December 15, 2016

Banking in Somalia: SMEs struggle to get financed

The concept of banks and banking is fairly new in Somalia. After the war, the entire financial infrastructure had to be rebuilt from scratch. The financial sector has gradually improved over the last couple of years – local banks have established micro-investment departments and loans (Direct Loan Funds and Loan Guarantee Funds) are beginning to be provided. However, since the country has very limited experience in funding, investment and loan management, this process has not been littered with obstacles.

2Two major challenges stand out. Firstly, that local banks are hesitant when it comes to providing loans to new entrepreneurs and only willing spend a very limited amount of their investment capacity on loan provisions; and secondly, that some local organisations that have recently engaged in loan funds have failed to provide effective loan schemes to local SMEs. Therefore, loan provisions have stopped or funds have become inaccessible for most SME’s due to confusing application requirements.

As part of the Migrant Entrepreneurship Programme, SPARK has studied the reasons behind these problems. In a recent four-day training, we discussed possible solutions with more than 20 participants from local banks and microfinance institutions from all over Somalia.

1Since this was the first training of its kind in Somalia in over two decades, there was a lot of interest. Major financial institutions, such as Dahabshiill Bank, Amal Bank and Darasalaam Bank, as well as several smaller organisations, were in participation. It was great to have such institutions under the same roof, in mutual discussion, for the first time.

During the training, investment officers from local banks and microfinance institutions were able to improve upon their fund management skills, including the processes, principles, different types of funding, screening for funding, assessment, monitoring and repayment scenarios, based on the Islamic Finance system.

The training also uncovered several basic challenges within Somalia’s financial landscape, such as a weak legal system, lack of collateral and a lack of financial data, from both the institutions and SME’s. Together the participants generated some ideas for improvement, such as stronger cooperation between institutions. The experience cemented the need for stronger cooperation between financial institutions.