing anti-corruption and anti-terrorist-financing initiatives; developing other financial infrastructure that is essential for the normal functioning of markets; supporting the microfinance industry; and developing affordable micro-insurance for the underprivileged.
Our active portfolio currently includes nine financial service projects with a net commitment of $157m, as well as 72 analytical services and advisory projects.
The World Bank Group is committed to making a positive difference in these countries by strengthening their financial sectors and increasing financial access as a way to stimulate overall economic growth and enhance job opportunities – steps that are essential in fulfilling the group’s mission of eliminating extreme poverty and promoting shared prosperity.
Gloria Grandolini is the senior director of finance & markets global practice at the World Bank Group.
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