Financial Sector Overview
Somalia is emerging from more than 2 decades of civil conflict that destroyed its financial system, and is today making significant progress towards consolidating peace, entrenching state-building , and driving economic recovery. The political and security situation, however is still fragile, and Somalia remains ineligible for most financial assistance programmes due to its longstanding arrears. These factors may impede the strong financial sector needed to support the economy's wholesale recovery
Before the civil war began in 1991, Somalia's financial system was rudimentary, comprising of the Central Bank and 3 Commercial Banks.All Financial institutions collapsed in 1991, and depositors lost their savings, which eroded the public confidence in financial system and banks.
From then until 2009 there were no financial institutions in Somalia, outside the semi-autonomous northern regions of Somaliland and Puntland. The informal sector than developed to fill the gap during that period provided basic financial services, especially trust-based loans and money transfer services. The latter called hawalas, palyed a vital role in facilitating international remmittances and domestic financial transactions. A process to regulate and supervise these institutions began in 2012.
In December 2009, The Central Bank of Somalia (CBS) restarted operations from offices in Mogadishu and Baidoa. It carries out traditional central Bank functions like licensing, regulating, and supervising all banks and financial institutions. It also ensures the public can access general banking services including receiving deposits and providing lending for private or commercial purposes, until commercial and development banks can fully take over these functions.
However, the CBS faces several challenges, including:
- Inadequate human, technical and financial supervisory capacity;
- The dollorization of the economy, with estimated 95 per cent of currency in circulation being the US dollar
- The unique situation of having de facto regional central banks already in operational (in Somaliland and in Puntland.).
- The potential conflict of interest given CBS involvement in both commercial banking and bank supervisory activities.
Technical assistance and policy advice from development partners have helped enhance the CBS's capacity and create a framework for licensing and supervising financial institutions, reflected in the Financial Institution act of 2012. The authorities have requested more help to address other challenges and especially to develop strategies to address dollarization, the limitations of current payment system, and monetary policy constraints.
Currently the formal financial sector consist of CBS, six licensed banks and 9 licensed money Remmittance providers. Each bank maintains one office, four of which are in Modadishu, and one in Somaliland and Puntland. A further 12 banks have applied for license , or have expressed an interest in operating in the country. There is no equity market or securities exchange in the country.
There are also large number of informal financial sector institutions including hawalas, that are not yet licensed or registered by the CBS but already offer international and domestic money transfer services, as well as many other bank-like services including travellers cheques, non-interest bearning deposits, and consumer lending.
There is lack of information about balance sheets and financial transactions for banks and money remmittance providers, which make it difficult to capture the depth of financial sector. Indeed the lack of statistical capacity is central problem in Somalia, impeding the availability of basic economic and financial data.
Access to formal financial institution service is very low in Somalia, according to Global Findex Data 2015. Only 7.9 per cent of adult held an account at a formal financial institution, compared with the sub-Saharan Africa average of 28.9 per cent. Far few 2.8 per cent - held savings at a formal financial institution compared to sub-continental average of 16 per cent.
By contrast may Somalis use mobile money services: 37.5 per cent of Somali adults had a mobile money account in2014, compared with the sub-Saharan average of 11.5 per cent.
Table 1 : Financial Access in Somalia(SO), 2014
Source: Global Findex Database(2015). * Developing countries only
Strategic actions for building financial Sector
Somalia's bank is committed to building a formal and sound financial sector. To do that, it has adopted six strategic goals that were laid out in the Strategic Plan 2013-2018. These goals are closely linked to, and aligned with, rhe overarching constitutional and legislative mandate of Central bank, which is to build an effective financial system and foster price stability.
The Strategic Plan lays out a road map on how to achieve the set goals, which are summarised below :
- Formalise the financial sector: After two decades where the informal financial sector was dominant, reconstituting formal financial system is key to developing and growing Somali's economy. This will achieved through setting prudent regulations and oversight as well as rebuilding formal financial institutions and establishing effective compliance mechanisms;
- Establish effective monetary policies: To achieve its mandate to maintain financial stability , CBS needs to develop an effective monetary policy supported by a forward- looking policy framework, prudent economic data, and effective foreign reserve management.
- Build a strong banking operations foundation: Effective and efficient banking operations, supported by robust processes and systems and conducted within well-defined risk management and control frameworks, will help establish a strong banking operations foundation necessary to formalize the financial sector.
- Increase Organizational effectiveness: A well defined organizational structure generates efficiencies and strengthen human resource capacity by broadening the skills and knowledge of CBS staff, promoting a culture of high performance. The Central bank will work to attract, retain and motivate employees. It will devise decent recruitment processes, provide good pay and benefits packages, offer equitable training opportunities, and implement effective performance evaluation and succession planning system.
- Strengthen Reporting and Transparancy: A more comprehensive reporting strategy that incorporates the gathering, processing and analysis of information, and synthesis and packages it clearly, helps inform better decision-making.
- Promote good Governance : The CBS is committed to maintaining good corporate governance aligned to international best practices, which it uses to set and attain its objectives, and monitor their delivery and quality. A board of directors offer oversight and develops corporate policies and procedures , while good governance guidlines provide proper incentives for the Boards and management to pursue strategic goals in the best interest of the Bank and its stakeholders. Good Governance practices also provide effective monitoring and risk management by encouraging the bank to use resources effectively.