The Horn Of Africa States: The Banking And Financial Systems Of Somalia

[Deeq A.]

By Dr. Suleiman Walhad

We will devote this article on the banking and financial systems of Somalia and more particularly its central bank, the Central Bank of Somalia – CBS. This is important under the general perspective of Somalia’s fragile governance and organizational framework.

The fact that there is a semblance of organization, in the country, in the form of a federal infrastructure based on clan fiefdoms, is generally due to overt foreign making. It was designed solely to avoid future blame that they did not help when there was a need in the country. The country is a homogenous nation that did not need to be segregated from each other in the form of a system that they hardly understand. It has created internal borders, flags and symbols that appear to be separate countries that are not loyal to the center. It has so far caused more pain than good. This is just to point out a few of the salient points in the tall order of running the country and for that matter its central banking authority.

The Central Bank of Somalia (CBS) is the monetary authority of the country that is not really a monetary authority. Indeed, there is no currency to manage and/or control. The federal Government does not supply the Somali Shilling and some of the regions print their own versions of the same currency. Recently there was even news that a warehouse in Khartoum where Somali shillings printed for Somalia in Sudan, was stored, was ransacked and that much of the monies therein was dispersed in the streets of Khartoum as paper, that capital of that other failed country, which appears to be going the way of Somalia in fragility and governance.

some of the fractured constituencies of Somalia print their own currencies such as Somaliland, which manages its own currency, the Somaliland Shilling, which it manages better than the central banking authority in Mogadishu, the Central Bank of Somalia (the CBS) with respect to the Somali Shilling.

That lofty goal of the Central Bank of Somalia “to become a globally respected institution dedicated to serving the economic interests of the nation” would appear not to have been achieved as yet and this remains to be an elusive objective. The central banking authority is, in fact, reduced to handling the cash management of the federal government whereby it receives collected taxes and grants and then disperses them to meet its various expenditure bills such as those of public salaries and travel expenses of its authorities.

Somalia, indeed, has over the past decades descended into anarchy and chaos and indeed, failed to meet the needs of the Somali citizen in terms of security and delivery of basic needs for goods and services. The fact that there is no central authority in the financial system despite the claim to the contrary is a stark evidence of this.

The currency of the country is not functional, and the main currency used for business transactions and for that matter any transactions is the United States Dollar. No one is even sure if the United States Dollars that circulate in the country are genuine or forged. How could one verify their validity when there are no proper verification authorities in the country?

Attempts have been made by the authorities to set up a nominal functioning financial system in the country, including introduction of a payment system, but the country has been functioning without a central financial authority for all these past forty odd years through the private financial activities of money transfer companies, which appears to be the only really functioning financial institutions in the country. The same continues today and the CBS barely any controls on the banking and financial system. The private sector owns most banks where they keep the funds deposited with them and use these deposits for their own purposes, building properties in their names and companies, buying and selling of goods and services in their names or companies, setting up manufacturing units and setting agricultural projects all either in their names or companies. There are no checks on how the peoples’ monies or deposits are deployed and there are no rules in this respect. No wonder one sees the country entirely becoming the assets of two major parties, the Hormud/Salam Bank Group and the Dahabshil Group.

These two institutions own and manage most activities in the country including but not limited to real estate, electricity, telecommunications, agriculture, fuel and energy, shipping and transport, trading and even bankrolling at times the governments of the country, both regional and federal. They even take out the peoples’ funds and invest them in other countries such as east, central and southern Africa without permission from either the CBS and or the depositors of those funds. There are also an increasing number of smaller money transfer companies that simulate them and copy them.

The unfortunate story of these two large institutions is that they do not work together but, indeed, undermine each other instead colluding together and creating systems that serve them both in the form of a cartel. They would have created together a central banking authority in the country that is functional as they find themselves operating in every village or umbrella tree in the country. They would have been able to assure themselves of a say in the affairs of the state and its financial systems instead of working beyond the rule of law, as their activities appear to be at present. They could have been the source of all laws using the legislative/executive branches of governance which currently is blood-related clans rather than interest-based groupings.

The two institutions, and indeed, the many MTC institutions that copy them could have forged rules of the game, be it politics and/or money rules to assist them become even richer and wealthier to compete with their counterparts in the rest of the African continent and indeed, the world. There is nothing wrong with making more wealth and secure for themselves a better off situation. This is a powerful human motivation, and we cannot blame them. However, we must blame them and their pseudo-advisors for failing themselves and the nation for they, indeed, have the resources to correct and set a new and better path.

I brought together at one time Chairman Jimaale (Hormud/Salam Bank Group) and Chairman Mohamed Said (Dahabshil Group) to help them forge a common path and an association, which could have helped them both in managing the resources of the country and region, but I must admit the encounter did not produce or achieve the desired goal. It is always either my way or no way in the approach of the Somali to all matters even if they are of common concern. This explains why there is no functional governance in the Somali landscape and hence the real cause of the “failed State” nature that marks the country. It is not much different where Somalis lead Somali populations such as those who are just beyond the confines of Somalia, in the region.

This allows external actors to intervene in the country, and play havoc on the land, a rich land, which is poor at the same time, where foreign interferences have undue influences both overt and covert. The politicians of the country have no other ideology upon which to differ from each other excepting the tribal/ethnic factor and have, therefore, miserably failed not only themselves but also the nation and region. It is where the corporate business should have taken the mantle to fix and manage things. But they also have failed.

Paying their taxes, putting the right people forward for the leading positions, and/or financing them to move in the desired political directions and opposing those who use religion and tribe/clan to attain goals and disrupt the lives and lovies of people, would have been a better approach than the current aloofness of the major corporations of the country and this is, in the main, due to the failure of the financial institutions to lead.

It is why the Central Bank of Somalia remains to be a chest holding government cash only and not really a central banking authority despite the lofty claims in its paperwork. The country, indeed, has no laws and no constitution and is managed on ad-hoc basis and on the whims of people. How could we expect miracles in such an environment? It is reported that the current mandate of the Governor of the Central Bank of Somalia is ending, and a new governor is to be appointed. It is perhaps time the financial corporates came together and put a common candidate for the job and then worked with him or her to fix, at least, the financial sector of the country, where Somalis appear to have achieved the unthinkable – success at the individual corporate levels, but not at the collective level.

Central banks generally face three challenges in carrying out their mandates. They usually face ambiguities as to their mandates, structurally lose their independence and are expected to carry out social and quasi-political activities without corresponding power. The Central Bank of Somalia is no different. Indeed, it is not clear, if they even understand their plight let alone clarity of their mandate, for the country is run on ad-hoc basis by a singular person at the very top, in the form of a president, who still emulates the role of the Military rule of long ago. Many would perhaps assume that I am referring to the current president only, but it is not the case. Every president who came to rule the country has behaved the same way as the military regime, assuming that the people have entrusted the job only to him, which is not the case.

The art of compromise and/or consensus in the country appears not to function and the only possible solution – a general reconciliation conference of the people of the country, which should have been the only job a president should have done under the present circumstances seems to have been avoided by all presidents, including the present one, since the collapse of the military regime.

Central Bank of Somalia, despite not being functional as a central bank, is also not independent from the political rulers of the country. It has no independence in figuring out and setting out new contours for managing the country’s broken financial system, and at least forging acceptance of the people of one currency whose supply and pricing is controlled by it. The fact that some of the regions print their own separate currencies or the same old Somali Shilling in whatever quantities they want clearly plays to the tunes of clan and gang politics.

Appointments and dismissals are done on political basis, and more particularly on tribal basis – the so-called 4.5 or 5.0 version clan-sharing of powers in the country, and not on the basis of the best candidate and competency. Currently some of the fractured constituencies of the country maintain their own independent central banks or deposit boxes, one might say. They are not linked to the main central bank of the country and act independently. This gives rise to the erosion of the powers of the Central Bank of Somalia, at a time when it needed to have firm grip on the country’s finances and money supply.

Currently people entrust their deposits with private institutions which manage those funds anyway they want or wish without any controls of any sort. There are no legal and enforceable requirements that funds could not be deployed in some sectors or limitations thereof, or controls in terms of cash availability in case there is a run on one of the banks/MTCs or the death of one of the principals of a financial institution and his inheritors start fighting over the wealth left by the deceased. There are no enforceable controls on how much can be invested outside the country and how much of the peoples deposits can be used by the owners of the banks and financial institutions, with reporting to the Central Bank System Monitoring authorities or departments. The poor citizen is held high and dry and there seems to be no rules in this respect, except for the traditional “Xeer” or customary law. How does that work in a modern society, which is exposed to multiple hazards and risks beyond the traditional environment?

It would also seem that currently lenders or the financial system in the country prefer or encourage financing only on tribal basis to keep whole segments of the population deprived of financial support, even if they were the best skilled and most suitable executors of any project. It is where a need for a central bank neutral to the malaises of society is required, but at present, this seems to be beyond the realm of the Central Bank of Somalia.

The Central Bank of Somalia, despite all the drawbacks mentioned and others, still remains to be a requirement and an instrument that the country needs to develop and maintain. It should remain part of the social and economic fabric of the nation and the authorities of the nation should put genuine bankers not politicians to run it and manage it, although a general manager of any enterprise is normally a politician at heart too. He has to manage people to carry out his/her job. Governance challenges in Somalia are plenty, but one must be accountable to the population and the future of the financial systems of the country

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