Somalia has been without a formal commercial banking and financial institutions sector since the overthrow of Siad Barre’s government in 1991. Immediately prior to the civil war, Somalia’s formal financial sector was composed of:
- Central Bank of Somalia
- Commercial and Savings Bank ;
- Somali Development Bank; and
- State Insurance Company
At present the financial sector is composed of the Central Bank of Somalia, Somali Remittance Companies, and Micro-finance institutions (as pilot projects in the North-Western regions-Somaliland and in the North-Eastern regions-Puntland).
The Central Bank is currently operating under the 1968 Act, No. 6 of 19th October, which specifies the roles and responsibilities of the Central Bank. These include acting as a fiscal agent to the treasury, supervising commercial banks and others financial institutions, issuing currency etc.
In the absence of formal commercial banking activities, the credit creation and therefore money creation by the commercial banks does not exist in the economy at present. Under such circumstances, all economic transactions in the country are being handled through cash payment to settle obligations in domestic trade, including transactions that involve large sums of cash, which could have been otherwise settled through other means.
Inflation and exchange rates:
The economy is deeply dollarized in view of weak confidence in the local currency, with prevalent use of counterfeits. Alongside the Somali shilling, the US dollar is widely accepted as a medium of large and high value transactions even for local trade exchange.
The Remittance companies supported with spin-off activities in telecommunication sector are the main medium for much of the hard currency movements to and from the country and they provide the infrastructure of trade and commerce in Somalia and abroad. The remittance companies are the only financial services providers in the country for the majority of households and for the whole for the private sector.
No commercial banks are operating in Somalia. It has been reported that some regional banks are in discussions with the Somali Remittance Companies with regard to joint ventures. The local Somali business community is also exploring the possibilities of launching commercial banks that could also provide service to the private sector.
Challenges facing the Financial sector of somalia
The following are challenges facing the financial sector of Somalia
- The insecurity resulting from the civil war
- Lack of an effective formal banking sector .
- Lack of effective financial operating framework
- Lack of skilled staff
- Inadequate legal framework
- There is no formal financial sector in the country
- Lack of stock market and securities exchange
- Lack of insurance companies
- Weak regulatory framework
- Inadequate security
- High operation cost