The slow re-awakening of Islamic finance in Somalia

12 December, 2018      436

 

 

Somalia, the troubled land at the Horn of Africa with one of the most homogeneous Muslim populations in the world, is believed to benefit from the strong footprint Islamic finance is currently setting in East Africa. The country, which between 1991 and 2009 had no monetary system in place due to a collapse of the central bank and subsequently the entire banking system during the Somalian civil war, saw some return to customary and religious law in most regions in the past decade and with it a slow rebuilding of a Shariah-compliant banking system.


Most of the drive comes from the Somali diaspora some of whose members are actively engaged in setting up Shariah-compliant banks or other financial service providers which has led to some progress for the industry. 


For example, Mogadishu-headquartered Amal Bank developed itself in the recovery years since 2009 into what it says is today a “modern Islamic bank” that offers “a wide range of financial products and services in retail, corporate, institutional, diaspora and microfinance banking.” The bank, formally launched in 1998 but basically non-operational for a decade since then, benefited greatly from the end of the civil war and today operates a total of around a dozen branches in the capital and three other larger cities in Somalia. 


Other banks in the country offering fully-fledged Islamic banking or at least Islamic windows include Salaam Somali Bank, Al Barakaat Bank of Somalia and Premier Bank, all headquartered in Mogadishu, as well as Dara-Salaam Bank in Hargeisa, the capital of the autonomous northern region of Somaliland.


The most recent example was the setting up of a new insurance company called Horn of Africa Insurance Co in October 2018 by nobody less than Yussur Abrar, Somalia’s central bank governor in 2013, who has plans to introduce takaful in the entire region starting from Somaliland. To that end, Somaliland’s current central bank governor Ali Ibrahim Jama announced that the local parliament will release an “Insurance Act” in 2019.


Experts say that there are three options for Somalia to develop its Islamic banking business further. The first would be the modernisation of the old traditional hawala systems with their private money transfers into transfer banks with additional banking services, a way that Al Barakaat is following.


The second option would be the further opening of the country to foreign and internationally operating banks which would not only raise the level of professionalism in the Somali banking system, but could also contribute to growth in cross-border financing which decreased dramatically in the crisis years. Naturally, such a solution would require a solid legal framework which has yet to be provided from Somalia’s authorities so that foreign banks could open own branches or enter joint ventures with domestic banks.


Another proposal on the rebuilding of Somalia’s financial system is the creation of locally-owned private Islamic banks in Somalia. 
“These banks would be financed by local Somali business people and managed by hired professionals mainly from the Somali diaspora,” suggests Mohammed Warsame, specialist and researcher on the Somali economy at the University of Sharjah.
The proponents of this model argue that it would be the best way of reviving the country’s financial system and injecting life into currently idle funds to boost the economy, which would – in turn – lead to better economic growth and more political stability.
Overall, it is believed that joint ventures by Somali banks with international financial institutions would be the best banking model for the country at the time being, mainly due to a lack of local banking excellence. This would also bring more sophisticated products and online tools, while mobile systems could play a bigger role in offering Islamic banking products and services for the large portion of unbanked people in the country. 


However, most industry actors are also aware of severe institutional shortcomings and the absence of the rule of law which could critically impede the improvement of the Somali banking sector unless adequately addressed, which makes it a political priority.


Original Source: https://www.gulf-times.com/story/616007/The-slow-re-awakening-of-Islamic-finance-in-Somali


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