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The Regulatory Role of the Central Bank of Somalia
by Suleiman Walhad
Friday, July 30, 2021

 

Somalia is recovering slowly from its long drawn civil war, which is still continuing, albeit, at a lesser intensity. It would appear to have moved to a continuing bickering between politicians, which is completely sidelining the very reason for which the civil war started - the removal of a dictatorship and putting in its place a more balanced governing system to reflect the ages-old pastoral democracy of the Somali nomad. The banking system, the subject of this paper, along with all other aspects of Somali life is also coming back to shape, although it appears it has a long way to go before we can truly speak of a Somali banking system. The regulatory framework of this financial system and /or its absence is the subject of this paper.

It consists of a central bank, a growing number of banks, money transfer operators (“MTO”) and one or two takaful and re-takaful companies. It is not clear as yet whether there are regulatory guidelines to manage these institutions. But one thing is clear. The central bank has no substantive authority over these institutions, as most of them were operating without any central bank licensing before the re-invigoration of the Central bank in 2012 and do provide full information of their activities to it. They were born out of the true Somali trust in other Somalis when it comes to money matters without, sometimes, any paper trail. It is how the MTOs started and how they operated until they were forced to keep records of the many transactions, they make daily by anti-money laundering rules and regulations of the many countries where they operate. MTOs operate in over some 144 countries where Somalis reside today as citizens or permanent residents.

The Central Bank of Somalia (“CBS”) does not do many of its supposed functions, but from time to time carries out surveys, without having access to the real day to day data from the financial institutions, the core instrument which allows any central bank to carry out its functions properly. It does, indeed, act as the depository box of the government, through which the government receives its local revenues and foreign aid and from which it pays its expenditures to meet its obligations – salaries of its staff and other government expenses.

As an organ of the government, the CBS cannot speed ahead of it, for many of its activities are dependent on the governance infrastructure and its development, which today, remains still incomplete. We know there are multiple states in the new federal structure, a phenomenon undigested by ordinary Somalis, but which have been concocted by dubious politicians with the assistance of foreign countries that did not have the best interest of Somalia at heart. But Somalia has to live with it and move on. Each member of the federation owns or proclaims to own a central bank and these central banks are not linked, and neither are they linked to the federal central bank. Despite this anomaly in the central bank infrastructure, the commercial banks operate in all member states of the Somali federation.

As I noted in my recent paper on the “Fault Lines in the Somalia Banking System”, the commercial banks of the country proclaim to be Islamic, but the Central Bank Act and its regulations denote it as a conventional institution. I did point out in my other article on “Somalia – Banking and Finance”, that there will be need to revamp the Central Bank Act to include guidelines with respect to Islamic banking and other rule books for all its activities.
Managing other peoples’ money, supporting financial institutions in a country, and carrying out the duties and functions of a central bank, is not an easy task and in particular when one is dealing with a pastoral democracy, where sometimes it is very difficult to reach any consensus, and where unfortunately, no one is strong enough to impose his/her will on the others. And when you add the undermining of those outsiders, who do not wish the country well, the cocktail becomes even complicated and complex.
A central bank is the government’s arm for licensing a bank or a financial institution to operate in a country. Without this authority, it becomes an anarchic financial system, which will not be trusted by other financial institutions around the world. No wonder the Somalia banking system, till to date, is shunned by other banks and financial institutions in the world, as they do not fall into a normal acceptable operating environment. We need to note that a financial system is a function of its government and country, in which it operates, often termed the sovereign risk. Here lies one of the key activities of the Central Bank of Somalia – the decision to grant or not to grant an operating license. In Somalia, things have kind of worked in reverse and banks were operating without being authorized by anyone and the existing banks were all licensed, only after the re-activation of the central bank in 2012, after a two-decade absence. 

The regulatory framework of central banks generally includes supervision of the banking and financial system with the aim of promoting its sanctity and soundness, so that its customer base can have confidence and trust in its activities. Sometimes banks and financial institutions may stray away from their rules and may engage in many activities prohibited in law and hence there rises the need for an enabling and guiding supervision, through a central bank. The Central Bank of Somalia, despite its existence today, is far from carrying out any supervisory role, due to the obvious bickering of the Somali politicians, atypical of a pastoral democracy, where when there is a failure of a consensus, one clan would just move away to join another clan confederation, in another location. The various member states currently colouring the Somali state is a clear example of this pastoral democracy. One has already declared that it has walked away from the general Somali fold. This highlights the need for the central Bank of Somalia to redouble its efforts to supervise the banks and financial institutions in the country, with the objective of creating a sound financial system.

One of the key activities of a central bank is to act as the bank of banks and financial institutions, wherein when one gets into trouble, the central bank gets in to assist, usually, through being a lender of last resort. People deposit their excess funds in banks and banks must keep a portion of those funds with central banks, ensuring that the banks do not exceed certain fund outlays, that is, it does not take unnecessary risks visa vis its capital base and its deposit size. This is to instill confidence of the customer base in the banking system, knowing that the central bank is the ultimate guarantor of their deposits with banks. Using the deposit base judiciously is the ultimate goal. The central Bank of Somalia would need to enhance its insurance of the average customer of the banking system.
As we noted earlier, banks and financial institutions, in general must keep part of their deposits with the central bank. This is called the “Reserve requirement”. It is where a central bank draws much of its controlling power. It can change the level of reserve requirement from 10% to 20% to 30% or reverse wise. The larger the reserve requirement, the lesser the amount a bank can deploy through its lending or investment activities and vice versa. We are not sure, as yet, as to what is the reserve requirement of the Central Bank of Somalia or those of the member states of the Somali federation, if any. But it must institute a guideline and rule book in this regard.

Banks and financial institutions within a jurisdiction have to ensure that they play or operate within certain guidelines as to the level of risks they can take to ensure that the customer deposit base is not abused. It is where central banks play the role of putting certain restrictions and limitations to banking activities. How much a bank can invest is generally a function of its capital base. This is called the capital Adequacy ratio. Banks have to ensure that that the risk profile of a bank are within the limits prescribed by the central bank. It is not clear as yet as to what are the requirements of the Central Bank of Somalia in this regard. Here again, there is a major flaw of the banking and financial system of Somalia, and this is related to the fact that most banks, if not all, do not provide up to date information on a daily basis to the central bank and hence monitoring of the system obviously is absent. But monitoring the risks banks and other financial institutions are taking is a must and Central Bank of Somalia should work hard to ensure that it is leading a financially acceptable system. This would require carrying out regular or periodic audits of banks and financial institutions, involving not only the assets of a bank but also its liabilities and treasury activities.

In Somalia, it is clearly known that the banking system abuses the customer deposits for the benefit of the capital owners and directors, who use the funds to build their properties and carry out many of their own investment activities using the deposits placed with them, without rewarding these deposits or without regard to the conflict of interest they are engaged in. One can clearly see the huge edifices built by the Somali banks or by the owners and directors in the various cities of the Horn of Africa, from Djibouti to Kenya. In a normal and fully functioning banking system, these would have come under scrutiny. A periodic audit would have clearly shown the many weaknesses of the system. One would have noticed the many loans and investments that the owners of the banks and its directors have extended to themselves without adequate protections of a normal banking and financial system.

General Conclusion.

Central banks are generally responsible for regulating, supervising, and monitoring of banks and financial institutions within a system. The role of the Central Bank of Somalia is no different, but it faces multiple drawbacks, mainly related to the total collapse of the system, which is just waking up from a long comatose state. This does not negate, however, its role as a government organ not to seek to fulfill its duties as a regulatory body of the banking and financial system. The CBS should not be sitting back waiting for the bickering politicians to finish off their quarrels. It is an independent organ and should continue to develop its activities and slowly assert itself in the financial landscape of the country. This would enable it assist economic growth, financial stability, and create confidence in the system and country.

References

-    Dr. Walhad, Suleiman, “The fault Lines in the Somalia Banking System”, Iyess.org., June 20th, 2021.
-    Dr. Suleiman Walhad, Suleiman, “Somalia – Banking and Finance”, Iyess.Org, June 23rd, 2021.
-    The Role of Central Bank in a Developing Economy of a Country. www.yourarticlelibrary.com › banking › the role of central bank in a developing economy of a country/11138.

Suleiman Walhad


 





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