Global financing gaps, in the tune of trillions of dollars, signal that economies require more credit, not less; banks must be instruments of capital allocation to productive use, not repositories of speculative assets.
By: Abdikarim Jama
Banks are intermediaries: institutions that turn short-term deposits into credit for productive activity. Their raison d’être is financing households and firms, not accumulating assets that sit on their balance sheets. Yet across the world, banks have increasingly diverted capital into housing and property development—locking up funds that could support businesses and households, distorting credit allocation and magnifying risk
This divergence from core banking functions has consequences not just for individual institutions but for economies at large. Housing and real estate investment, when undertaken by banks with deposit-funded capital, dwarfs the capital allocated to productive lending. This trend is especially acute in countries with shallow financial markets and limited capital-market alternatives.
A World Starving for Credit
Despite the central role banks play in credit creation, vast segments of the economy remain starved of finance. According to the latest estimates from the World Bank Group’s MSME Finance Gap Report, formal small and medium enterprises (SMEs) in emerging markets face a financing shortfall of approximately $5.7 trillion, equivalent to about 19 per cent of GDP and roughly 20 per cent of total private sector credit. Nearly 40 per cent of formal MSMEs are credit-constrained, with women-owned businesses bearing a disproportionate share of the gap.
Housing finance, a related but distinct challenge, similarly illustrates global unmet demand. World Bank research shows a substantial affordability and financing gap in housing, with tens of millions of households unable to access formal housing finance, especially in low-income and middle-income countries.
These figures underline a paradox: banks, whose fundamental business is lending, are often unwilling or unable to meet enormous unmet demand for credit to productive sectors, while simultaneously allocating capital to non-core property development.
Prudential Limits
Some jurisdictions have wrestled with this tension by incorporating prudential safeguards that limit banks’ direct exposure to real estate investment while still allowing conventional housing lending.
In advanced economies such as the United States, banking law constrains banks’ ability to hold real estate for investment purposes outside very narrow criteria tied to foreclosure or operational use, and such holdings must be divested within defined periods. This prevents banks from morphing into developers and mirrors broader regulatory intent to preserve capital for lending.
In emerging markets, regulators often impose ceilings on banks’ real estate exposure as a percentage of capital or deposits. Where such limits are enforced, banks tend to maintain healthier lending portfolios and avoid excessive concentration in cyclical property markets.
The Cost of Weak Restraints
History is replete with examples of what happens when banks’ exposure to property and real estate is inadequately restrained.
Japan’s asset price bubble in the late 1980s was underpinned by banks’ extensive lending against land and property. When prices collapsed in the early 1990s, banks were saddled with impaired property-linked loans that weighed on balance sheets for years and contributed to what came to be known as the “lost decade”.
The global financial crisis of 2007–08 was driven in large part by excessive exposure to real estate and mortgage-related assets in the banking sector. Banks in the United States and Europe recorded combined writedowns in the hundreds of billions of dollars on mortgage and property-linked exposures, eroding capital, necessitating government support and constricting credit to the broader economy.
The repercussions of unfettered real estate exposure extend beyond advanced economies. In the United Arab Emirates, banks’ heavy exposure to property and developers contributed to stress in the banking system when the global financial crisis hit. Property prices in Dubai declined by more than 50 per cent from their peak, leaving developers with unfinished projects and banks with rising non-performing exposures. Although sovereign support helped avert systemic collapse, the episode underscored how quickly property downturns can translate into banking sector vulnerability.
Somalia’s Unmet Credit Needs and Banks’ Strategic Drift
Somalia’s financial sector remains in early stages of development but is characterised by stark credit constraints. Formal credit to the private sector in Somalia stands at under 5 per cent of GDP, a fraction of levels seen in more mature banking systems. An estimated 77 per cent of firm’s report being credit-constrained, and most rely on internal funds for working capital and investment. Only a small share of firms’ capital needs is met by banks, and even fewer by formal mortgage or housing finance.
Other indicators illustrate the underdevelopment of financial intermediation: a small percentage of adults hold bank accounts and even fewer receive loans, and businesses report substantial barriers to accessing finance. MSME financing programmes supported by the World Bank, such as the Gargaara facility, have disbursed only modestly to date—reflecting both demand and supply constraints.
In this context of scarce finance, many Somali banks have invested substantial capital in property and real estate holdings rather than extending credit to productive sectors. According to recent sector data, real estate loans account for a significant share—roughly less than 20 per cent of total credit to the private sector—even as overall credit penetration remains low relative to GDP.
This allocation of capital is symptomatic of deeper structural issues. In an environment with limited long-term investment alternatives, banks treat property as a store of value and a revenue source but in doing so divert funds from lending to entrepreneurs, farmers, traders and small businesses—precisely the sectors that could drive wider economic growth.
Policy Implications: Re-Anchoring Banks on Their Core Function
Restricting banks’ direct investment in housing and real estate is not an assault on development; on the contrary, it is a necessary re-anchoring of banking on its core function: lending to the real economy.
Prudential regulation should differentiate clearly between housing finance (credit for homeownership or construction), which supports families and productive activity, and proprietary real estate investment, which represents a speculative and illiquid use of capital. Effective regulation would cap direct real estate holdings, impose higher risk weights on non-core property exposures, and reinforce capital adequacy standards that ensure lending capacity is preserved.
The alternative is stark. Without robust limits, banks risk accumulating property-linked exposures that may look profitable in the short term but erode liquidity, restrict productive credit, and amplify systemic risk when property markets correct. For Somalia and similar economies, where access to finance is already a binding constraint on growth, banks must be steered back toward lending—not competing with their own borrowers for scarce capital.
The challenge is urgent: global financing gaps measured in trillions of dollars signal that economies require more credit, not less; banks must be instruments of capital allocation to productive use, not repositories of speculative assets. Strengthening prudential frameworks to restrict real estate investment by banks is a critical step toward that goal.
Abdikarim Jama
Financial Economist
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