THE MICROFINANCE SERVICES IN SOMALILAND

THE MICROFINANCE SERVICES IN SOMALILAND

The potential of creating institutional credit and deposit services for poverty alleviation in Somaliland is quite significant. About 2 million people, or 60% of the population, are considered poor and have no access to formal financial services. According to the Microfinance Baseline Survey (2011), there are over 100,000 micro-small enterprises that provide employment opportunities to nearly quarter of a million people or 33% of the country’s total employment. Accordingly a large number of urban and rural households derive their livelihood from micro-small enterprises. Therefore, development of this sector represents an important means of creating employment, promoting growth, and reducing poverty in the long-term.

However, in spite of the importance of this sector, the baseline survey shows that provision and delivery of credit and other financial services to the sector by formal NGOs and non-financial institutions has been inadequate. According to the Baseline Survey, more than 50 private

Enterprises, including 15 local NGOs, practice some form of microfinance services in almost all the major towns of Somaliland. In addition, a number of MFIs have operated in the country without appropriate legal and regulatory framework. Therefore, microfinance services have been grossly misused by some NGOs and other providers or entirely robbed by privately-organized money launders7.

An example of existing microfinance institutions in Somaliland have been described below:

A) SALAAM FINANCIAL SERVICES

Salaam is the financial services subsidiary of Telesom, whose main product line is remittance services. The company has established a registered bank in Djibouti, with representative offices in Hargeisa and Mogadishu. Salaam remittances can process wire transfers from Somaliland, by transferring money to the Djibouti Bank and doing the wire transfer from there. However, management declares that the company is still facing problems with Letters of Credit (LCs). Salaam also offers checking and savings accounts, as well as investment and microfinance loans to Telesom affiliated customers.

Investment loans are available to Telesom shareholders or require a Telesom shareholder guarantee. The loan requires a 30 percent down payment, a flat fee averaging 10 percent annual (larger loans over $100,000 may be as low as 8 percent, while smaller or riskier loans are 12 percent). There are between 1,300 and 2,000 shareholders, so this guarantee does appear to have some reach throughout Somaliland. Salaam has been offering this loan product for one year, and has given about 30 to 40 loans as at the time of the study.

Some example borrowers include food import businesses, vehicle purchases, building materials firms, housing, and land purchase. Since the program is still new, management is unsure of the level of repayment or potential challenges that may arise with delinquencies.

In addition to Salaam Financial Services, Telesom also offers Zaad domestic mobile phone money transfer and payment system. Zaad is offered as a “value-add” service, primarily to capture market share of customers and maintain customer loyalty for Telesom. There are currently no fees for using Zaad service.

B) KABAA MICROFINANCE INSTITUTION (K-MFI)

The mother organization, Doses of Hope was established in 1997 in Netherlands by Somali women in the diaspora. Locally in Somaliland, Doses of hope started a lending project in in 1999 with a clientele of 100 women (interviews with management). This has since evolved into Kaaba MFI, the only MFI in the country currently with a vision to transform into an MFI bank.

Kabaa MFI has 13,000 cumulative borrowers to date (active clients in Dec 2012 were 2,000). It issues a sharia compliant loan of maximum $ 500 through groups of 25 members organized in smaller cells of five members (buys good/item and lends to borrower with a profit margin).

There exists no regulatory framework for the microfinance sector, so Kabaa remains registered as an NGO and relatively unregulated by the government. From 1999 to 2007, Kabaa engaged in conventional Grameen Bank-style microfinance. However, as the organization attempted to expand, its management declares that it was frequently confronted by community members and religious leaders who were more and more disapproving of the conventional (non-Islamic) style of its loan products. In 2008, in partnership with Oxfam, Doses of Hope began the transformation of the program into an independent Islamic microfinance institution, registered as an NGO in February 2009.

Kabaa’s main microfinance product has an average loan size of $140-200, with a maximum of $300. The Murabaha ‘mark-up’ is 8 percent, with loan terms between 4-6 months, paid either on a weekly or monthly basis. There is compulsory savings for all microfinance borrowers, but no collateral. Groups are made up of five members, who know and trust each other; and five groups make up an association. Each member must have a guarantor and if a client defaults, there is first an attempt at collection within the group, then within association, and then with the guarantor. Since its transformation to an Islamic banking model, Kabaa declares a 98% repayment rate.

The MFI plans to set up four branches in rural and urban locations of Hargeisa and Gabiley districts, with a goal to reach 5,000 active borrowers by 2012. In addition, it is exploring the possibility of offering an Islamic savings product. Some of its future goals include having a branch in all regions of Somaliland; being financially sustainable by 2015; being able to offer youth-inclusive financial services; opening a business development / business consulting department; and strengthening its management information system, particularly if and when it pilots a new savings product.

THE ASSESSMENT REVEALS THE FOLLOWING CHALLENGES EXPERIENCED BY THE MFI:

·        Very limited capacity (low capital base, limited staff and systems, only two branches, limited skill base and inadequate products);

·         High unemployment and therefore large numbers of people in self-employment and no other bank for the poor, therefore cannot cope with the demand;

·         Due to lack of regulation and policy framework, vision of transforming into a bank cannot be realized;

·        Unable to upscale to target middle and small scale enterprise that can leverage technology and bigger employment;

·        Unable to diversify to other sectors of the economy e.g. fisheries, livestock, dairy that require more funding;

Reference

ILO report, April 2013