Access to Finance in Somalia: Challenges and Recommendations

Introduction

The document highlights the challenges faced by local businesses in Somalia in accessing credit and borrowing at high costs. It emphasizes the need for legal and regulatory reforms to address these issues.

The Challenge of Access to Finance

• Lack of collateral: Firms rely on friends or relatives for financial needs due to lack of collateral.
• High banking service charges: Complex application procedures and limited access to finance hinder business growth.
• Limited networking: Businesses struggle to establish relationships with suppliers, customers, and partners.
• Complex application procedures: Obtaining credit is a time-consuming and difficult process.

Policy Implications and Recommendations

The following recommendations aim to improve access to finance, promote financial inclusion, and enhance the overall business environment in Somalia:

Improving the Legal, Regulatory, and Supervisory Framework

1. Encourage foreign bank entry: Bring longer-term funding sources and increase competition, which could improve borrowers’ financing terms.
2. Develop the microfinance sector: Establish a comprehensive financial inclusion strategy to support SME finance, financial literacy, and women’s education.
3. Strengthen financial institution law: Ensure effective government policies support creditor rights and insolvency regime.
4. Establish a credit reporting system: Prioritize the establishment of a centralized credit bureau and develop related infrastructure.

Promoting Growth and Macroeconomic Stability

1. Continued pursuit of sound and stable macroeconomic performance: Improve access to finance for individuals and firms and financial inclusion for vulnerable populations.

Availability of Information Regarding Credit Histories, KYC, and Financial Risks

1. Prioritize the establishment of a centralized credit bureau: Develop related infrastructure should be a high priority in Somalia.

Promoting Financial Inclusion in the Policy Discourse

1. Develop a comprehensive financial inclusion strategy: The policy discourse in this area has been limited to date.
2. Addressing land governance and establishing effective reforms: The formal land registration system is to be revived, and some significant revisions will need to be made.

Encouraging Foreign Bank Entry and Establishing a Moveable Collateral Registry

1. Encourage foreign bank entry: Consider encouraging foreign bank entry into the market.
2. Establish a moveable collateral registry: Use an online registration system for encumbrances over moveable assets that is easy to access, reliable, and secure.

Effective Creditor Rights and Insolvency Regimes

1. Stronger creditor rights: Help improve access to finance.
2. Reliable legal system and judiciary: Necessary for lenders to enforce contracts and foreclose collateral on loans.

Developing a Medium-Term Strategy for SME Development

1. Develop a medium-term strategy for SME development: The SME strategy should be a matter of high priority, including SME finance.
2. Further research on the current initiative of Gargaara: Needed to inform expansion and support training for SMEs.

Developed Microfinance Law and Improved Existing Microfinance Institutions

1. Developed microfinance law: Enable a broader range of providers to provide SMEs and low-income segments of the population.
2. Improved existing microfinance institutions: Contributing to the country’s economic progress and prosperity.

These recommendations aim to improve access to finance, promote financial inclusion, and enhance the overall business environment in Somalia.