Written by Mohammed Dahir Ahmed
One of the somber challenges faced by Somaliland private sector is access to finance regardless of its form-Islamic or conventional. In a survey done by the World Bank, 48.8 percent of the firms surveyed in Somaliland indicated that access to finance as the number one constraint as far as doing business is concerned compared to a world wide average of 16.9 percent. It is a well documented fact that access to finance creates innovaton, job creation and growth. In Somaliland, formal and regulated financial services are almost non-existent, neverthless informal and unregulated financial services exist.
Somaliland currently faces three choices regarding the type of banking system it wants to adopt; 1. Islamic banking system 2.Conventional banking 3.Dual banking system, where conventional and Islamic banking operates side by side.
- Islamic Banking System
According to London securities and investment institute, Dr. Ahmed Elnagger initiated the first modern experiment with Islamic banking in 1963, in Mit Ghamr, Egypt. The Mit Ghamr savings project was based on profit-sharing and applying certain concepts of the modern credit union movement. Eventually in 1971, the Mit Grammar project became the Nasser Social Bank. In consultation with Tengku Abdul Raman of Malaysia and Prince Muhamad Faisal of Saud Arabia, Dr. Elnaggar set the framework for the creation of Islamic Development Bank by the Organization for Islamic Conference. The formative years of Islamic banking and finance were between 1975 and 1990. The two regions with the most dynamic growth have been the GCC states and Malaysia. Islamic banking and financial principles are now applied in more than 70 countries and more than 300 institutions consider themselves to be sharia compliant.
Financial techniques applied by Islamic banking systems includes among others;
A.Mudaraba: Profit and loss sharing partnership (investment financing).
B.Musharaka: Profit and loss sharing partnership (joint venture).
C.Salam: Similar to a forward sale contract, payment at spot and delivery of fungible a specified future date.
D.Istisn’a: Progressive financing of manufactured goods.
Presently, the Islamic Republic of Iran is the only country that adopts only Islamic banking system and prohibits conventional banking products and services. Previously Sudan and Pakistan adopted Islamic banking system only, but later adopted dual banking system where sharia-compliant banking and conventional banking systems exist side by side.
- Coventional Banking System
All the 50 plus members of the organization of Islamic conference (OIC) allow conventional banking system except Iran, which prohibits conventional banking system.
- Dual Banking System.
Under dual banking system, Islamic banking and conventional banking system are allowed to exist side by side. Dual banking system is adopted by all the members of the Organization of Islamic conference (OIC) except Iran. Major Muslim countries such as Saudi Arabia, Malaysia, Egypt and Indonesia adopt dual banking system where conventional and Islamic banking system exists side by side.
Back in 2012, when the new central bank law is passed by the Parliament, the international community welcomed with enthusiasm and the news appeared in most major international news agencies. This is how Reuters News Agency reported the news; “Somaliland has passed a law that formally establishes a central bank, and is now poised to pass another to set up commercial banks in a bid to attract foreign lenders to start operating in the self-declared country by 2013. Somaliland, a breakaway state in the northeast of Somalia, remains unrecognised internationally.It has no formal banking sector and its people rely heavily on remittances from Diaspora communities in Europe, North America and the United Arab Emirates, as there no loan facilities.”The President has signed the Central Banking Act into law,” Abdi Dirir, governor of Somaliland’s Central Bank, told Reuters on Monday.”We are expecting the Commercial Banking Act to be passed in the next three to four months,” Dirir said.
Similarly the Guardian in 2012 wrote; “former British protectorate is poised to pass a banking law that will, for the first time, allow companies to operate as formal banks, offering services taken for granted throughout much of the world. Somaliland paved the way for the new banking regime when it passed a law in April formally establishing a central bank.Somaliland has gone for such a long time without a formal banking system because it has not really needed one until now, as the money-transfer system was cheap and efficient. But it is unsuitable for commercial transactions. “As the emphasis tips away from remittances to new trading relations, you need things like letters of credit, so there are gaps in the current system,” said Mohammed Yusef, chief executive of Petrosoma, an oil exploration company based in Somaliland.The law can be expected to introduce competition, which A.Rashid Duale of Dahabshil says he welcomes. “We already compete in 155 countries,” he said. Cac, a Yemeni state-owned bank, Salaam African Bank, based in Djibouti, and Banque de Dépôt de Crédit Djibouti, a subsidiary of Swiss Financial Investments, have all expressed interest in starting operations in Somaliland, which has a population of 3 million, with 1 million people living in the capital.Somaliland hopes that the new banking law will make it easier for money to flow into a country in desperate need of foreign investment. Money from remittances has been used to build hospitals, schools and other infrastructure. But much more is needed. While money is clearly flowing into construction, judging by Hargeisa’s building boom, roads are in dire need of resurfacing. Streets in Hargeisa are marked by potholes and ridges that slow traffic to a crawl.”
This was the case back in 2012,to have a Dual Banking system where Conventional and Islamic banking systems operates in the country. However, business and investment misconceptions of some parts in the society and strong lobby against conventional banking by Dahabshil and Telesom companies have created a new fog on the development of Somaliland financial industry and that is why the passage of Commercial Banking act is more than fours years overdue. This has costed Somaliland a lot, since jumpstarting the economy and spurring private sector investment became totally unattainable and the small, informal and unregulated financial services currently existing in the country could not sufficiently inject the liquidity needed in the market, resulting a stagnant and moribund economic growth.
In support of Dual Banking system,Malaysia’s Deputy Central Bank Governor Dr. Awang Adek clearly expounded the benefits of dual banking system and why it is needed in Malaysia and other parts of the world at the International Conference on Islamic Economics in the 21st Century as follows:
———-“First of all, through a dual banking system, Malaysian Muslims have a choice to bank in a system that is in line with their religious belief. It provided an alternative to Muslims who have restrained from using the banking system which, prior to 1983, was totally conventional.
SecondIy, a dual banking system provides a complete and comprehensive banking alternative to Malaysians. This means that a wider range of Islamic banking products and services will be made available in banking institutions which offer Islamic banking. In the dual banking system, there is not only an Islamic bank, but also other supporting banking institutions such as commercial banks, finance companies, merchant banks, takaful companies, securities firms, savings institutions, and rural co-operative bank. Islamic financial services are also available in the financial markets such as Islamic money market and the Islamic capital market. In short, all Malaysians would have no problem with the diversity and availability of Islamic products and services in the country.
Thirdly,the menu of Islamic financial products in a dual banking system tends to be more comprehensive and wider. In a competitive environment, where conventional banking tends to be a competitor, Islamic banking operators have to be innovative and creative to ensure that their products are superior to, or at least at par with the conventional products. Therefore, the elements of efficiency and innovation are vital to ensure Islamic banking will remain relevant, and able to capture a fair share of the banking system. The operators certainly cannot afford to remain complacent.
Finally, the level of sophistication in terms of Islamic banking products is prevalent in a dual banking system. It is a fact that the conventional banking system is in a sophisticated and advanced environment. Hence, Islamic banking has no choice but to keep up with the sophistication and advancement of the banking system. This element has been the plus factor on why Islamic banking products available in Malaysia are seen to be at a relatively advanced stage. As the country moves forward towards greater IT environment, Islamic banking is fortunate for being able to capitalise on the changes in the banking system. Innovation will always be an important element to motivate Islamic banking operators to be dynamic and pro-active in their pursuit to position Islamic banking in the mainstream banking.”
Bearing in mind Somaliland’s longterm economic competitiveness in the Horn of Africa and the Arabian Peninsula; Gulf countries, Djabouti, and Kenya all have Dual Banking systems. Similarly, Somalia’s Central Bank is planning to introduce Dual Banking system in his country. Therefore, economically Somaliland will not be in a competitive economic position if it adopts either Conventional Banking system alone or Islamic Banking system alone but it will be in a very competitive position by adopting Dual Banking system.
By: Mohammed Dahir Ahmed.