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It’s a Vibrant Banking Sector,but Where’s the Regulator?


The banking sector in Somalia has realised some tremendous growth in the past two years. New banks have been setup and existing ones have widened their services to cater for increased demand. Part of the momentum in growth has been triggered by the increased engagement between the government and the international donors and financial institutions, including the

2013 resumption of relationships with the International Monetary Fund. The World Bank Group also returned to Mogadishu in 2014 after nearly 20 years of absence.

The bank has set up a Multi-Partner Fund for Somalia, a facility to finance emergency expenditures in Somalia’s budget through the Recurrent Cost and Reform Financing project (RCRF). Late last year and early this year, two banks opened their doors: International Bank of Somalia (IBS) and Premier Bank. Both provide international and local financial transactions. Last year also saw the setting up of the first Automated Teller Machine (ATM) in Mogadishu by Salaam Somali Bank. In most parts of the world, an ATM might appear like a basic service in banking. In Somalia, this was such an important development that it received coverage by the international media.

All these developments are creating quite a buzz in Mogadishu. Business analysts say a confident and strong banking sector will be critical to the on-going efforts to re-start the country’s economy. The Somalia banking sector is, in reality, in its infancy. The culture of contemporary banking had died and for many years, banking was informal. Traditional money transfer systems cropped up to fill the gaps created by the absence of formal banks. This is also a country that has for long operated without a well established Central regulatory system: a Central bank. In the absence of financial services regulations by the government, financial institutions have virtually been operating in a vacuum.

The banks cannot perform critical functions like money transfer through the swift code systems. Many of the current banks use foreign swift code, cash handling, inter-bank transactions and chegues payment systems. The US dollar is the main currency of exchange in the country, even though attempts are being made to prop up the Somalia Shilling. As general manager of Salaam Somali Bank Hassan Jama Awale observes, the emerging banks are trying to recreate the culture of banking. Creating an understanding of how banks operate has become part of their mandate. “Imagine someone who was born in 1991.

He is now 25, and there is a possibility he has never seen banking services nor been part of the formal banking services. To such a person, this is completely new phenomenon. We have to educate them on how this system works,” says Awale. For long, many local Somali were used to the popular money transfer system called Hawaala, which emerged during the long conflict and was primarily the most common system of money transfer, especially from over-seas. According to a United Nations study, more than 40 per cent of Somali receive remittances, the bulk of which are used for basic needs, including food, clothes, medicine and education.

The banks in Somalia are generally for immediate cash transactions. One cannot channel money out of the country or receive from abroad through the banks. Thus, the wide use of the Hawaala system still remains useful. Awale sees the client base of most banks growing, but he observes that it will take a while to educate people about the other benefits of banks and increase the uptake of other services, including business financing and savings products. In most countries, business financing is more of a norm.

 In Somalia, business partners finance their ventures by pooling resources obtained from friends and relatives. It is a purely trust-based model of investment. This mode of business financing is an upshot of many years of glaring deficiencies in the local financial sector, primarily due to the conflict. People had to adopt the most practical systems of financing their businesses. Part of the plans by the banks to popularise their services has been to introduce Sharia or Islamic banking, where credit is not dependent on interest but other factors.

 “For instance, if a client comes to the bank and wants to buy a car, the bank will buy the car at the client’s request, and will sell it to the client according to the market price, but with a little markup depending on the value of the car. The total of this the market price plus mark-up  is what the client pays back,” explains Awale. The banks are not just sitting tight and waiting for things to get more organised or for the government to fully establish the Central Bank. In Somalia, innovation has helped people to get on with work and life. Salaam Bank, for instance, is the in process of linking up with other established banks within the region to offer more services to its clients. “We have acquired Visa memberships, and we are quite hopeful that by April this year, the bank can start issuing Visa cards and also be able to remit funds in and out of the country,” says Awale.

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