SOMALILAND: ISLAMIC BANKING CAN SUSTAIN SOMALILAND’S DEVELOPMENT

SOMALILAND: ISLAMIC BANKING CAN SUSTAIN SOMALILAND’S DEVELOPMENT

Somaliland's President has signed the Central Banking Act into law. Back in 2012 the financial sector agreed to have a Dual Banking system where both Conventional and Islamic banking systems operate in the country. However, the Commercial Banking Act is more than four years overdue. Economically, Somaliland's long-term competitiveness can only be ensured by introducing the Dual Banking System in the country.

The country lacks financial regulatory and over sight, which is necessary for Sustainable Development projects. The Central Bank is very weak in terms of spearheading the fiscal and monetary policies. Case in point is the recent much debated inflation rates.

Unfortunately, due to the legal and sovereignty of the country, there are no conventional banks, but Dahabshil International Bank is at the forefront of introducing Islamic Banking and Finance. Salama Bank is another competitor in the financial sector currently operating in Somaliland. Both banks offer basic banking services, but are not aggressive enough to take the risk of financing mega projects for developmental purposes. Both banks are conservative in their lending schemes. There is no credit rating agencies for the consumers as well as the institutions. Islamic Banking can provide some of the financial & investment solutions and has been growing globally at a constant rate. Islamic Banking has been growing at a rate of 10-12 per cent per year in the last decade.

Unlike the high interest rates of Structural Adjustment Programs (SAPs) of the 1980s, Islamic Banking can enhance the development dilemmas of the country. Islamic Banking prohibits interest and advocates for profit-and-loss sharing. Sharia compliant banking can link developments with real economy. For example, Dubai World Ports have signed an agreement in modernizing the port of Berbera. Such developmental projects would require sound financial systems. If Somaliland government were to opt Islamic Banking, then the government would need to adopt important and necessary financial reforms. To begin with, the country needs stronger legal institutions that protect property & intellectual rights.

International Development Agencies note that if the government of Somaliland is to have full confidence in Islamic Banking, then it needs to standardize and diversify the economy, which may attract more investment from multi-lateral agencies, such as the World Bank, Islamic Development Bank and the United Nations. For instance, World Bank is eager to assist fragile states and countries hit hard by instability with concessional financing. World Bank and its Multilateral Investment Guarantee Agency (MIGA), has injected $427 million Sharia compliant investment guarantee for an infrastructure project in neighboring Djibouti. New technologies, such as, mobile banking through ZAAD and E-Dahab can enhance the hard to reach areas and potential customers. Technology can play pivotal role in providing level playing field. Dahabshil & Salaam both invest heavily on the latest technology for improving the economy

WHAT ARE THE STRENGTHS AND WEAKNESSES OF ISLAMIC BANKING IN SOMALILAND?

To begin with, Somaliland has more opportunities to establish Islamic Baking for many reasons: Firstly, Somaliland inhabitants are 100% Muslim, Sunni, Sharia sect. And in Islam Banking, free-from-interest manner is used, as interest is forbidden in Islam. Secondly, there are no other banks operating with the system.

In addition, in the last decade, economy of Somaliland has been growing gradually.  As we know, the Banks play great role about economic growth, whereby, investment or transferring money all over the world, many Businessman need to deal with their suppliers through Banks in order to globalize their business.

Besides that, Somali landers are low income level, so that, they need more investment and more opportunity to create a small business.  Fortunately, Islam Banking has a product called Qardul hassan (good loan/benevolent loan), that allows to loan a money from the Bank and invests in your business, then you return without any extra money; there is no service charge or interest rate.

Another considerable reason is that, Muslim nation hate conventional Banks, when introduce the Islamic Banking in Somaliland, not faced any challenges, because there is no Banks work here, another chance was the existed many remittances transfers money all over the world. Also, based in Islamic Finance model (not interest rate), holding capital estimated millions of dollars, possibly, that remittances easily converts to Islam Banking, according dealing with foreign countries, having good reputation on their customers in all over the world.

On the other hand, some weakness exist Islamic Banking in Somaliland. One problem is that people they didn’t deal with Banking system in the last two decades.

Alarmingly, we could mention or indicate few weaknesses might face on Islamic Banking in Somaliland in this moment, such as: At first, lack of knowledge about Islamic Banking, most people they do not know what is the Islamic Banking? Unless its free from interest, Further, they do not able to classify between Muharaba and the interest loan, senior managers of the Islamic financial institutions  failed to give full orientation to people.

To abridge, as we illustrated above, Islamic Banking contains many products to satisfy their customers; unfortunately, Islamic financial institution in Somaliland they didn’t use or didn’t not give many optional products to customers.  For instance, one of these products was very important to the low-income nations; and it is Qard hassan/ Qardul hassan (good loan/benevolent loan).

SUSTAINABLE DEVELOPMENT GOALS (SDGS)

Islamic Banking can help the much needed Sustainable Development Goals of Somaliland and offset the developmental challenges the county is currently facing. Islamic Banking can scale up the developmental project that is much needed is Somaliland. The mega project that soon will be under way in the port of Berbera can trickle down and spark swift sustainable development.

Finally, Somaliland’s long term development plan 2030 vision of Somaliland should be aligned with the growing trend of Islamic Banking thus opening new employment opportunities for the youth and the recent graduates. Islamic Banking can facilitate and collect the payments of zakat to the needy, thus fulfilling the humanitarian aspect of Islamic Sharia. Most important of all, just like conventional banks, the Islamic Banking needs enabling environment to grow and prosper. Expectations are that utilizing Islamic Banking modalities will lead to win-win situation for the investors as well as the recipients.

Article by Hamze Dalha