By: Mohammed Dahir Ahmed
The financial services sector in Somaliland is presently dominated by the remittance business, which offers remittance services and checking accounts.
However, several banks obtained licenses under the Islamic banking act from the Somaliland Central bank. Such banks in addition to their Somaliland branches have their headquarters in some other country in the Middle East or Africa, which they hold a license from their central banks. Those banks provide basic banking services but are not yet aggressive enough to provide all banking and investment services highly required in the country. Of course there are constraints they face such as the incompleteness or none existence of the enabling laws to conduct their operations.
As the Somaliland banking system is at introductory or infancy stage, it is worthwhile to ask which form they will take in terms of their market operations; market competition or monopoly, only local banks, or mixture of local and international banks in light of reaching the unbanked in Somaliland and extending financial inclusion for all. Under monopoly banking, banking products are limited as innovation is stifled, the consumer choices of banking products is restricted, the sovereignty of consumers is limited, and consumers are charged high prices. Most significantly, the welfare and consumer surplus of banking service customers is reduced.
On the other hand, competition among banks creates innovation in banking products, nurtures customer services and welfare, competition fights with complacency and makes bank staff more innovative and efficient, it creates sectoral and geographical focus, it enhances learning from what your competitors are doing, and most importantly interbank competition promotes financial inclusion. To promote competition in the banking industry, regulators should make low barriers to bank entry and exist, foster competitive pressures from non-bank competitors, and make easy access to credit information.
According to Thorsten Beck Professor of Economics and Chairman of the European Banking Center at Tilburg University, competition among banks can be a powerful source of useful innovation and efficiency, ultimately benefiting enterprises and households; competition can also foster stability through improved lending technologies. Competition forces banks to move out from their comfort zones and reach out sectors such as small and medium sized enterprises (SMEs).
According to a study done by the International labor organization (ILO) in Hargeisa Somaliland in 2013, out of 168 traders interviewed, only 26% use accounts with an institution- usually a remittance a company, while 74% do not have an account. The 26% whom have accounts use mainly for receiving money, payment for work or selling of goods and services (15%). About 10% use it for savings while 1% use accounts for receiving money or payments from the government.
Consequently, there is a big untapped banking potential in Somaliland to serve the 74% whom does not have a bank account as well as those 24% who have an account at remittance companies. Savings accounts, where the savings grow either conventionally or in investment venture under Islamic banking setting is exceedingly needed in Somaliland. Although people keep some money in mobile platforms, it is mainly for payment purpose for business goods or personal consumption, but not for savings and investment purpose. Likewise, Somaliland vastly needs a bank with innovative investment venture, resource mobilization platform, sufficient resource base and with appropriate risk appetite either in conventional or Islamic banking stream.
Currently, because of collateral and credit history problems, the couples of banks presently operating in Somaliland have limited operations and provide loans in an informal and back door channels. For example, one of the banks will solicit you in addition to property as collateral to furnish a guarantor, who should be a prominent businessman or a shareholder of their company. Furthermore, those who are successful in getting the loan, always complain about the mark up rate of 12%, which is comparably high in comparison with regional countries. This further amplifies the existing saga of financial exclusion. Most of the loans relate with construction and trade finance with no new and innovative investment ventures either in Islamic banking settings or conventional banking settings. Their operation is not based on the existing economic gaps in the country and this is further exacerbated by the lack of influential national monetary and fiscal policies, as Somaliland state’s national economic influence is minimal in terms of economic policy directions as well as the volume of its economic activities.
For that reason, competition among banks will enhance financial inclusion and the regulatory authorities such as the Central bank should encourage this and dishearten monopoly, complacency, and lack of innovation and competitiveness.
By: Mohammed Dahir Ahmed
Mohammed, holds Islamic finance qualification (IFQ) from the London institute of securities and investment on top of other business and finance qualifications.