The Federation of German Industries (BDI) has recommended that the German government throw its weight behind the African Continental Free Trade ... Area (AfCFTA) Agreement, arguing the continent is pivotal in efforts to diversify markets.
Ziraat Katılım of Turkey and Banque Misr of Egypt, which are both state-owned, were approved by the Central Bank of Somalia (CBS) at the start of July. The decision follows the election of President Hassan Sheikh Mohamud in May.
Central Bank governor Abdirahman Abdullahi said the new entrants are “solid banks that will add value to the development of Somalia’s financial sector and contribute to the growth of our economy”. He added that their entry will enable local banks to gain experience of international banking standards.
According to the CBS website, Somalia has 13 licensed commercial banks and seven money transfer companies, commonly referred to as hawalas. The approval of the two foreign banks is expected to boost the financial sector in Somalia. Analysts say the two lenders can be instrumental in breaking the international banking correspondence barrier, which has long been an obstacle for Somalis wanting to trade in global markets.
- “If the licensing [has been] done correctly, then we will get benefits, such as easing of money transfers, since those banks are recognised in the world,” says Yahya Amir, an economist.
- He adds that the banks will also facilitate the flow of donor funding. “This will help Somalia to receive funds allocated to economic grants more transparently.”
Abdiaziz Ahmed Ibrahim, who teaches economics at the University of Somalia, says licensing the two banks will open opportunities for foreign investment in the country. “International banks can be the key for Somalia to receive foreign direct investment,” he says.
- He adds that Somalis will now get competitive financial services thanks to new competition in the market.
- Only 15% of the Somali population have bank accounts as the majority mainly use mobile money for local transactions and hawalas for international transfers.
Protecting small players
A World Bank report in 2018 said Somalis carry out 155 million transactions worth about $2.7bn every month, making the Horn of Africa nation one of the countries with the highest mobile money usage in the world. That could now change as banks become attractive avenues to handle financial transactions, in addition to providing facilities, such as credit.
Amir, who has served on the central bank board, warns that regulatory mechanisms should be put in place to cushion local banks from direct competition with foreign banks when it comes to small projects, which local players can handle.
- “It would be better not to allow them to invest in the small projects,” he says. If international banks are allowed to invest in every project, local banks “won’t be able to compete”.
- Analysts say establishing a robust regulatory regime is one area that the central bank should be keen on. Ibrahim argues that the central bank should ensure it protects the financial sector from regulatory loopholes that could jeopardise investment.
Foreign-bank entry can put Somalia back on the international financial map.
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