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 formal financial sector in Somalia is quite small and the informal financial sector has, to some extent, filled the void. The money transfer companies mainly in urban areas are playing a central role in keeping the financial ties to the Diaspora. The scale and scope of remittances has been closely linked to Somalia’s role as a source of labour for the Arabian Gulf and to the Somali Diaspora that has mushroomed in the West.
Characteristics of financial sector of Somalia
The existing financial sector can be characterized by the following:
- The remittance companies plays a vital role in the current Somali economy
- Virtual lack of financial intermediation i.e. deposit-taking and lending through financial intermediaries, although some limited lending does take place through non-governmental organizations in form of micro-finance;
- The economy is predominantly cash-based
- Lack of public confidence in a banking system especially where the government is a key player.
- The provision of very limited banking services, such as money transfers, foreign exchange and deposit facilities, provided by the remittance companies operating informally.
- The banking sector in Somalia currently comprises of an active informal sector and virtually non-existent formal sector.
- The private sector remittance companies dominate the informal sector, whereas the formal banking sector includes central banks in Mogadishu (southern Somalia), Hargeisa (Somaliland) and Bosasso (Puntland).
The Financial sector has been summarized to include the following