Elective politics in Somalia is slowly gaining traction, and as political maturity gradually crystallizes, so is the country’s banking sector.
After the re-opening of the Central Bank by the debut Transitional Government in November 23, 2009, formalization of licensing procedures as well as enactment of other prudential regulations continues to add a coat of credibility and integrity to the sector. As the new coat continues to stick, two Kenyan banks – Kenya Commercial Bank (KCB) and Commercial Bank of Africa – have previously expressed an intention to enter the market. In fact, KCB already has the green light to open a shop in Mogadishu. At the same time, a number of Gulf banks are in queue to open shops in the country. In total, 12 commercial banks have reportedly applied for a banking licence. I doubt this number has changed.
As I said in one of my previous articles here, authorities should eliminate entry barriers into the sector, if any, for foreign players for the simple reason that foreign players have the potential of bringing in global best practices and in the process help elevate the profile and credibility of the sector. However, as every imaginable positivity in the sector incubates somewhere in a laboratory, I think a number of things in the sector need to be escalated.
First, banks which have laid strong foundation of compliance need to open shops in neighbouring countries, especially Kenya. For noble reasons: Kenya is still not very strong on Islamic banking and needs additional players with strong background in Islamic financing in home markets. Further, Somalia-linked trade between Nairobi and Mogadishu is quite strong. While there are still no official representative figures to that effect, such moves have the long term benefits of helping formalize such trade ties. Finally, by allowing Somalia-domiciled compliant banks to open shops in Nairobi, Kenyan authorities will be boosting the profile and credibility of Somalia’s banking sector. In my view, International Bank of Somalia (IBS) and Premier Bank are well positioned to open a shop each in Nairobi. The shop can either be a representative office, to scout for business opportunities (and booking them back at home) or a fully subsidiarized operational shop-whichever way fits internal strategies.
Second, there is an urgent need for Somali banks to now strengthen their balance sheets and help support the economy. Somalia is in the middle of rebuilding its infrastructure: New energy production, expansion of transport network-air, water and land, housing, provision of water, education infrastructure et cetera. Indeed, as the country retools its economic engines, demand for factors of production, except land, will rise. Additionally, extraction of resources that will form the core of Government’s fiscal receipts also at some point will need to be financed.
These are initiatives that cannot, at this point, be financed by the country’s treasury. Hence public-private partnerships (PPPs) will be core to the financings-and banks will play a critical role in the PPPs and they can only actively participate if they have the requisite balance sheet strength. The current product offering basket of selective on-balance sheet activities and preference for off-balance sheet activities may not help entrench the sector’s visibility as an economic enabler through efficient capital allocation.
Somalia is in the middle of rebuilding its infrastructure: New energy production, expansion of transport network-air, water and land, housing, provision of water, education infrastructure et cetera. Indeed as the country retools its economic engines, demand for factors of production, except land, will rise. Additionally, extraction of resources that will form the core of Government’s fiscal receipts also at some point will need to be financed”.
Third, the Central Bank needs to regain its money price setting function. Usually, Central Banks set the cost of money via a funds rate benchmark. It could be through repurchase agreements (repos) or policy rates. A funds rate is the cost at which the Central Bank would lend money to banks. In turn, banks use this to price any lending product to customers. By lending to customers banks are effectively creating money. When Central Bank wants to slowdown the money creation engine, it simply raises its cost of lending to banks; and banks in turn transmit the same to customers. However, the Central Bank’s funds rate is a more of a policy signal; and sometimes transmissions into the system may not materialize as expected.
That notwithstanding, the current dollarization of the economy simply means the Central Bank has no control over the cost of money circulating. However, in order for the Central Bank to regain this function, it will mean reintroduction of the country’s local currency, the Somali Shilling (SOS). I’m aware plans have been in top gear to reintroduce the SOS.
Fourth (and linked to the third point), the Central Bank also needs to regain its lender of last resort function. This is a critical function of any Central Bank. In money markets, there are always sharp liquidity oscillations – it maybe a systemic or idiosyncratic issue. Whatever the case, the Central Bank needs to intervene by offering liquidity support. However, this is also tied to the reintroduction of the local currency.
Fifth is about introduction of additional technologies around the mobile financial service platforms. Indeed, penetration of mobile money transfer platforms in Somalia remains very high. However, the backing of this ‘digital’ money transfers is still physical cash. What if instead of the physical cash the platform owners adopted cryptocurrency as the backup currency? That is to say that all mobile money transfers/payments will be backed by cryptocurrency to be purchased and held in digital wallets. Think of all paybill transactions for electricity, supermarket purchases et cetera will be done via cryptocurrency.
Sixth and still tied to technology, the Central Bank will need to develop a single switching technology for all banks.
At this juncture, the technology needs to be regulatory-owned in order to help entrench fair play, especially in a country where refereeing is missing in most critical sectors. The switch should be designed to clear all card and mobile phone transactions as this will also enable banks construct their own mobile e-wallets, thereby bypassing the telco(s).
Finally, the sector should also focus on building a vibrant financial markets. Shariah-compliant fixed income markets as well as interbank overnight lending should not be far from reality in the country’s financial system.