Somali Economic Forum is Independent organization committed to improving the state of Somalia.

Why are Somali banks not lending as they should?

Why are Somali banks not lending…

SEF London - In the world of finance, banks (financial intermediaries) are considered to be the most important engines for economic growth, as their primary objective is to bring together lenders (savers) and borrowers (investors). Banks traditionally use depositors’ money to provide individual and business loans and sometimes to invest in major projects.  

You might well ask yourself, “If banks have people’s money, why are they not lending to those who need financing, such as SMEs and entrepreneurs with great business ideas?”

Evidently the Somali economy has been growing over the past decade, due to increasing urbanisation, better security, increasing FDI and the return of the diaspora, which have contributed to the economy via cash investments and improvements in the labour market, as they are primarily highly skilled workers.  

The number of banks has also been increasing in recent years; this is good news, partly because it contributes to the wellbeing of the economy, in terms of employment. The number of businesses using banks increased by 7% between 2010 and 2014 according to SEF’s Finance Report 2014. In addition, the number of individuals using banking facilities has also increased, including the unbanked low-income individuals from the lower segments of society. This is because “people are starting to trust banks and starting to realise the important role financial institutions play in their day to day life,” says Hafsa Isse of Barwaqo Bank, a pioneering non-profit microfinance institution.

Arguably, the reason banks are not lending as they should be is because of their structure, particularly with regards to risk.

Unlike banks in the United Kingdom, Somali banks own 98% of their investment capital and with so little of depositors’ money there is not much pressure on these banks to perform.

Any business is subject to risk; in the case of banks; most risk stems from lack of, or unbalanced available information, which is what economists call Asymmetric Information. When a bank lends someone money they do not know whether this person will pay back the loan on time, or whether they will default. Therefore, to minimise risk, banks gather information about the person applying for the loan and assess his/her cash flow. This is what is referred to as Adverse Selection, and takes place before the loan is granted. In Somalia it is hard to find clear and reliable financial information pertaining to a business or individual because of the lack of credit agencies. It is even harder to find information about companies, as the majority of Somali companies do not have sufficiently audited financial reporting.

Often, borrowers take unnecessary risks after securing a loan; this is what is referred to as Moral Hazard, where the borrower provides inaccurate information regarding the proposed investment or use of funds. He/she may highlight secure and less risky business activities; for example, the borrower may say that they are looking to open a fast food restaurant in a crowded area in the city, or set up an ice cream van near the beach that also sells cold beverages. However, they may actually end up spending the money on establishing a meat distribution company in a high risk and untested market, for example. This would be a risky enterprise, because if fresh meat is not sold within a day it has to be thrown away, and if it needs to be kept in cold fridges it becomes extremely expensive, due to high energy costs - currently at $1 per kWh.

Nevertheless, the economic situation in Somalia has improved in the past few years. The financial services industry in particular has grown, and so have its players; insurance companies and non-banking institutions have been established and are contributing to the advancement of the financial sector in Somalia. With time and experience banks will be able to assess risks more efficiently, with the help of credit agencies. As the demand for finance grows, banks will have to respond to that demand and seek out ways to expand, either by raising funds in the capital market through the Somali Stock Exchange, or by finding other channels, in order to take advantage of these opportunities. 

Contributed by Hassan Dudde who is the Managing Director of Somali Economic Forum

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East Africa Islamic Finance Summit 2016

East Africa Islamic Finance…

Somali Economic Forum in partnership with East Africa Business Network (EABN) is pleased inform you that the first East Africa Islamic Finance Summit (EIFIS 2016), is scheduled for the 17th of February 2016 in Nairobi, Kenya.
This inaugural event has been organized by Somali Economic Forum & East Africa Business Network (EABN) in partnership with GBS Africa and Anjarwalla & Khanna. The event is supported by Regional Governments and in Kenya, through the National Treasury with Hon. Henry Rotich, Cabinet Secretary giving the keynote address.
The summit aims to initiate dialogue, build network between East Africa's financial institutions, policy makers and the Islamic Finance institutions in the region and the Middle East.  Experts in Islamic Finance will discuss the development of Islamic Finance in East Africa, explore infrastructure projects in the region and discuss alternative opportunities for project and trade finance for both public and private sector projects.
Speakers and panelists will cover key areas including Regulatory Framework, Regional Infrastructure Projects and Opportunities for financing and Sukuk Issuance, Takaful Market amongst other topics.
Participants will interact and network with senior executives from Private Equity companies, Financial Institutions, Hedge Funds, and Development Financial Institutions from the Middle East with an interest in East Africa.


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