Somalia’s formal banking providing alternative to Hawalas

Somalia’s formal banking sector is re-merging to link the country to the global financial system, for the first time in decades.

Since the outbreak of civil war in 1991, the country has relied on the multi-million dollar informal and unregulated money transfer services, commonly known as Hawalas, kept alive mainly by remittances from abroad.

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In recent years Hawalas came under scrutiny for a perceived link to terrorism activities and money laundering. In February 2015 US banks stopped money remittances to Somalia through Hawalas. In the aftermath of a deadly attack on Garissa University College in Kenya, the government shut down at least 86 Hawala outlets in the capital Nairobi and its environs, blocking remittances of between $70 million to $100 million per month.

Although the Kenya government has rescinded its decision on Hawalas and allowed some outlets to resume business, it is highly unlikely that the controversy surrounding the Hawalas will go away anytime soon.

This is one reason why the government is urging 97-percent of Somalia’s unbanked to consider patronizing available formal banking systems in the country.

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In 2009, the Central Bank of Somalia was re-opened and among its key priorities, was the establishment of Sharia-compliant policies, to regulate the country’s financial markets. Late last year Somalia’s first international bank, opened its doors to the public. The International Bank of Somalia introduced modern banking services to the country, eliciting international acclaim. This year in May, Premier Bank Ltd opened shop in Mogadishu with a plan to spread beyond the capital city.

The bank has partnered with MasterCard and SWIFT to deliver global online financial services including Automated Teller Machines (ATMs).

In June 2015, Somalia’s fortunes appear to be on the upswing after the International Monetary Fund (IMF) completed its first economic consultation on the country in two decades.

According to IMF’s assessment, Somalia’s economy grew by 3.7 percent in 2014. “Economic activity is estimated to have expanded by 3.7 percent in 2014, driven by growth in agriculture, construction and telecommunications,” said the IMF in a statement at the end of its June 8-18, 2015 consultation.

The return of IMF to Somalia is positive progress for the country’s fledgling economy, despite hurdles to be overcome, which include a weak local currency, high energy and bandwidth costs, and shortage of skilled labour.

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International Bank of Somalia (IBS) Chief Executive Officer, Ahmed Hassan Yusuf, says “Operating costs in Somalia are very high. You have to do everything by yourself and that’s a challenge. The other challenge is that you need to educate people on how the banking sector works, or who benefits from the banking sector. So educate about banking and understanding banking because people have their own mentality of how banking works. So, some of the products you are going to introduce, if you are not able to make adaptation to the local customs, there will be a challenge.”

There are no recent figures to illustrate the banked population in Somalia. Estimates put it at only 3-percent. Premier Bank’s Managing Director Mahat Ahmed underscores the need to attract a huge number of the unbanked into the formal system of banking.

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“Premier Bank’s intention is to be part of the overall goals that we continue to witness in our beloved country. On the business side, we have also put in place products and services that we do feel will support the growth of the business community”, adds Mr. Ahmed.

Yet all this would be impossible to achieve, without a safe environment where business thrives and locals undertake their activities without security concerns. The relatively safe environment in the capital Mogadishu and in other towns has been made possible by the presence of the African Union Mission in Somalia (AMISOM) peacekeepers, who are working alongside the Somali National Army to ensure lasting peace.

The Managing Director of International Bank of Somalia is optimistic that the country’s banking sector will grow tremendously and attract more financial players, complete with a securities exchange, if the current peace is sustained.

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“The Somali banking sector is growing or set to grow. More banks are coming. More regulations or regulation actors will be coming to see. And there will be good news coming for example a stock market, and an association of banks” emphasizes Mr. Yusuf.